As of this year, the average salary of a first year NYU Law graduate is $160,000. This number will be similar to other law school graduates from the other top ten law schools. When employed by a law firm, that graduate must earn 3 times his salary in order to be profitable for the firm. That multiple covers overhead, law firm profit, and fixed costs.
Now, because of the pressure to earn that multiple, that attorney now must work for no less than 2,500 billable hours per year. Of course, the more hours that first year associate works, the more profitable will be that associate. And his chances to become partner will be increased as well. It is not unusual for a first year associate to pull 80 hours a week for the year.
How does that roll out into hourly rates? By taking $480,000 divided by 2,500 of the minimum billable hours results in an hourly fee of $192 for a first year associate. Metropolitan law firms charge a premium since the urban operational costs are high. So the first year hourly rate will be close to $200 or $300 per hour.
Each lawyer in law firm, whether a partner or a first year associate, must account for his time, generally by multiples of 6 minutes. From emails to courtroom appearances , from phone calls to legal memoranda, from office visits to travel, the lawyer must bill for the time relegated to the client.
Now I mentioned billable time. What I mean is that whenever I call a former colleague of mine, now a managing partner of D.C. law firm, I keep track of my minutes not to exceed 15 minutes, since I know that my time is not billable. He, in turn, has to work longer in the day to accrue his average daily billable hours. Since I am acutely aware of his work process, I try to keep my personal calls to a minimum.
We are addressing the description of attorneys affiliated with major firms. Hourly pricing can vary dramatically by geographic locations and educational background. Unfortunately, clients don’t have the luxury to pick any attorney when filing for IPOs, as the client must select nothing less than the top ten New York law firms normally identified by the investment bank. And the partner’s hourly rates easily exceed $1,000 per hour for IPOs or M&A. But these costs are predictable and mandatory.
As a CxO, I have had the experience in employing a wide variety of law firms. This experience is crucial in establishing future monthly budgets when there are predictable potential transactions requiring outside counsel. In fact, when drafting financial spreadsheets, I also include the potential legal costs for different matters. Since these costs are not immaterial, I always suggest adding a line item approximating legal costs to the annual budget and business plan.
I myself have seen too many plans not taking into account for legal costs. And to avoid paying for them, many entrepreneurs attempt to avoid hiring counsel or reduce costs by renegotiating fees at their peril or drafting the paperwork themselves. What will happen more of ten than not is the production of poor quality work on documents, whether they be contracts or corporate minutes, exposing them to long term liabilities or legal issues. These are the type of issues that an investment firm wishes to avoid — losing its investment on long term, avoidable litigation. When smart money does its due diligence, they hire outside counsel to read through the company’s contracts, press releases, corporate books, etc. The investment or VC firm expects a report and, if the documents don’t pass the smell test, they walk away.
As I described earlier, the law
firm has little or no flexibility to reduce the hourly rate because of the embedded variable labor costs. The best recommendation is to anticipate these costs as part of the business plan projections and not ignore them. There is no point of being “pennies wise, and pounds foolish.”
Major investment or VC firms generally hire brand name law firms for their work. Regardless of the public opinion that any lawyer can produce the same work, the perception is more important here than the reality. And if the company is represented by a recognizable law firm, then the perception by the investment community is that company’s legal work is being well managed. I don’t want to delve into qualitative issues here comparing law firms. And there is no requisite rule that a company must seek expensive representation, but I do believe it might have a material impact during the due diligence by a VC or investment firm.