Meeting Clients Halfway: A Tall Order

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP


The meltdown is being keenly felt, with rare exception, at U.S. law firms. The horror stories are growing, as proud old firms fall by the wayside. The question is whether the law business will, in fact can, respond proactively by (as the attached puts it) meeting clients halfway. Joe Bartlett argues that there are a number of efforts a law firm can undertake to counteract the rising tide of client discontent, convincing clients that the firm is taking the initiative in reforming age-old practices, in aid of greater efficiency, quality, responsiveness and timeliness.

Innovations Designed to Streamline, Facilitate, Enhance The Delivery of Legal Services, Empower Clients . and Reduce Expense

A recent polemic featured on,[1] builds on a familiar theme - that lawyers are pricing themselves out of certain significant markets in this country, including particularly emerging growth finance, a/k/a venture capital.

The irony is that service businesses generally have made astonishing progress in enhancing efficiency and output while, coincidentally, reducing costs and prices. The question is whether the law business is keeping pace at a level which is consistent with the potential which modern technology and system design hold out.

I have to confess a bias. I have written on this subject, in a 1978 book entitled The Law Business to which the publisher added a tagline, A Tired Monopoly. I wrote this book while on a sabbatical, on the faculty at Stanford Law School, when I had a chance to sit and reflect on what I saw going on around me. My opinion has not changed in that regard. And the issue was reviewed in detail in 2000 by an English academic, Richard Suskind, in a profound monograph, Transforming The Law[2] . a book which I find enormously instructive and influential.

Before, however, I outline the ways in which I plan to deal with the issues, allow me to provide some background.

First, the law business has, in fact, gone well beyond the era of quill pens and powdered wigs. Thus, there are sophisticated management information systems which help law firms deliver their services efficiently and to a standard of quality of which the lawyers can be proud. To cite only some highlights, Lexis and Westlaw have collected, and indexed online, the entire census of statutes, regulations and reported cases; SEC filings are available on EDGAR, including thousands of contracts and forms filed as exhibits; trial dockets and opinions in a given case are searchable; and many treatises and trade periodicals are in digital format and readily accessible. Most firms can and do, in fact, eschew much in the way of the print libraries they used to maintain . as, indeed, do law schools and bar associations. Lawyers and clients stay constantly connected by Blackberries and similar devices. Associates and partners in charge of researching an issue or preparing a brief rarely have to leave their desks; they can access electronic files as they enter the courtroom. And, all the younger lawyers are facile typists, meaning the one-to-one lawyer-to-secretary ratio is long gone.

In that regard, the law business is significantly ahead of perhaps the last car on the train of what Goldman Sachs has labeled "connectivity" . the healthcare sector. As Goldman has pointed out "The average UPS driver has more technology at his/her disposal than a physician."[3]

That said, my crusade has to do with my business, the delivery of legal services. It is my view that, although the issues are nowhere near as well publicized, we need an increase in legal "connectivity," borrowing the Goldman Sachs phrase, because the law business, although not to the extent of the healthcare industry, is decades behind the times. I do not deny, of course, that, in many respects connectivity flourishes, as indicated above, in the law business. But, in certain critical areas, we are materially undershooting the possibilities, particularly when we interact with existing and potential clients. Thus, while there is ample information all over the web which lawyers could share with clients to get them up the learning curve, the point (as Ross Barrett, co-founder of VC Experts, has pointed out) there is a critical difference between "information" and "intelligence." Thus, no one in their right mind ever escorted a client, however sophisticated, to a law library and advised: "Spend some time in the stacks. It will do you a lot of good." Similarly, Westlaw, Lexis, Practising Law Institute lectures and webinars, while highly useful to lawyers, are of little value to a client . except as intermediated by counsel. Moreover, as John Hempill points out, connectivity needs to run in both directions. Lawyers need to be educated as well . not only on current legal developments but also on their clients' particular situations. In short, the clients need and deserve, at a minimum, a reciprocal GPS system rather than a bound volume which contains raw maps of every country on the planet . in other words "intelligence" rather than "information."

To be sure, clients get guided tours, in person . as, indeed, they always have. They call at their counsel's office, sit down and enter into a two way dialogue which initiates and informs the process: the lawyer learns the client's objectives and special needs and the client gets an introductory course on the legal principles and rules likely to be encountered. Often, when a thorny issue is put on the table, the lawyer admits that the questions are complex, and she will have to go into the books before responding . which she later does.

