News
Law Practice
Aug. 9, 2002
Designated Hitter
Dicta Column - By John Selbak - Four years ago, a quiet revolution began spreading through the legal community, ushering in a series of changes in the way many lawyers will represent their clients in the decades to come. Along with a growing reliance on the Internet, innovative software applications and the newest in high-tech gadgets, technology has changed the way in which every business conducted its day-to-day activities.
Dicta Column
By John Selbak
Four years ago, a quiet revolution began spreading through the legal community, ushering in a series of changes in the way many lawyers will represent their clients in the decades to come. Along with a growing reliance on the Internet, innovative software applications and the newest in high-tech gadgets, technology has changed the way in which every business conducted its day-to-day activities.
At the same time, lawyers were becoming increasingly involved with the companies that were bringing about these changes. And as the focus of these attorneys' practices was shifting to better serve technology companies, many first discovered the new demands placed on them by the leaders of this revolution: the technology entrepreneur.
I remember the comments I received from technology clients when I first began handling their matters. "You are such a lawyer," a client would remark with a smile. Another would comment, "Only a lawyer could draft an agreement such as this."
Fortunately for many of us, we eventually gained an understanding of how we had to change our method of representing these clients to better serve this emerging market.
Representing high-technology clients is markedly different from representing regular corporate clients. These observations are the result of discussions with dozens of attorneys who changed the manner in which they delivered legal services to these new types of clients. Some of these methods were suggested by entrepreneurs themselves.
And while these methodologies may best be geared towards the representation of high-technology clients, rarely have I spoken with a client outside the technology sector who didn't also support these principles.
• Find a tolerance for risk. One of the first formulas a student learns in business school is that "risk equals return." The higher the level of risk an enterprise can accommodate, the higher the possible reward. Step across the campus to the law school, however, and you will find an entire school dedicated to the eradication of risk.
Entrepreneurs know that their success lies in the level of risk they can manage. In the developing field of technology, where the prize routinely goes to those first in the space, there is no shortage of risk that each company must take if it is to survive. For the most part, however, lawyers have paid little attention to this concern.
Lawyers tend to view risk as a stop sign, whereas entrepreneurs see it more like a yield sign. Rather than stopping at the first sign of risk, the entrepreneur has a predetermined level of risk that he is willing to tolerate.
In order to effectively represent these clients, lawyers must learn to act within his or her client's risk tolerance level. Otherwise, valuable time and money is spent in an effort to eradicate all risk, while the entrepreneur's goal of being first in the space is impeded by the lawyer's delay.
Take the act of reviewing a routine services agreement that was drafted by a third party. The traditional lawyer will mark every provision that is remotely counter to the client's interest or could be written in a way more favorable to the client. Meanwhile, the client is paying significant legal fees and lengthening the agreement negotiation process, not to mention losing potential profits because of the increased time it will take for the two parties to conduct their business together.
Had the lawyer known the client's risk threshold, he could have accepted certain clauses as falling within the client's risk tolerance, thereby decreasing the number of proposed changes and shortening the time necessary to negotiate the agreement. In the end, this would result in an increased chance that the client and the third party will conduct their business as was originally planned.
Some lawyers would argue that the time and fees expended prevented great damage to their clients. But eliminating these types of risks are the exception, not the rule. Entrepreneurs are generally very adept at identifying which relationships or situations are truly risk-laden and which fall within their risk tolerance level.
While lawyers tend to think that contract wording is the only way to eliminate risk, the entrepreneur has a much broader toolbox from which to work. For example, having an exclusive right to desirable technology will go much further in ensuring that his or her partners will avoid breaching the contract. Or the entrepreneur may believe that a breach by a partner could have little effect on his or her market position.
Lawyers must know the level of risk the client will tolerate and offer their legal services within the client's predetermined level of risk tolerance.
Consider the company that wants to hire away a programmer from an out of state competitor who appears to be bound by a noncompetition clause. Associates are sent scurrying to do research while the partner discusses the pros and cons of each action with the client. The entrepreneur, however, is two steps ahead. The company is going to hire this programmer regardless of the risk. A lawyer who knows and accepts this would state, "If you've already decided you're going to do this, go ahead. If this results in a claim, we'll worry about researching the validity of the noncompetition clause at that time."
• Legal training teaches lawyers to look at one side of the argument, consider the counterargument, present all other possible arguments and then provide an analysis of the merits of each argument. Nowhere in this framework is there any room for an actual conclusion. Law professors preach that conclusions are unimportant so long as the proper analyses are provided.
This method could not be further from the way in which entrepreneurs want to be counseled. Entrepreneurs want the "best" answer that accounts for all known variables. They don't want a fall catalogue of issues, only to be left alone to make the ultimate decision. They want conclusions to questions such as: What is the probability our partner would discover our breach of this provision? What is the probability that they would sue to enforce the contract? What is the probability we would lose the case? What would be the maximum damage exposure if we lost?
