Legal

As I discussed in my previous article From Contract to Smart Contract a Smart Contract is not necessarily a contract in it self.

If the Smart Contract is designed to be run 100% autonomously you don’t necessarily need what a normal legal contract offers you. But very few things live entirely on the block chain for now.

A couple of months back I wrote this article What Lawyers could Learn from Programmers. It was meant to be provocative and I had hoped for better responses from the law community itself.

Well now George Grellas wrote a huge fantastic comment to the original post outlining the issues as seen from the eyes of a lawyer. I’d like to really thank George for taking the time. His comments are very good and to ensure that more entrepreneurs see them, I’m reposting it as a full blog post here:

I have been a startup business lawyer in Silicon Valley for over 25 years.
I agree with your broad points that lawyer monopolies are a hindrance to good legal services and that things in law that can be commoditized can and should be for the benefit of consumers.

Six or seven decades ago, lawyers were paid to do title searches when a home was sold. Who would want to pay a lawyer to do that today whatever that lawyer’s real property expertise when title companies do that job cheaply and well.

So too simple incorporations and LLC formations can and should be done through inexpensive online services for many small businesses.

Other areas lend themselves to this as well. And more power to those who set up such systems for the benefit of consumers. They are performing a public service.

Remember, though, that law is a slippery beast.

David Dudley Field inspired adoption of the California Field Codes in 1872 with the express purpose of using ultra-simple language to permit lay understanding of the law. The theory was to take the law away from esoteric judicial rulings as much as possible and put it in “simple” statutes that anyone could read and understand. As any California lawyer can tell you today, judges and lawyers wound up “interpreting” those simple statues to the point where all the old complexity reasserted itself with the added kicker that the new statues themselves added yet another layer of complexity to the process (the question being not just what judges meant in all their old rulings but what the legislature meant in adopting the statutes themselves). This produced a whole new set of rulings that was more complex than ever, making California’s laws some of the most complex in the whole nation!

Law, therefore, in trying to capture and regulate the whole range of complex affairs, doesn’t easily lend itself to simplicity and standardization. Elements of it do, of course, but as a whole it does not. Therefore, any attempt to reduce it to simplicity must be approached with circumspection.

I personally think Nolo does a fabulous job with its self-help resources of helping consumers take some measure of control of their legal matters.

Yet, when the process is unguided, it can lead to problems.

I attempt to present the other side of this on my website in a couple of answers to FAQs. Why can’t I just use a form contract? ; What are the distinctive aspects of setting up a startup business?.

The latter item illustrates some common pitfalls in parties attempting to incorporate themselves when setting up a startup. Many will fill in their kits and follow instructions. But then they issue stock without restrictions, leaving themselves vulnerable to founders who take large amounts of stock and then walk away from the company. They fail to put the IP into their startup. They combine the “cheap stock” issuances with simultaneous investor dollar contributions in ways that create serious tax problems. These are all serious errors in forming a typical startup. Yet, when founders use kits, they have no idea about these issues. Does this matter? Sometimes not – they just fix the problems later. But often it does lead to real problems. And fixing the problems later is much more costly than doing it right in the first place.

Could the startup process (i.e., involving a team of founders with a tech business model) be systematized much more than it is today? Yes, it can. Can it be handled through online incorporation services who do nothing more than supply kits? Not even close.

When it comes to standard forms, these are useful and every attorney uses templates. But it is very wrong to assume that the process of doing contracts reduces itself to simply filling in blanks. The worst lawyers I ever hired tried to do that and little more (using my firm’s otherwise well-drafted forms) and their work always proved a disaster – I would essentially never let it out the door. Indeed, if I see a situation where a very simple form will solve a client’s needs, I always tell the client it is a waste of time to pay for attorney time for that purpose. But in almost every transaction of note the issues are almost never that simple.

