A Founder's guide to navigating the law (w/Daniel van Binsbergen)

0:00Today, we're delving into the world of law. As a founder, navigating the legal landscape can be daunting, especially when it comes to deciding what actions to take and when to take them. I think the most difficult thing is to figure out what should you do and when. When is the right time to register a trademark? When is the right time to hire a big firm versus a small firm? When should you create an employee handbook? If you ask a lawyer, you're going to get very different stories. And in my experience, what the lawyers tell you doesn't always align with what rationally makes sense as a founder.

0:35So unfortunately, you now have to navigate this yourself. Our guest today is Daniel van Binsbergen, or DVB for short. A lawyer who left the comfort of his law firm in 2014 to revolutionize the legal industry. But what exactly is wrong with the legal business? Well, for starters, it's archaic. Lawyers, they started out as a guild. You know, like, it's a little bit medieval in some ways. They don't adopt technology very quickly, and it shows. But the bigger problem is, founders and lawyers have misaligned incentives. The people who end up making money, whether you succeed or fail, are lawyers. As a founder, you might prioritize speed and have a higher risk tolerance, while lawyers are paid by the hour and aim for roughly zero risk.

1:22Often it might be a five grand risk with a 1 % likelihood. We shouldn't even be talking about it. Founders seek solutions while lawyers see their role as identifying problems. So what is value to the lawyer? Here are a bunch of risks. Look how diligent I was. I found 30 risks for you. Isn't that great? What they often don't understand is that that's a bad news conversation. In the early stages of a startup, there are countless potential risks. And attempting to mitigate all of them could eat up your time and resources. Well, fortunately for us, we have DVB, a lawyer turned founder who's experienced both sides of the equation, building the legal marketplace Lexu, which he exited right after our interview, by the way, almost definitely not a coincidence.

2:08In this episode, he shares his insights on prioritizing legal matters, redefining your relationship with your lawyer, and much more.

2:20I'm really excited about this episode because it's hard to make law interesting. Law is kind of by its very nature boring and, you know, entrepreneurs and startup people, we like the exciting, don't we? We like to get on with building and not the frameworks and stuff. Why this is valuable, wherever you are in your journey, whether you are super early stage, you know, DVB comes into this episode with tons of advice for the things that you could avoid, the costs that you could avoid and circumvent because he's like, you know, the whole industry tells you they're important. In reality, they're just not.

2:48And he didn't even do them for his own company. So he really like walks the walk. He doesn't just talk a load of stuff and give people advice. He does all of these things. He circumvents the things that he knows are complete nonsense in the legal world. So you're getting legal entrepreneurship merged advice here that's really valuable. And then if you're sort of more like a decade into your journey, like me, he's got advice on how to, you know, avoid pointless fees and negotiate with your lawyers. and it gave me an exact framework, by the way, that I literally used straight after our interview and saved£4 ,000 with my own law firm, which was super valuable.

3:18So whether you are new to this game or you're building and you have been building for ages, there are tactical pieces of advice in this episode that he can recommend that you can follow that will save you money on your legal fees and add value to your business. I'm really excited for you to listen to this interview. So So let's get to it. Okay. So Daniel, or DBB as I've come to call you, what are the most common mistakes you see entrepreneurs making and at what stage? So there's a huge spectrum. So if you look at the stories that people tell about their horror stories about legal things. It's usually they either underlawyered something or they were the recipient of significant overlawyering.

4:06So I think the most difficult thing is to figure out what should you do and when. So when is the right time to register a trademark? When is the right time to hire a big firm versus a small firm? When should you create an employee handbook? If you ask a lawyer, you're going to get very different stories. And in my experience, what the lawyers tell you doesn't always align with what rationally makes sense as a founder. So unfortunately, you now have to navigate this yourself. Okay, so on that note, you talk about overlawing, underlawyering. Is there such a thing as underlawyering when you just start up?

4:44Yes, so I think there are a few things that you do need to do when you start because they will come back to bite you. But if you ask a law firm at the very beginning, they're gonna give you the entire menu, which is then the overlawyering. Okay, what's the set menu? So the set menu to me is when you start out, don't do anything silly. So somebody I know started a dating app, which is now quite a significant dating app, and they wanted to get a little bit too clever. So they incorporated in Malta because they'd heard there might be some tax benefits very, very far down the line. And as a result, they needed to get a local director on their board, very complicated.

