An investment in legal services is an important consideration in starting a business. Make sure you know how your legal budget will be spent. What follows is part two in a series about the factors to consider in your choice of lawyer.
Factor Two: Know When to Hold ‘Em
Are you a gambler or a planner? One the one hand, engaging a lawyer to ensure things get done correctly will be a substantial business expense at the inception of your business. On the other, the choice to skimp on a lawyer may cost as much or more on the backend when faced with contested issues of ownership, contracts, and litigation. Knowing how lawyers bill can help you in your choice of law firm, and in budgeting for the initial expense.
Most lawyers will charge you by the hour for the time they spend working on your case. This time is billed in increments of one tenth of an hour. If a lawyer sends you an invoice for 2.4 hours, that means the lawyer spent two hours and between 19 and 24 minutes working on your case. Different lawyers working on your case may charge different rates. In general, the lawyer in charge of the case will charge the most, and any associates or paralegals will charge less.
A less common (but becoming more popular) method of billing a client is a fixed fee arrangement. In this method of billing, you and a law firm agree that you will pay a set amount for a set project. For example, it is common to see a fixed fee billing arrangement for forming a single member LLC. It would be extremely uncommon to see fixed fee billing arrangements for projects with variable or unknown length. For example, you will likely not see a fixed fee billing arrangement for any matter in litigation. A fixed fee billing arrangement represents a risk to both the attorney and the client. If the work takes the attorney a small amount of time, the fee is more valuable to the attorney. If the work takes the attorney a large amount of time, the fee is more valuable to the client.
A third common fee arrangement is the contingency fee. Entrepreneurs will likely not utilize this fee arrangement for general business matters. The concept of the contingency fee is that the attorney provides work now for a cut of the proceeds received if they are successful in recovering any money. In order for an attorney to use this arrangement, there must be some money coming back to the client at the end of the representation. This is a common fee arrangement for personal injury cases and other litigation matters where a client is suing for money.
Your fee arrangement may be one of these three or a hybrid using two or more of these arrangements. You should ask about the potential fee structure of your case and be sure to get ballpark estimate or estimates within a range in your initial lawyer selection process, otherwise, you may be gambling with the future of your business.
Check out the final installment of this series: Choosing a Law Firm for Your Startup: Part 3 – Factor Three: Compatibility.
Homero Vela is a small business attorney with Barkdoll & Von Ahsen, LLC.