Someone with a discerning eye almost always needs to review custom contracts carefully. This, of course, can be a smart lay person using self-help resources. And some people are inclined to invest time and effort for that purpose in a way that helps them manage their legal budgets more carefully because they pick up a lot of the burden themselves. But it is a burden, and it has a cost attached to it – there is always a cost-benefit component to any such effort. What is worse, many people do not do a good job of thinking through the issues and wind up cutting corners. A contract in their hands can be like a loaded gun in the hands of a six-year old – wildly unpredictable and sometimes dangerous results can follow.

Your point about lawyers’ FUD is dead on. This is a despicable practice. I have spent a long career, though, working directly with thousands of entrepreneurs – smart people who see right through anything that is phony. I always use a direct style with such clients – telling them straight how the law works, how they can manage it, and when they need something more custom. Even with this approach, there is no more than maybe 15-20% of the business law matters I handle that lend themselves to commodity handling.

One further illustration: take standard Series A funding documents drafted by national venture capital associations. These are expertly drafted and very standardized. They can be used in a fill-in-the-blank fashion. And they work beautifully. From a founders’ standpoint, however, such documents seriously distort the picture. They are in “standard” form only because they fit the pattern that VCs like. Many of the provisions in those documents can and should be resisted by founders because they can be seriously harmful to founder interests (even the idea of a reflexive incorporation in Delaware can wind up prejudicing founders). Moreover, many Series A fundings can be done with documentation that is far simpler than that found in the “standard” forms – simpler and highly favorable to founders (we use such documentation all the time when our founding teams go for angel funding, etc.).

Indeed, many “standard” contracts are prepared by interested parties who have a direct stake in slanting them in one direction only. Ever read a 50-page “standard” commercial office lease – beautifully drafted, needing only a few blanks filled in. Yet any tenant who signs such a lease without customizing it will agree to many onerous provisions that commercial landlords have built into such documents.

“Standard” contracts for the sale of a small business, in turn, are prepared by broker organizations whose main motive is to make sure a deal closes and does not have too many complications. Such documents are very professional and very easy to use – again, just fill in a few blanks. But any buyer who uses such forms in buying a business of any significance whatever will easily wind up losing the vast majority of protections (especially relating to warranties) that go into any custom contract to buy a business. Again, I try to educate consumers about these issues on my website, using not FUD but a reasoned explanation of what the issues are and where the risks lie.

I hope you don’t interpret my comments as critical or self-serving. They are not meant to be. The issues you raise are important ones and your discussion of them is very helpful. But any such discussion has to take realistic account of the true complexity of legal issues and of the limitations of standard forms and procedures.

Lawyer monopolies need to be limited or even abolished. Law needs to be made more consumer-friendly. Standardization needs to occur as much as possible. But skilled handling of the law and its complex aspects will never reduce itself to simple forms or procedures. Any balanced discussion of this topic needs to take that into account. Legal complexity cannot simply be wished away, no matter how gifted the people trying to program the standard algorithms (to borrow the programming analogy). And the motives of interested parties who stand to gain from such standardization cannot be ignored.

Sorry for burying what amounts to a 1,500 word piece within the scope of comment. Please accept this in the spirit of my validating the importance of the issues you raise and wanting to further that debate by taking all important factors into account.

Please visit George’s firms website as it really seems to be a fountain of knowledge for small business and early stage startups.

My main comment is that this is exactly what we as startups wish for from our lawyers. A sparing partner, who understands our needs and is able to explain the issues that most of us non lawyers don’t instinctively understand.

Most entrepreneurs I know complain about the lack of transparency, the FUD and all the things I complain about in the original article.

George Grellas associates seem very transparent. Even their billing practices page page would make me feel more confident about making that initial phone call. Maybe us programmers could even learn from that as we often end up being not too transparent in that end.

Over on the Extra Eagle Blog our company blog, we are trying to create a new simpler and shorter Consulting Agreement.

If you’re a consultant, work freelance or even if you hire freelancers why not check it out. We’re looking for your input on creating the perfect general purpose consulting agreement.

