Iain and Milan (TLF) had the fantastic opportunity to gain insight from Conrad Everhard, Founding Partner at Flatiron Law Group LLP (Flatiron) based in New York City. Flatiron combines the traditional strengths of elite New York Law Firms with the nimbleness and industry savvy of the best Silicon Valley firms, the systems orientation of the Big 4 accounting firms and the latest secure cloud technologies to help get legal work done faster and better (and oh, by the way, less expensively too.)
Getting to know Conrad
Conrad, what is something you believe that other people think is insane?
That’s an easy question. What we are doing at Flatiron is insane. We have left the comfort and security of our big firm practices to start a next generation law firm using a new business model. If we succeed, we are going to fundamentally change the legal service delivery model.
We think we are going to do it!
Do you have a quote you live your life by or think of often?
Theodore Roosevelt: “Far better is it to dare mighty things, to win glorious triumphs, even though checkered by failure… than to rank with those poor spirits who neither enjoy nor suffer much, because they live in a gray twilight that knows not victory nor defeat.”
What have you changed your mind about in the last few years? Why?
That’s a good question. I have become more politically progressive in the last few years. My own hardships, (the failure of my company, AE Polysilicon), and the hardships of others, have softened my Darwinian edge. I am still a capitalist, but I am now more at home with the Silicon Valley wing of the Democratic Party. This country faces real challenges, access to health care and the cost of secondary education, among others. The future of work itself is in play. I was a lifelong Republican, but regurgitating the 1980s Reagan playbook (tax cuts for the wealthy) is the last thing that the country needs right now. Frankly, I think that the beneficiaries of automation and out-sourcing, the capital classes (the owners of equity), have an obligation to contribute back to society part of what I call the “innovation dividend” so that the people who have been “disintermediated” by the new economy have an opportunity to rejoin the economy. Otherwise, you are going to get societal chaos, which is already happening our politics.
Flatiron and tailoring legal services to better serve startups
Please paint us a picture of your typical client – what does Flatiron offer that the said client can’t get at a global elite law firm?
Our model is to offer premium legal services (mostly in the areas of corporate deal work) at a level of quality that matches (or even exceeds) the quality of big law but at a production cost which is much lower than big law by using a higher efficiency, more rational, delivery platform. That way we can price ourselves below the market, without discounting or sacrificing quality, and still capture a big chunk of the efficiency margin achieved by leveraging our platform.
It’s not rocket science. It is just basic business strategy. Thinking of it graphically, there are two components to our model, quality (which we call the vertical vertex) and a high efficiency delivery model (which we call the horizontal vertex). Our model operates at the intersection of the vertical vertex (quality) and the horizontal vertex (the high efficiency delivery platform).
Quality always has to be the primary value driver. Without quality, efficiency is meaningless. You can’t compete against the big firms for premium deal work without quality. You’re just LegalZoom. There are two ways that we ensure quality. First, all of our partners are senior level former partners of leading global law firms. We have been trained at elite firms, including Sullivan & Cromwell, Thacher Proffitt and Jones Day. Many of us also served as general counsels in the private sector and in entrepreneurial capacities. We don’t hire junior associates and we don’t pass the costs of training junior lawyers to our clients.
Secondly, we are laser focused on practicing only in our core areas of expertise, principally corporate deal work in M&A, private equity and venture capital. We have made a conscious decision not to try to be all things to all people, and dilute the quality of our brand. We do what we do best and out-source to other legal providers the things that they do best. We believe that this approach creates the best, most cost-effective outcome for the client.
In terms of driving efficiency, what we call the “horizontal vertex”, we apply project management principles to each client deal. We look at each deal (each “project”, if you will) holistically, breaking the deal down into its components parts: 1) high value, strategic work, 2) high labor, lower value, commodity work, 3) high value work outside of our core areas of expertise and 4) repetitive, form driven tasks. We then allocate workflows for each bucket in the most economically rational way, prioritizing quality in each instance.