These clients are not paying for fanciful analysis, they want a partner in the decision-making process. Taking a position creates additional risk for the lawyer. But the entrepreneur is usually drowning in risk and is little aided by one who refuses to roll up his or her sleeves and get involved in the action.
• Entrepreneurs want lawyers who understand their business, who are just as capable at critiquing a business plan as they are reviewing an appellate brief, who are just as comfortable in the boardroom as the courtroom and who realize that law is only a means, not an end.
High-technology clients, therefore, require their attorneys to be adept at handling questions regarding all types of contracts, from shareholders' stock option and employment agreements to software licensing agreements. They should be able to spot antitrust issues as well as potential securities violations. They can explain the difference between an incentive stock option and a nonstatutory option as easily as they can explain why California's wage order for classifying computer programmers as exempt employees requires a higher standard than its federal counterpart.
This type of project management creates client loyalty and avoids clients complaining about being handed from one lawyer to another within the firm. Also, high-technology clients value lawyers who attend their board meetings and company picnics, who know the names of their products and the company's history
Lawyers have always looked at clients as a source of revenue, while clients have traditionally looked at lawyers as a necessary expense that must be contained. Until lawyers become a source of revenue, clients will find ways of limiting and controlling their attorneys' involvement with their companies.
Today's lawyers need to become a value-added and revenue-producing service provider. We must be able to bring business acumen, strategic advice and assistance to all aspects of operations. These can include introductions to similar companies in the field, new service providers, potential strategic partners, new customer bases and even future acquirers or acquisition targets.
Once a client sees that its attorneys bring more value than their hourly rate, the client will engage the lawyer to perform a whole host of legal services that are necessary to realize the fruits of this relationship.
• What are the ethical considerations of acting as this kind of lawyer? For example, does the lawyer have an ethical duty to warn the client of risks even if the client does not want this kind of advice? If the client is engaging in blatantly illegal or negligent conduct, or where there is a high probability of potential harm to the client, the lawyer has a duty to counsel his client regardless of whether the client wants such advice.
Lawyers, however, tend to overadvise their clients about potential risks. They often see entrepreneurial clients on a metaphorical tightrope, walking over Niagara Falls, while the client merely sees himself as taking a stroll on the sidewalk. While we should not abdicate our role as lawyers in some needed situations, we should be cautious not to bind the entrepreneur with fears about every conceivable risk that could possibly manifest itself.
In such a case, the lawyer is merely hindering clients from reaching their full potential, something no client can afford.
John Selbak, a partner with Musick, Peeler & Garrett in Los Angeles, is the practice group leader for the business and technology group.
By John Selbak
Four years ago, a quiet revolution began spreading through the legal community, ushering in a series of changes in the way many lawyers will represent their clients in the decades to come. Along with a growing reliance on the Internet, innovative software applications and the newest in high-tech gadgets, technology has changed the way in which every business conducted its day-to-day activities.
At the same time, lawyers were becoming increasingly involved with the companies that were bringing about these changes. And as the focus of these attorneys' practices was shifting to better serve technology companies, many first discovered the new demands placed on them by the leaders of this revolution: the technology entrepreneur.
I remember the comments I received from technology clients when I first began handling their matters. "You are such a lawyer," a client would remark with a smile. Another would comment, "Only a lawyer could draft an agreement such as this."
Fortunately for many of us, we eventually gained an understanding of how we had to change our method of representing these clients to better serve this emerging market.
Representing high-technology clients is markedly different from representing regular corporate clients. These observations are the result of discussions with dozens of attorneys who changed the manner in which they delivered legal services to these new types of clients. Some of these methods were suggested by entrepreneurs themselves.
And while these methodologies may best be geared towards the representation of high-technology clients, rarely have I spoken with a client outside the technology sector who didn't also support these principles.
• Find a tolerance for risk. One of the first formulas a student learns in business school is that "risk equals return." The higher the level of risk an enterprise can accommodate, the higher the possible reward. Step across the campus to the law school, however, and you will find an entire school dedicated to the eradication of risk.
Entrepreneurs know that their success lies in the level of risk they can manage. In the developing field of technology, where the prize routinely goes to those first in the space, there is no shortage of risk that each company must take if it is to survive. For the most part, however, lawyers have paid little attention to this concern.
Lawyers tend to view risk as a stop sign, whereas entrepreneurs see it more like a yield sign. Rather than stopping at the first sign of risk, the entrepreneur has a predetermined level of risk that he is willing to tolerate.
In order to effectively represent these clients, lawyers must learn to act within his or her client's risk tolerance level. Otherwise, valuable time and money is spent in an effort to eradicate all risk, while the entrepreneur's goal of being first in the space is impeded by the lawyer's delay.