AmLaw Daily has a great interview with Richard Susskind about his new book The End of Lawyers?: Rethinking the Nature of Legal Services. It is essentially about the fundamental changes that are coming in the business models of lawyers due to changes in technology in general and the economy as a whole.

The book points to a future in which conventional legal advisers will be much less prominent in society than today and, in some walks of life, will indeed have no visibility at all. This, I believe, is where we will be taken by two forces: by a market pull towards commoditization and by pervasive development and uptake of information technology. At the same time, I identify a whole new set of jobs for lawyers who are prepared to spread their wings.

The fact of the matter is that almost everything that is not highly specialized has come down in price due to technology and commoditization. Richard argues that lawyers have fought against this for too long and need to start changing the way they do business or they will loose for good.

The cost for entrepreneurs of almost all repetitive non specialized things is trending towards zero. We all know that having our own server farm is now pretty much a silly thing to do, unless you are in the server farm business.

Ruby on Rails and Agile methodologies also introduced us to the innovative concept that our smartest most creative people shouldn’t spend 90% of their time on boring repetitive things like configuration and requirements documents.

Why should we still pay top dollars to lawyers for them to fill out word templates or advice us on simple things that google could solve just as easy for us? Why use a law firm to pay a premium on incorporation when 100s of companies who do this well are competing for your business via Google Ads?

Fear, Uncertainty and Doubt

The simple fact is that we pay big bucks to lawyers for silly tasks because of the centuries old campaign of FUD spread by the law industry about people doing things for themselves.

Like Interior Designers lawyers have essentially managed to run an outdated protection racket in the US. Each state has a private association known as a Bar Association which has a state granted monopoly on deciding who can practice law and also pretty much in deciding what “practice of law” means.

Nolo Press and Agree2 are forced by these rules to put silly disclaimers like this on our sites and books:

These also try as much as they possibly can to retain the lawyers monopoly on filling out word templates.

Legalese is another weapon for creating FUD in entrepreneurs. If you look at a contract and can’t understand it, the theory goes you should call a lawyer and have him revise it. Most don’t and hope everything is fine.

Law scholar Adam Freedman who wrote the brilliant Party of the First Part argues that legalese as a concept was pretty much invented and has been preserved by the law profession as a method of job protection over 500 ago.

The current argument I most hear from people who should know better is that each silly little piece of legalese is there because it has a specific legal meaning within the court.

I call total BS on this. If engineers believed in this we would still be riding our cotton to market on a horse drawn carriage. Judges are people. The vast majority of them very intelligent and perfectly able to understand plain English. If some new precedents have to be created so be it.

I know many programmers who live by these same principles. Talking technical BS where it isn’t necessary and overcomplicating architectures and code to preserve their jobs. It’s BS when we do it, it is BS when lawyers do it.

The good news is that the programmers who broke with this BS of the secret brotherhood of programmers now have more work than they can handle and bill at much higher rates, due to previously unheard levels of trust between the client and the programmer. I’m certain the same will be true for the lawyers who break the ranks of secret hand shakes, double talk and word templates.

the lawyers who break with tradition and build new traditions will probably end up with more work than they can handle. The ones who don’t will loose out to Agile US Lawyers, Online services and offshoreing, just like what happened in the US IT industry.

We need more simple on-line legal services

In the comments to the above interview Patrick McKenna says:

Online subscription services typically require a significant initial investment in non-billable time to establish and then take about three years to break-even. Those on-line services that were launched by many UK law firms five or more years ago are proving to be extremely profitable today. Meanwhile, too many US firms are obsessively intent on short-term billable hour requirements to consider making longer-term investments of this nature.

Just imagine the cool and profitable services a smart innovative (Agile) lawyer could come up with working with one or two good programmers.

Online company registration systems are a great example. They can and should be a lot more innovative. In the UK there are several law firms and Accountancies that offer legal/accounting services as complete package deals. Almost all US services are stuck in the Web 1.0/AOL era.