5:25And then that meant that for every little thing they needed board approval for, they needed to pay money and get all of that stuff papered. Now, if you're a massive crypto company and you're needing to be in a weird jurisdiction for regulatory reasons, that's one thing. But if you're just wanting to run a dating app, you're making your life so hard by doing something a bit too complicated. Got it. Okay. So what are the basics? So the basics to me is if you're based in the UK, just incorporate a UK limited company. If you're based in the US, just incorporate one of the standard companies there.

5:59And then the main thing to worry about is if you're working with somebody, what do you agree in terms of equity, ownership? And what is the vesting schedule? Because what you don't want to do is spend six months working with somebody. Then they leave and they formally still have 50 % of the business and there's nothing you can do about it. What's a common vesting schedule? Just give us the download of a 101. What do you recommend? Pretty standard is four years with a one-year cliff. So that means that if one of you leaves within the year, they don't get to keep anything. If they leave after a year, they get to keep 25 % of their stake and so on.

6:33And then usually it's a monthly schedule. Got it. And do you see people gaming that system a little bit in the early days? Like, are we kind of fallen out at six months, but I'll wait a year? Potentially. I mean, that does happen. I think it's worth mentioning, though, that if a founder who's leaving gets too greedy and is walking away with something that is actually not palatable and the business can't really raise more money or continue, there's often a commercial negotiation that happens where the leaving founder might have to give up a bit more. Okay, got it. So table stakes stuff you've incorporated in the country that you're planning to run the business in.

7:10If you have a co-founder, you've got a sensible agreement. What else? Then it depends on where you are in the journey. So as a founder, you need to weigh up so many different things you could be doing. You could be spending 300 grand on IT security. You're probably not going to do that when you're still trying to create an MVP. The legal work is similar. So you could be doing lots of things. Let's say you have one employee. A lawyer might say, create an employee handbook because one in 100 employees will sue you. And then this handbook would be helpful. Now, I don't think that's wise. You're taking way bigger risks all the time and you need to balance what money you have against what legal risk you want to prevent.

7:52So my rough rule of thumb is what is the main constraint in your business? And I think in Matt Lerner's episode, he really spoke about that eloquently. Like what's the rate limiting factor and what legal work is kind of associated with that? So if you have an MVP and you want to launch to the world, that's the moment to maybe get your trademark sorted. I have a lot of people in my network who unfortunately have had to spend tens of thousands of pounds because they launched in a very public way, lots of PR under a brand that was trademarked by another company. So, you know, you're in TechCrunch, maybe the Financial Times, you're very excited.

8:31And then all of a sudden the legal letters start coming in, all these cease and desist letters saying, you're infringing on our trademark. You need to pay us 100 grand in damages. You need to take out an ad in the Financial Times to apologize and so on. And you're furious. You're like, well, this can't be right. Then you go to a lawyer and they're like, well, I guess it is right. Let's negotiate. So that's a really easy fix is before you go live in a public way, just try to register a trademark because the lawyer will do a trademark search and see is the brand that you thought up actually available in the classes you need.

9:05when we were starting Heights, we had a load of names that we wanted to run through. And honestly, we could not believe our luck that a name as good as Heights in our classes that we needed was available UK, Europe, and USA. And actually it was an interesting process to know going trademark down the funnel. Lots of names were really liked. And in Ali Abdaal's episode, we talk about blank piece of paper and you need some constraints. Constraints are helpful. um in reality actually having uh trademarks as constraints it's actually very helpful in like in in in working out what business you're looking to make uh what the business does what's it called there's a bunch of names that are just trademarked and so forget about it yeah just like because you get very emotionally attached to a name yes you do very um okay so trademark's done we're sorted then what then nothing like is that enough it depends on what you want to do next um if you're b2b uh at some point hopefully you'll sell to to another business now if you'll fail and you'll need to work out how to liquidate a business exactly then that's next um so assuming you have your first customer if that's a small customer they will typically behave a bit more like a consumer and just having click through t's and c's will be fine um you can probably make do with a template you find online.