The problem, of course, is that the meter is on, prompting my question: What can be done to create an information sharing eco-system before the first meeting . both lawyer and client getting up the learning curve prior to the starting gun going off? Can I structure a system such that the client has a chance to enjoy an outcome similar to that which an informed patient can look forward? Based on compelling evidence, informed patients have significantly better outcomes than the guys who wander in and say, "Whazamatter with me, Doc?" Moreover, if a client has been prepped in advance, the parties do not waste a ton of time discussing and answering questions which the informed client should and can already have under her belt.

O.K. What systems can be installed to advance the mutual education process efficiently? How do we save time (and money) by using IT, Wikipedia-type sources, Web 2.0 and common sense (plus a modicum of elbow grease) to help meet the growing impatience with deemed unnecessary legal expense . and without handing the client a scalpel and asking her to take out her own appendix. Allow me to make my didactic points by way of examples, which I am refining into a practice modality, governing the way I go about my business.

1. Model Forms. The good news is that the language in the documents typically deployed to memorialize the business deal in a given transaction are becoming, at least presumably, standardized, if only by osmosis on material selection. In my 1978 book, I wondered:

"Why law firms throughout the country could not draft standard language for use by all lawyers (not just lawyers within a given firm) in putting together, say 90 percent of the text."[4]

That metric is changing. Model forms are available on line . from, for example, the National Venture Capital Association, and from commercial vendors. Most large firms maintain internal libraries of model forms, in some cases lightly annotated; in fact even if a central library is not maintained, a lawyer in need can go onto the firm's internal grid and ask for a model form, usually with positive results. Legal treatises, replete with exemplars of model forms, come accompanied by digitized versions on disks. And, I trust, I will be pardoned if I refer repeatedly to the features offered by VC Experts; while justifiably proud of the content and data available to subscribers (including over half the AmLaw 200), I am using that resource as a generic example of the Wiki-type facilities, and there are many, available to enterprising lawyers and firms as they search for money and time saving methods to draft documents, analyze issues, research problems, and in fact, help train young associates.[5] Thus, when a client calls for a given agreement, plus explanations of its constituent parts, a real time response is available from multiple platforms; the lawyer picks her favorite portable (i.e., digitized) library (which in my case, and for over half the AmLaw 200, is VC Experts) and clicks 'send.'. Bingo, the first draft has arrived.[6]

2. "Top Ten" Cheat Sheets: The Guided Tour

That said, however, the job, done right, is not that simple. As Carl Kaplan points out, the clients (whom he, a noted punster, refers to as the "tutorialees") need more than access to documents and annotations. In fact, as pointed out by Carl and a number of my colleagues who reviewed the first version of this paper, advanced client connectivity is most usefully advanced by a guided tour . the GPS system I referred to earlier. That is to say, as a client is approaching a particular transaction, the trick is for counsel to pull out a list of items in the term sheet, stock purchase agreement, agreement of plan and merger, et al, on which the client should focus. Simply forwarding a model form to the client, even a compact form, can be, depending on the experience of the client and the length of the working relationship, inadequate. Thus, in any deal there are a discrete number of items, for example, the Series A convertible preferred stock purchase agreement and allied documents which are of lesser importance; registration rights, for example . rarely if ever exercised; so also drag along and tag along rights. This is not to say they are trivial and can be ignored; but it is, in my view, the job of the lawyer to focus the business people on the issues likely to be critical and identify the same, providing a brief explanation as to how to focus most profitably and effectively on the points likely to arise.

I call the guided tours "Top Ten Cheat Sheets." The term "Top Ten" is borrowed, of course; it refers to the number of bullet points in a memo . a "cheat sheet" (concise set of notes used for quick reference) . which highlights, on the eve of a transaction, the points (which can be any number, of course, but 10 is as good as any for this purpose) in a document to which the client should pay special attention. By way of an example, I am attaching (Appendix A)[7] a typical edition. The whole idea is to start the question and answer session between lawyer and client from again, an elevated plain.

3. Checklists. A related concept is the proffer of a checklist.[8] VC Experts is, for example, assembling, cataloging and indexing onto a checklist the possible contingencies which might amount to a material adverse change or effect, as the phrase appears in the contract between the buy and the sell side, pending closing of the deal. The soon-to-be-forthcoming "Big MAC" checklist (which, given the nature of VC Experts, is subject to continuing enhancements from the troops in the field) will go down, point-by-point, the issues which have arisen in court rooms around the country, and particularly the Delaware Chancery Court, on this issue. For each contingency the list will indicate: "Yes this is, based on precedent, likely to be a material adverse change." "No, this is not." The clients then can make sure the lawyers and bankers keep going down the list until the parties have exhausted the examples from history, plus those added to the list by creative lawyers and other professionals in this sector. The trick, of course, is to build into the economics of the trade the effect of potential walk rights based on MAC clauses, as listed on the checklist.