A corporate structure can easily be standardized with an online service to handle meetings, share registers and all standard form documents people use now. Innovate and make a lot more than you would billing people for dum repetitive work. Then focus on being their on standby for more traditional creative work for your now much larger client roster.

Shameless self promotion alert: We at Agree2 are trying to create a system for both lawyers and non-lawyers to manage agreements and legal templates. Our API would allow you to easily create and manage such services. If you have any ideas or would like to talk to us about it please email me personally at [email protected].

Be the next Lawrence Lessig

The GPL revolutionized software. Several years later Lawrence Lessig helped revolutionize the world of publishing with the Creative Commons License.

There are lots of other things that need revolutionizing. I’m in the Legal Committee of the Open Web Foundation where we are trying to create an open standard IPR license to allow employees of companies to be able to work on web specs without fear of IP attacks. This is important work, but there are lot more interesting things that should be commoditized.

Imagine when talking to prospective employees or investors that you could say we are incorporated under the CCA (Common Corporate Agreement). This imaginary package would be a standard Articles of Incorporation, Memoranda of Incorporation etc. It would be written in as plain English as possible and be sufficiently good to protect both founders and investors. The idea is like the GPL it is a common non negotiated concept that everyone understands.

Y Combinator have graciously published their package of Series AA Equity Financing Documents which offers some of this. Y Combinator have managed to standardize a lot of these things as part of their own business model, which is great. However they are not a well analyzed immutable generic object like the GPL. For more on these documents checkout The Startup Lawyers Analysis.

This is where someone like Lawrence Lessig comes in. A sharp charismatic lawyer who is willing to take on the existing traditions. We the entrepreneurs are willing to follow you. If you are such a lawyer read Seth Godin’s Tribes which should provide great inspiration.

We’ve already seen what happens when you leave drafting your agreements entirely to an uninterested legal team.

Yet people still have their lawyers draft up an agreement, which more than likely for most contracts really is a paralegal filling out a word template. There are lots of myths surrounding agreements that I wrote about earlier in It wont hold up in Court.

I can’t stress enough that an agreement is not between lawyers, it’s between it’s parties. You as the entrepreneur and the other party, whether it is your users in a User Agreement, your client in a consulting agreement or an investor in a term sheet.

Yes for many of these you need to bring lawyers in. In particular high value risky agreements such as Term Sheets you need lawyers to help you out. That does not remove your responsibility however to understand the core of the agreement.

The mysterious Uncle Saul who is now one of my favorite bloggers says in his great post Roping in the Legal Eagles :

As the businessperson with the most intimate knowledge of a particular deal, you should draft as much of the “business-oriented text” of your contracts as possible. At the very least, you or the appropriate member of your team should document the primary deal points in bullet-point form. The more specifically you document the business terms, the fewer iterations will be required to finalize the agreement. Even a highly attentive, business-oriented lawyer cannot put himself in your shoes. They do not work at your company, so there is no way they will have your insights. Thus, the more work you do upfront to document the business issues, the less you will ultimately be charged and the more closely the agreement will reflect the spirit of your verbal negotiations.

Your Lawyers do NOT and can NOT understand every aspect of your business. Only you and your team have that knowledge. Uncle Saul continues:

There is no magic language which makes an agreement legally binding; in fact, in most cases, the simpler the text, the better. Many a binding contract has been written on the equivalent of the back of a napkin. Once you draft the straightforward text, sans the legal mumbo-jumbo, ask your lawyer to review the text to ensure your layman descriptions do not result in an unintended interpretation. As noted in Tom and Huck, plans and agreements written in plain language reduce confusion and benefit all parties. If you select the right lawyer, he will not load up your text with gratuitous legal jargon (leave that job to the BDC’s legal squad).

Go read the rest of Roping in the Legal Eagles for more tips on how to create and deal with a good legal team.

I guess my best advise here is to remember that it is your job as an entrepreneur to take risks. It is the lawyers job to avoid risk. Don’t let the lawyer talk you out of risks worth taking, have him educate you so you can make the decision if the risk is worth taking.