10:27Now, lots of lawyers listening to this will say, no, dangerous, dangerous. You might get sued. In my experience in the very beginning, the risk of nobody wanting what you built is way higher than getting a lawsuit. So when I founded Lexu for the first six months, I didn't even have T's and C's. And I just took that risk because I felt I couldn't justify my time on them. And it's only when we got more volume that I thought, okay, now's the time. If there was ever an advert for the lack of necessity, it's founding a legal marketplace startup that serves customers and lawyers as your marketplace and not having T's and C's.

11:05At least you're practicing what you preach. Okay, so a question I've really been wanting to ask, how pointless are law firms in the world of AI and GPT? It's a big question. I think there's going to be a lot of change in the next five to 10 years. I think the change won't happen as fast as people think, because I think the rate limiting factor on that change isn't going to be what the tech is actually capable of. It's the humans who currently buy and sell legal services. How quickly can they adjust to the new reality? And probably the insurance, right? Like the risk reward factor always feels the reason lawyers are so expensive is because you feel like you're very insured against the downside too and there's a lot at stake yes and but not every legal job is the same so in my head there's always this spectrum between low risk legal work that kind of the plumbing just needs to happen and then there's the i'm selling my business i'm doing a huge round this is so important that i just want another human to be on the call with me to talk me through what i should be thinking about yeah okay so most legal mistakes that first-time founders make take us through them what are they i think um so aside from the fact of not getting a trademark not getting your vesting sorted um it's doing stuff that in hindsight is is a bit silly um so for example if you're a tech company and you raise around and it's not a traditional investor they may say things like well let's structure the investment as a loan and let me get a security interest like a debenture over your shares in case you don't pay it back now in that moment you might think well what other option do I have I need this money to get going but then what you've just done is signed a contract that means that if if that investor ever wants to pull that money back and you can't pay it which you usually can't they can just pull all the shares and basically take the company away from you so those are the big kind of nuclear events that you want to avoid.

13:13So those are the big things I'd be worried about. Have you done something of that magnitude? Aside from that, I think there's just almost a death by a thousand paper cuts. Often working with lawyers is they might send you an invoice. You're like, how is this possibly reasonable for what this work actually represented to me? And then the mistake might be that you keep working in that way or you might do what they tell you is appropriate. And maybe that was actually appropriate for a big corporate and not for you. So I think there's this whole piece around how can you work more effectively with law firms and have a bit more of a balanced relationship.

13:53Do you find that law firms are well aligned with their incentives when they want to work with startups? Because in my experience, a lot of lawyers do want to work with startups because corporate law can be very boring and they think that startups are sexy but there's like a disconnect really between understanding what people in the value that people attribute with this stuff right when you don't have much money as a startup many thousands of pounds feels like a big deal and it's so insignificant to the lawyer and what they usually charge there's a massive like difference of interest here so do you find that that's like a common problem in the legal firm practice in the startup world in general there's sort of misalignment in understanding where things actually make sense?

14:35100%. So in my mind, there are two huge conflicts at play. So one is how do law firms bill and how do they like to bill, which is by the hour, and what makes sense for the customer. So the customer doesn't want to get a very surprise invoice. And the law firms, just through history, there's this culture of, well, the billable hour is the currency of value in the firm. So the lawyers who bill the most hours, they're really respected in the firm. And when I worked at a large firm, those were the stories that were celebrated. Like, oh, this lawyer was able to bill that many hours on this file. Amazing.

15:08And we knew which clients would be sensitive to a lot of hours on their bill and which ones weren't. And when you measure, you improve. So that's the starting point. The lawyer comes to you and thinks, I have these billable hour targets. I'm going to get fired if I don't hit them. That's on their mind. What's on your mind as the founder is, this is super annoying. I need to get this legal work done and I don't really want to do it, but I know I have to. The lawyer is super excited to do this work for you and wants to offer value. So what is value to the lawyer? Here are a bunch of risks. Look how diligent I was.