Take for example an M&A deal. We break down and allocate M&A deals as follows:
- High labor, lower value, commodity work, like due diligence or opinion back-up, is either out-sourced outright to lower cost legal service out-source providers (we work with several of the leading LSOs) or (what we call) “in-sourced” within our own external community of project lawyers who work with us a project basis. Most of these individuals are former big firm trained senior associates and junior partners. In either case, the team is managed by Flatiron lawyers and supported by high efficiency electronic tools, like virtual deal-rooms and e-search engines licensed from 3rd parties.
- Repetitive, form driven tasks, like creating 1st drafts of principal documents, drafting ancillary documents and schedules, and preparing closing materials, can also be out-sourced or “in-sourced”, including to non-lawyers, law students or lawyers in training who work under our supervision. These tasks are also susceptible to the application of knowledge management (form repositories, databases) and advanced technology tools, like document automation and artificial intelligence. We are developing our own state of the art form databases. As part of our long term plan, we also intend to create proprietary AI tools, some of which we may commercialize.
- High value work outside of our core areas of expertise, like tax and ERISA, is out-sourced to outside law firms that collaborate with Flatiron on a project basis. We have collaboration arrangements in place with several law firms, including for tax. We also out-source non-core non-legal services, like paralegal services, to third parties.
- Finally, there is high value, strategic work, like complex deal structuring and drafting, high level deal advice and negotiation. Under our model, this is where Flatiron lawyers devote most of their time, to the areas that are mission critical to the client. Our mission statement is to apply the bulk of our creative energies to the areas that matter the most.
The beauty of our model, in addition to delivering the best outcome at the most cost efficient price for the client, is that we can capture in granular detail our own internal costs of processing deals, using our own proprietary back-office tools. This allows us to bid and give estimates with confidence on legal projects and to offer fixed fees and other non-traditional service offerings, like services for equity. If you would like to dig deeper into our model, please check out our M&A 2.0 white paper at https://flatiron.legal/ma-2-0-flatiron-way/
Why, as a partner of a global elite law firm, did you decide to pack up and start out on your own – in hindsight, was there a particular incident or turning point?
We left big law because we understood intuitively that we needed to get outside of the big law firewall to implement fundamental change in the business model, to a place where we controlled the strategy and the messaging. At a certain level, this logic applies to all industries. You need to get outside of the corporate suite to drive real change. That’s why there is such a vibrant start-up industry in the United States. But the thesis applies to even greater extent in the legal industry, which has been notoriously resistant to change.
There are two reasons why big law is so resistant to change. The first is that, by historical accident, big law has become locked into the leverage model, which treats junior, untrained labor as a profit center rather than as a cost. Under the leverage paradigm, each additional hour of junior labor time accrues to the bottom line, no matter how inefficient to the client. You might think that reducing production costs to capture bigger margins might have some appeal to law firm managers looking to gain a competitive advantage. But the argument does not resonate with the existing generation of law firm leadership. They have spent their entire careers working under the leverage business model. They are not out of the box thinkers.
The other problem with change in big law is the unwieldy corporate governance system. Law firms are not like traditional corporates. There is no real division of labor, with department heads responsible for dedicated business segments, like sales & marketing, all reporting to a CEO or board of directors. In big law, each business generating partner is his or her own profit center, his or her own “power silo”, responsible for his or her own business generation.
So, in order to implement system wide change, you need the buy-in of virtually all of the “power silos”, no matter how strong or centralized the law firm management may be. There is no way, short of using compensation as a weapon, to enforce across the board evolution. That’s why, when you go to any legal technology conference, the big law “chief strategy officers” always talk of implementing incremental change, of walking on egg shells and of not rocking the boat with the law firm partners. They talk that way because they have to herd cats.
We founded Flatiron because we want to drive fundamental change in the law firm model and we could not accomplish this objective within the constraints of big law.
What was the toughest challenge you faced in starting Flatiron and how did you overcome it?
Our biggest challenge is getting buy-in from the big corporates and their general counsels. A lot of general counsels talk about wanting the legal industry to change. But, when it comes time to select outside counsel, more often than not, the GC will select the law firm that he or she knows. It’s the safer bet, even if not the most cost effective. If something goes wrong, nobody is going to point the finger at the GC for selecting a firm off the legacy list.
