Someone asked the simple question of when to hire an outside counsel or attorney. And I answered accordingly. Here, instead, I would like to quickly address of when to hire in-house counsel. In many early stage companies, I have noted the focus to hire an in-house counsel or a general counsel. Some motivations seem to stem from the perception that the company has full staffing to run a business. However, I tend to look at it from a bottom line approach. For that process, I refer to an old economic adage – Coase Theory of Firm, where the economist stated generally that firms or corporations internalize a process when it is economical to do so. In the case of hiring an in-house counsel, one brings an internal counsel when it is cheaper that handing out the work to law firms.
How is that done? One estimates the company’s average monthly legal fees and the type of work being handled and then determine which is cheaper, hiring a salaried counsel or sending the work to a law firm. To a great degree, that analytical process comes from looking at the type of work being done. In one example, I noted a fintech company concerned with the various financial filings for its transactions. Since those filings were the lifeblood of the company, it could not avoid them. As the company grew, it had to file more paperwork. Although the forms were straightforward, they did require some legal expertise that could be handled internally faster and cheaper.
Large companies create such large legal departments that, in many ways, form a large law firm staffed by specialists. In one previous employer, the company had one lawyer whose only duty comprised of handling corporate minutes. Another staff counsel I noted only focused on non-disclosure agreements. One attorney handled privacy matters. The bulk of the attorneys managed contractual transactions. And these attorneys worked with the various departments across the board.
In contrast, the general counsel in a startup has to wear many hats while being exposed to the many specialties not experienced working in a law firm or a large legal department. Not only does the startup counsel manage legal matters, but could be involved with strategic issues regarding the company. And, in my experience, I found myself more involved in international tax and accounting issues as part of the international corporate development, subject matter normally handled by the CFO. So duties expand and become challenging.
In-house counselling can be cost effective when done right. In one previous employer, the financial analyst remarked that the current outside legal fees ballooned to $50k a month after I left. During my tenure, it only averaged about $5k a month and these outside counsel legal activities included substantial M&A that demanded hiring them. Just like Coase Theory of Firm pointed out, there are instances where it makes sense of internalize the legal activity.