15:44I found 30 risks for you. Isn't that great? What they often don't understand is that that's a bad news conversation. What you would probably prefer is they review a contract and say, actually, this is good to go. This is ready to sign. I remember as a lawyer, actually having that anxiety of spending two hours on a contract, not really finding a major issue. And then I found one. I'm like, oh, thank God. Now I can justify my existence. And you almost relish telling the client there's a big issue there, not realizing that that's bad news. So we need to be a little more like doctors, knowing like, okay, this isn't going to be great to hear.

16:22So we can't just offer the bad news. We have to offer the solution as well. Okay. So culturally, how do you think the law profession is actually changing in line with how the world is moving and what we know about startups and the pace they work at and how entrepreneurs work? So I think they recognize that they may have to offer a fixed fee. Behind the scenes, though, they're still accounting on a billable hour basis. And if they spend more time than they can bill, they then need to write it off and sometimes need to get permission from the board of the firm to do that. So it's highly embarrassing.

16:54So as a result, they'll still find it a little bit easier to push you to pay a bit more so that they don't have to have that conversation. Historically, though, they've had a monopoly. So if you're a startup, you're going to go often with a big firm and they know that. And as a result, there's not been that real push to change. I think that's changing now. There are way more alternatives for pieces of the work. In the UK, you've got seed legals, which is a more tech operated way to get certain work. You have lots of boutique firms with ex big law partners and senior associates charging roughly half.

17:28You just need to do a little bit more work to figure out what's appropriate. What do you think is the motivation for the people who've gone from big expensive law firms into smaller ones? Sounds like they're accepting less money. So what is the actual motivation for those lawyers? How does that model actually make sense? So it turns out that there's more to life than money. And I did not know that myself. But no, there's countless studies. Well, we've got the thumbnail sorted. Lawyer admits. No, there's countless studies that show that lawyers are actually the most miserable of all the professions.

18:02So they outrank accountants, architects, all these professional services in levels of misery. And I think... But they're so loved by us. I know. It surprised me too. The truth is, if you're under tremendous pressure to spend more time and your clients are perpetually annoyed with you for that, it's not a very happy place. You know, I routinely had to worry 80 hour weeks. A friend of mine told me this story that he had worked three nights in a row until 2, 3 a.m. He left the firm completely zonked, saw he had a voicemail from his wife, listened to it. And he actually thought all of a sudden he was in a conversation.

18:38So he started talking back and was incredibly annoyed that she was talking over him. And, you know, he was still billing 500 pounds an hour right up until that time. So you're not necessarily getting great value for money in that model. It's just not a nice place to be. Okay. So that's misalignment and also some understanding that there's more to life than just money. Maybe. Okay. What are the alternatives? So the solution is structure the relationship with the lawyer on a different footing. So if you approach a big law firm and you say, I've got a funding round, they'll say, great, we estimate 20 to 30K to finish this, but we'll see.

19:17And then you say, that's not good enough for me. Can we agree a fixed fee? And then the law firm will say, well, some funding rounds go on for 12 months. So surely we can't agree a fixed fee because not every deal is the same. And then you say, okay, well, can we maybe just write down what it depends on? So you mentioned 12 months. Okay. I'll make it 11. But anything that goes on for more than six months, you're entitled to revisit the fee. But we're not going to go to hourly then. We're just going to have a conversation where you're going to say, how do you need to adjust your fixed fee to reflect that?

19:49Similarly, what's included here? I have a subsidiary in this other country. Are the local fees of that lawyer included? Let's map all of that out. Let's spend a bit more time upfront scoping and then locking in a fixed fee to reduce that risk. and the lawyers will sometimes forget that they're on a fixed fee and then they'll still send you the invoice um i've had that experience a lot with u.s firms actually and then you have to tell them no no we had a fixed fee and then they just have to book off the time and i'm hoping that if enough founders do this that ultimately the culture itself will change i actually do that all the time with our lawyers um but then like you just said also forget so on important things always fixed fee and then stuff comes up during the year and you kind of forget.

20:35So it goes on to hourly and you're suddenly like, my God, I've got a massive bill from my law firm for what I think is quite meaningless work. Well, and that reminds me of another little tip. Um, it's sometimes worth just picking up the phone. Um, so. Which they charge for. Which they charge for, but you can kind of time cap that by, um. Do they charge on WhatsApps? They will. Um, but, but you can always hang up. What happens when you send a quick email with what you think is a quick question is that lawyer now knows, okay, whatever I answer, there's a paper trail. And if it's slightly wrong or not nuanced enough, I might get sued.

