Screening due diligence #4: Quality of Legal Counsel

Who is the company's legal counsel?

To be successful, early-stage companies need good legal counsel. The road from start-up through high growth to successful maturity is much too hazardous to forge ahead without a high-quality and appropriately experienced law firm on board. On one hand, law firms provide vital legal services such as creating corporate structure, addressing employment issues, and advising on contract negotiations. Companies receiving sound, quality legal advice in these areas certainly increase their likelihood of success. Regarding contracts, the venture capitalists at Accel Partners state that the "corporate contracts demanded of new companies grow geometrically - distribution agreements, employment agreements, financial agreements, patent agreements - and mistakes on any of them can seriously jeopardize a company's ultimate value. Even minor errors can require inordinate top management attention." On the other hand, law firms also often provide other services to early-stage companies, such as giving advice on business plan construction and financing strategy, and making introductions to venture capital firms, bankers, accounting firms, and consultants. Receiving this assistance from experienced and well connected lawyers can also boost a company's likelihood of success. Therefore, a fourth screening mechanism sometimes used by some venture capitalists is to evaluate the quality of companies' legal counsel.

Determining the quality of law firms is not always easy for venture investors, but, as Christopher Schaelpe, general partner of Weiss, Peck & Greer Venture Partners, explains, there are only "on the order of 15 major law firms throughout the country with a core competence in advising private high-technology companies'. In Silicon Valley, this fraternity includes Wilson Sonsini Goodrich & Rosati; the Venture Law Group; Cooley Godward; Gunderson Detmer; Fenwick & West; Brobeck Phleger & Harrison; Heller Ehrman White & McAuliffe; and Gray Cary Ware & Freidenrich. In Boston, it includes Hale & Dorr; Testa Hurwitz & Thibeault; and Edwards & Angell. In New York, it includes Skadden Arps Slate Meagher & Flom; O'Sullivan Graev & Karabell; Reboul MacMurray Hewit Maynard & Kristol. In Seattle, it includes Perkins Coie.