That’s starting the change. More GCs are being held accountable to a budget and are under pressure to find efficiencies. Some have reacted by bringing more work in-house. But there is only so much you can do in-house. Others have started to look at non-traditional solutions like legal service out-source providers (like Axiom and Bliss). Firms like Flatiron are part of that mosaic. If the general counsel community wants to drive real industry-wide change, they need to do more than just pay lip service to efficiency and start giving next-gen law firms like ours a seat at the table. If our generation succeeds, it will force the industry to evolve.
We recently hosted a panel discussion event at DLA Piper Brisbane called ‘Startups 101 – How to run a startup off the smell of an oily rag’ – a few questions came up that you may be well placed to help us answer:
At what stage of the startup lifecycle do startups actually need legal advice?
In the United States, the first critical legal decision is whether to incorporate as a limited liability company (an LLC) or as a corporation. There are pros and cons to both. Both have tax and legal implications which can affect your ability to raise money and to commercialize your technology. It is also at the formation stage that a start-up has maximum flexibility to use tax-advantaged equity to equitize partners and employees. Because it is at this stage that the company can plausibly maintain that is has only a nominal valuation. Once a start-up acquires “value” (via, for example, an equity fundraising or a strategic alliance), the company’s options for issuing equity to service providers and employees become much more limited.
Intellectual property is also an important consideration. In the US, once an invention enters the public domain, via fundraising or other commercials activities, the clock starts running for filing a patent. There may be other IP considerations in play as well from an early stage.
In your experience, what are the least understood legal pitfalls faced by startup founders?
The most common mistake that I see first-time entrepreneurs make is to squander their negotiation capital with the investors or venture capitalists, what I call “relationship capital”. The most important thing for first time entrepreneurs to understand is that the playing field with the investors is not level. Venture capital funds have more resources and know-how than you. They do venture deals for a living. They know that you need their money to succeed.
VCs look at hundreds of deals each year. They have limited attention spans. They are looking for reasons to pass. You need to be conscious about conserving your relationship capital.
Here are a few high level tips:
- Don’t let deal fatigue set in. Understand at the outset what deal points are mission critical to you, and protect only those points. Don’t become a nuisance negotiator.
- Don’t obsess over dilution. First-time entrepreneurs are going to get diluted. That’s how the game works. Your most important objective as a first time entrepreneur is to do everything within your power to drive your start-up to a successful exit. If you register a successful exit, you will establish a track record with the VCs. The next time around when you go to raise money, as a serial entrepreneur, you will dilute less.
- Make sure that your house is in order. It is important to make a professional presentation. Before you go out to raise money, make sure that the chain of title to your intellectual property is squeaky clean and that your paperwork is in order. There are a lot of off-the-shelf tools out there, like electronic deal rooms, where you can compile, organize and present your due diligence to investors in a professional manner
- Clean up your messes. VCs don’t invest into disputes. If you have problems (with former partners or customers, or otherwise), and they are resolvable, resolve them before you go out to raise money, even if you don’t like the outcome. It’s not personal, it’s just business. And if you have problems or contingencies that are not resolvable, get out front of them and spin your story to the VCs to mitigate the issues as best you can. Whatever you do, never hide the ball. The VCs will conduct comprehensive due diligence and they will find the hidden ball. Once they do, your credibility will be shot.
What should a startup founder look for in a co-founder?
There are three things that I think you should look for in a co-founder: Trust, competence and work ethic. Trust because, no matter what the legal papers say, as a practical matter you will be sharing control of the enterprise with your co-founder. You will need his or her buy-in to make major decisions and changes (like raising money or selling the company). You want a partner that will have your back and that will be there for you when the chips are down.
Competence because, in a start-up, there are only so many resources and so much equity to go around, and you need partners that complement your skill set, not that are redundant. You want partners that bring skills, relationships and/or access to resources that you don’t have.