21:10So why don't I spend five hours researching this and writing a memo? And I'm sure Dan will appreciate that. It'll have lots of citations and detail. And you think I just wanted a yes or no. And I didn't want to pay four grand for this. Whereas if you pick up the phone, you can say, look, what will you do if you're in my shoes? Like, just give it to me straight. This is what I'm worried about commercially. I know the legal part is part of the equation. What would you do? And they'll speak a little bit more freely. So you get a bit more commercial advice, but at the same time, you're only going to pay for the time of that call.

21:40Okay. So that's one even footing or change of footing, so to speak. What's the next? To me, it's avoiding big firms if you can. So large firms, they have really nice offices. So My old firm had a beautiful white marble, lots of gold, huge ceilings. And it was really nice. And clients liked it. But somebody needs to pay for that. And it's the client. So they have big overheads. So as a result, they have to charge really high rates. They also have a lot of leverage. They're trying to create leverage. So they're trying to push the work down to a more junior level. And what's better as training wheels but a very small and insignificant client?

22:18So if you go to a large firm, they'll say, okay, we have this new trainee, very bright, but has no idea about anything that you're doing, why don't they spend a lot of hours on your file? And we'll check their work and the senior associates work will also be checked. And then we'll just bill you for all of that. Now, if you found that partner who truly often has a lot of experience and that partner has left the firm for lifestyle reasons or otherwise, you might get that experience throughout. They're not stuck in this billable hour model where they too are worried about their billable hours. They're way more likely to offer you fixed fees and just to be a little bit more human about it.

22:54Nice. Okay. Third?

22:59Third, if you find yourself stuck and you didn't negotiate a fixed fee and you now have a huge invoice, the only move you have left is to heavily scrutinize. So you have to ask them, give me the timesheets, give me all the narratives, and then you unfortunately have to get out your highlighter and actually go through line by line what they billed you for. A lot of firms will have billing software, which means that even if the lawyer opens up an email because they're copied on iPhone, the tool will ask, should we bill that time? And it might default to 0.1 or 0.2 of an hour. So now all of a sudden, 100 pounds is added to your bill.

23:37So you want to go through and you think, well, who is this? This lawyer has never talked to me or did anything. Why are they billing time? I've literally got a seven grand bill with a lot of that kind of stuff in right now that I'm thinking about changing or at least scrutinizing. I'm not good enough at scrutinizing. Tell me about some founder horror stories. What are things that people need to understand to avoid? So one story that comes up a lot is there's this trend that lawyers don't just want to be lawyers. They want to be trusted advisors. And I think that's a great trend. but can they deliver on it?

24:14That's the question. So sometimes you go to a large firm, you've received a term sheet for an investment round and the firm says, we do this all the time. All right. You sit back, we'll negotiate this for you directly with the other side. And they may end up torpedoing the deal because they're treating what's in essence still a commercial negotiation that needs to happen as something that's completely locked in and we can just be really difficult about every single point. So I've heard a lot of horror stories of founders having to sidestep their own lawyers and the lawyers on the other side to save the deal.

24:47So they'll phone up the investors and say, like, we don't know what our lawyers are doing and what your lawyers are doing, but it seems like they've been talking for two months and we're nowhere near signing the term sheet. So the lawyers have advised me now on what they're worried about. Can we now agree and negotiate the terms? And then we'll have the lawyers paper it. So you have to figure out, like what should I get the lawyers to do and what do I need to keep on my plate? What are some warning signs you could even watch out for for that? Because that sounds very much like a damage limitation after the event where you've in theory not just spent unnecessary money but taking yourself further away from the ideal outcome.

25:27I think you just need to be clear with yourself what you're willing to delegate and it's the same in your business. So something critical you won't necessarily delegate. And I think getting your heads of terms agreed is critical and you need to be in the lead for that. So by all means, talk to your lawyers and get their thoughts, but you have a gut sense on like, what's, what's going to torpedo this deal. Another friend of mine was selling his business. He was 18. It was his first business. Very exciting. Didn't have that many offers. And he asked his lawyer, they send me the SPA. can you mark it up?