Take the act of reviewing a routine services agreement that was drafted by a third party. The traditional lawyer will mark every provision that is remotely counter to the client's interest or could be written in a way more favorable to the client. Meanwhile, the client is paying significant legal fees and lengthening the agreement negotiation process, not to mention losing potential profits because of the increased time it will take for the two parties to conduct their business together.
Had the lawyer known the client's risk threshold, he could have accepted certain clauses as falling within the client's risk tolerance, thereby decreasing the number of proposed changes and shortening the time necessary to negotiate the agreement. In the end, this would result in an increased chance that the client and the third party will conduct their business as was originally planned.
Some lawyers would argue that the time and fees expended prevented great damage to their clients. But eliminating these types of risks are the exception, not the rule. Entrepreneurs are generally very adept at identifying which relationships or situations are truly risk-laden and which fall within their risk tolerance level.
While lawyers tend to think that contract wording is the only way to eliminate risk, the entrepreneur has a much broader toolbox from which to work. For example, having an exclusive right to desirable technology will go much further in ensuring that his or her partners will avoid breaching the contract. Or the entrepreneur may believe that a breach by a partner could have little effect on his or her market position.
Lawyers must know the level of risk the client will tolerate and offer their legal services within the client's predetermined level of risk tolerance.
Consider the company that wants to hire away a programmer from an out of state competitor who appears to be bound by a noncompetition clause. Associates are sent scurrying to do research while the partner discusses the pros and cons of each action with the client. The entrepreneur, however, is two steps ahead. The company is going to hire this programmer regardless of the risk. A lawyer who knows and accepts this would state, "If you've already decided you're going to do this, go ahead. If this results in a claim, we'll worry about researching the validity of the noncompetition clause at that time."
• Legal training teaches lawyers to look at one side of the argument, consider the counterargument, present all other possible arguments and then provide an analysis of the merits of each argument. Nowhere in this framework is there any room for an actual conclusion. Law professors preach that conclusions are unimportant so long as the proper analyses are provided.
This method could not be further from the way in which entrepreneurs want to be counseled. Entrepreneurs want the "best" answer that accounts for all known variables. They don't want a fall catalogue of issues, only to be left alone to make the ultimate decision. They want conclusions to questions such as: What is the probability our partner would discover our breach of this provision? What is the probability that they would sue to enforce the contract? What is the probability we would lose the case? What would be the maximum damage exposure if we lost?
These clients are not paying for fanciful analysis, they want a partner in the decision-making process. Taking a position creates additional risk for the lawyer. But the entrepreneur is usually drowning in risk and is little aided by one who refuses to roll up his or her sleeves and get involved in the action.
• Entrepreneurs want lawyers who understand their business, who are just as capable at critiquing a business plan as they are reviewing an appellate brief, who are just as comfortable in the boardroom as the courtroom and who realize that law is only a means, not an end.
High-technology clients, therefore, require their attorneys to be adept at handling questions regarding all types of contracts, from shareholders' stock option and employment agreements to software licensing agreements. They should be able to spot antitrust issues as well as potential securities violations. They can explain the difference between an incentive stock option and a nonstatutory option as easily as they can explain why California's wage order for classifying computer programmers as exempt employees requires a higher standard than its federal counterpart.
This type of project management creates client loyalty and avoids clients complaining about being handed from one lawyer to another within the firm. Also, high-technology clients value lawyers who attend their board meetings and company picnics, who know the names of their products and the company's history
Lawyers have always looked at clients as a source of revenue, while clients have traditionally looked at lawyers as a necessary expense that must be contained. Until lawyers become a source of revenue, clients will find ways of limiting and controlling their attorneys' involvement with their companies.
Today's lawyers need to become a value-added and revenue-producing service provider. We must be able to bring business acumen, strategic advice and assistance to all aspects of operations. These can include introductions to similar companies in the field, new service providers, potential strategic partners, new customer bases and even future acquirers or acquisition targets.
Once a client sees that its attorneys bring more value than their hourly rate, the client will engage the lawyer to perform a whole host of legal services that are necessary to realize the fruits of this relationship.
• What are the ethical considerations of acting as this kind of lawyer? For example, does the lawyer have an ethical duty to warn the client of risks even if the client does not want this kind of advice? If the client is engaging in blatantly illegal or negligent conduct, or where there is a high probability of potential harm to the client, the lawyer has a duty to counsel his client regardless of whether the client wants such advice.
Lawyers, however, tend to overadvise their clients about potential risks. They often see entrepreneurial clients on a metaphorical tightrope, walking over Niagara Falls, while the client merely sees himself as taking a stroll on the sidewalk. While we should not abdicate our role as lawyers in some needed situations, we should be cautious not to bind the entrepreneur with fears about every conceivable risk that could possibly manifest itself.
In such a case, the lawyer is merely hindering clients from reaching their full potential, something no client can afford.
John Selbak, a partner with Musick, Peeler & Garrett in Los Angeles, is the practice group leader for the business and technology group.
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