Work ethic because you want to make sure that your co-founders are as invested and committed as you are to the enterprise. The worst thing that can happen to a start-up is for one partner to work a lot harder than the others. That leads to resentment and dysfunction, and ultimately to disputes over capital and equity ownership that will make it difficult for the company to raise money and grow commercially. You need hard working co-founders.
Legal innovation in the U.S
In Australia and the United Kingdom there is a burgeoning movement away from the traditional law firm model – are U.S law firms good at innovation and if not why not (or vice versa)?
Outside of the United States, the big game changer in the legal industry has been the introduction of non-law firm players into the equation, especially the accounting firms. The Big 4 accounting firms have applied their formidable service delivery logistics to the delivery of legal services. This has forced the legacy law firms in those jurisdictions to adopt to survive by, for example, adopting more aggressive knowledge management and automation strategies (like expert systems and document automation) than their U.S. counter-parts.
This kind of innovation is not going to happen any time soon in the U.S. What people don’t understand about the U.S. is that it is not one country. It is in fact fifty separate sovereigns plus the District of Columbia (and a bunch of territories). And the Bar in each jurisdiction jealously protects the commercial interests of its members by using its “practice of law” rules as a weapon to keep out not only lawyers from other jurisdictions but also non-law firm players, like the accounting firms. There is no mechanism to impose country wide change.
There are progressive jurisdictions, like New York, which are relaxing practice rules to allow for more competition and different types of the competition, but these changes will take time.
What must-have legal technologies are practitioners sleeping on? Does Flatiron take advantage of any of these tools?
Lawyers are sleeping on using the cloud based collaboration tools. They afford fast and more organized communications and get away from the endless barrage and drudgery of email. In fact most firms fail to recognize many of the cloud based technologies because they are stuck building and controlling their fortress, and they refuse to accept the reliability, safety and security of the right cloud systems and how nimble they make a firm. Clients have embraced these tools- their counsel can and should as well.
What advice would give a law graduate in 2017?
I would give a 2017 law school graduate the same advice that I would give to any recent graduate, including my two college age children. In this rapidly evolving economy, don’t be dogmatic about your career path. Be flexible and nimble and live within your means. Always be learning and adding to your skill set, whether it is new social media outreach tools or new practice areas. If your practice area gets disrupted, be prepared to shift on a dime to a new practice area. Expand your network, build relationships and learn how to generate business from an early point in your career. After all, your ability to generate business will ultimately be what the legal industry will value you on. Above all, don’t expect loyalty from your employer, whether it is big law or otherwise. The new economy doesn’t work that way any more.
What is your legal forecast? I.e. where will the U.S legal market be in 10 – 15 years?
We expect that there is a going to be a lot of disruption in the legal industry in the next 10-15 years. We foresee that AM Law 200 law firms with bloated balance sheets and too much labor will begin to shed practice areas and assets and lawyers, deconstructing themselves into smaller, leaner organizations more focused on specific practice areas. Some of these firms will go out of business. They will be replaced by a new generation of law firms, like Flatiron, which will compete with the AM Law 200 firms on the basis of quality and efficiency.
At the end of the day, we don’t anticipate that there will be a winner that “takes all”. Rather, we expect that a “mosaic” will develop over time populated by different types of legal service providers, all serving different niches of the market. There will always be a place in that mosaic for the super elite top 20-30 law firms in the world that will continue to service their Fortune 50 clientele. There will be a place for legal service out-source organizations (like Axiom) which will provide lawyers on or project or out-sourced basis to law firms and general counsels. As well for non-lawyers who will provide complementary services, like e-search and due diligence services, supported by advanced technology tools (like electronic search platforms and deal rooms). We also expect that corporates will continue to bring more commoditized and repetitive tasks in-house by expanding the size of their legal departments.
And, of course, there will be a place in the mosaic for the next generation law firms, like Flatiron, which, unburdened by heavy overhead and labor costs, will compete with the AM Law 200 on the basis of quality and cost and by offering fixed fees and alternate arrangements that big law will not be able to match. We are not exactly sure how it is going to all play out. We just know that, whichever way it plays out, Flatiron will have a seat at the table.
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