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Taking a Long View Right from the Start

While the legal profession as a whole may not be known for taking big risks, attorneys who specialize in working with startup companies must share a bit of the entrepreneurial spirit exhibited by their clients.

Partner-in-Charge, San Diego: Michael Attanasio

Revenue: $1.07 billion in 2017 (entire firm)

San Diego employees: 215 total, 97 attorneys

San Diego office: UTC area

Year founded: 1992

Firm description: Clients partner with Cooley on transformative deals, complex IP and regulatory matters, and high-stakes litigation, where innovation meets the law.

San Diego office chair: Carl Sanchez

Revenue: $1.12 billion for 2017 (entire firm)

Employees: 26 attorneys in San Diego office (9 partners)

San Diego office: UTC

Year founded: 2003

Firm description: With a strong presence throughout Asia, Europe, Latin America, and the U.S., Paul Hastings is an innovative global law firms.

A number of San Diego law firms and attorneys devote at least a portion of their practice to providing legal advice and services to fledgling companies. Some firms have established websites that cater specifically to startups, offering articles, how-to guides and access to common legal forms needed by new business ventures.

Two examples are PH Ignite, launched in August, by the law firm Paul Hastings LLP, and CooleyGo, which was created by Cooley LLP. Both are global law firms with offices in San Diego. While it’s nothing new for law firms and attorneys to work with startups, local attorneys said they want to make sure they are known in San Diego’s robust startup community, a goal which they achieve in a number of ways, whether through a website or regular involvement with groups that support startups, such as Connect, EvoNexus and San Diego Venture Group.

The process that law firms go through in evaluating potential startup clients is similar to what a venture capitalist might do when considering where to invest his or her money, said Scott Oross of Paul Hastings LLP.

“We follow the ideas and business models that we think are likely to be successful,” said Oross, realizing, like venture capitalists, “that there will be setbacks.”

Establishing a relationship between a law firm and a startup is a somewhat delicate dance, as each side checks out the other and both try to determine if they have a good fit.

“Our focus is on emerging growth companies,” said Jason Kent, an attorney with Cooley LLP, which employs some 1,000 attorneys in locations spread over three continents. “Companies that as part of their business plan, want to coalesce around a business idea, that is disruptive and interesting and lucrative, and grow that business rapidly over time.”

David Titus, a former venture capitalist who works on business development with Cooley in San Diego, said, “If they want to grow and go public and really change the world, that’s our ideal client… (those with) big dreams and the credibility to attempt them.”

Having the right attorney on board can help a startup achieve those dreams. Jennifer Cosco, CEO of San Diego startup Envy, which is set to launch a revamped version of its visual search engine, said new companies such as hers have a variety of needs for legal assistance, from help with structuring investment deals, to safeguarding patents and trademarks, to properly crafting the legal terms and conditions for their websites.

Long Term View

Working with Kent and his law firm, she said, has proven invaluable, because they take the long view and assume some of the risk with their client.

“With a startup that goes a long way, there is trust there,” she said. “They have our best interests, they have an incentive to help us succeed.”

Along with providing legal advice, she said, her attorney is a sounding board for financial and strategic issues, and is even willing to make introductions to business connections.

“They’ve stuck with us through the highs and the lows, they understand it’s not always going to be roses. That has been so helpful. Not everyone is cut out for that,” said Cosco. “Jason is a part of our team. He’s a part of the mix.”

Importance of Relationships

Working with startups comes with both risks and benefits for the lawyers and their firms.

“The risks are that you’ve bet on all the wrong horses, and none of the companies you work with… are able to get off the ground and be successful,” said Oross, of the Paul Hastings law firm.

But the upside, he said, would be representing a major company such as Uber or Facebook or Google, as he tells colleagues who question the risks inherent with startups.

“How do you think you get to work with companies like that? You get that by creating relationships from the beginning or very early on, as these companies grow up,” Oross said. “You have to place your bets early.”

“We live in a world where unicorns are real,” he said, referring to a term used by venture capitalists for a startup company that reaches $1 billion in valuation.

Oross said he’s been working with startups for 17 years, and they now make up about 75 percent of his practice. In San Diego, he said, his firm represents 35 to 50 startups at any point in time.

Titus estimated that his firm, Cooley, currently works with 75 to 100 San Diego startups.

Shift in Compensation

Along with taking on risk, law firms also have to consider compensation arrangements, as many startups are low on cash before they take on investors or begin selling their product.

Ted Sichelman, a professor at the University of San Diego School of Law, who has also launched startups earlier in his career, said law firms may offer reduced or deferred fees to a startup with the expectation that the company will grow into a lucrative enterprise.

In the mid-1990s through the early 2000s, said Sichelman, law firms were more apt to take an equity stake in a startup, but that practice is much less prevalent today.

“The general idea is if you work with enough startups, some will do well, and become paying clients over time,” he said.

Sector Expertise

Sichelman, who also serves as a consultant for startups, said he advises clients to find an attorney or law firm with knowledge of the market where the new company will be operating, allowing the attorney to negotiate more effectively for his or her client.

Why do attorneys choose to represent startups? According to Sichelman, it’s more than simply a chance at a big payday in the future. The work itself is interesting, he said, garnering news coverage and often breaking new legal ground.

Many different areas of the law come into play when startups are launched, he said, such as taxation, intellectual property, regulatory, corporate governance and employment law.

“If you’re like me and like to dabble in a lot of different areas (of the law) it can be a good way to go,” he said.

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