4. Compact Forms. At some point, clients in the transactional sector ("green goods"), whether on the buy or sell side, will undertake to read the documents counsel has drafted. How to save time and money? How about cutting the length of each document in half, without sacrificing comprehensiveness or precision, by squeezing out excessive verbiage. The job is easier than one would think: Start with replacing "in the event that" with "if." No need to leave any core provisions out. Just sit down with Strunk & White, and the job is, trust me, easy. Ask your clients if they would like to see documents half the length of the current models;[9] in fact, ask them if they would pay a bit extra for a document with half the conventional words And stay tuned as my models are posted on VC Experts, targets for wordsmiths everywhere to adopt, enhance . or debunk.

5. Spread Sheets: A Picture is Worth a Thousand Words A number of emancipated firms start clients off with questionnaires, designed to extricate in advance from clients their take on the critical metrics inherent in their deals. See Wilson Sonsini has a dandy on fund formation. That is progress, and many firms are on board. My question is: Can we go further? I, for one, think so. Consider a recent expansion of the questionnaire time saver, viz: the spread sheet illustrating the agreed economics flowing to the parties based on a spectrum of likely exits following closing of a private investment by a syndicate composed of a private equity fund and a strategic investor.

Thus, in the appropriate instance, I undertake to persuade my client and her counterparty to fill out a matrix, specifying numerically the economics of their agreement, as per the following example.[10]

Net Sale Price

Net Proceeds


Equity fund

Net Proceeds/


Net Proceeds



Net Proceeds



$100 million

$30 million

$56 million

$7 million

$7 million

$150 million

$42 million

$86 million

$11 million

$11 million

$200 million

$50 million

$120 million

$15 million

$15 million

$250 million

$65 million

$148 million

$18.5 million

$18.5 million

$300 million

$80 million

$176 million

$22 million

$22 million

$350 million

$100 million

$200 million

$25 million

$25 million

More than $350 million





This has proven both to save time and to promote accuracy, keeping the lawyers for both the buy and sell side focused. Thus, when wordsmithing the term sheet and definitive documents in a typical venture round, traditionally counsel for the counterparties ... the issuer and VC . initiate the process based on conversations and a term sheet; they draft language in legalese which is meant to reflect the economics of the deal and minimize subsequent disputes. I ask: Why not reverse the process? The clients take the lead, negotiating a spread sheet which indicates, numerically, a spectrum of outcomes (from the foul to the fair) which the parties envisage as possible future events, depending on the ultimate fortunes of the company once the investors exit. When the economics have been agreed, the parties then turn the spread sheet over to the lawyers, with instructions to draft the various provisions so that the agreed script is followed to the letter. The idea is to make the economics drive both price and terms; if in doubt, the parties test the language against the end results in the spread sheet .. and send the wordsmiths back to the drawing board if the words and the numbers do not jibe.

6. Eliminate the Biggest Waste of Time: Pompous Lawyers Sparring on "Market" Deal Terms. Assume a fund formation assignment. A lot of lawyer time is often spent arguing over the terms of the deal between the investors (the limited partners, or LPs) and the fund sponsor. To avoid this wasted effort, often involving a dialogue of the deaf at high decibel levels VC Experts is able to include in its Data Center a Survey of Fund Formation Deal Terms, which graphically computes and ranks the "market" or "industry standard," as the jargon goes, deal terms for both venture and buyout funds. You have no idea how much time is wasted in one of the negotiation sessions by the posturing of two hyper-aggressive lawyers in a pitched battle over deal terms. "We always get this deal term." "We never give it." This is a discussion of the 'my dog is bigger than your dog' variety. It can go on forever. The Deal Terms Survey in the package cited above can help finish that conversation before it starts. (Editors note: There are competing surveys available . law firms have choices in this regard; my objective is to stress the importance of the concept.)

And, once the fund is up and running, VC Experts is a resource for streamlining the investment process. No more argument about "market" or "industry standard" terms for the Series A round, as the fund invests in portfolio companies. VC Experts has the same data for the fund's investments as it does for the fund itself . by Fenwick & West for the Bay Area and by VC Experts for the rest of the country. In fact, this tool can be particularly useful if the competing lawyers start lobbing grenades at each other, the issuer side yelling that the deal terms offered by the VC are too harsh. VC Experts publishes a grid, based on its survey data, which allows the parties to plot the terms offered on an algorithm called the "cost of capital benchmark." The following excerpt from August 21stVenture Beat illustrates how this tool can be used productively by clients . intelligence vs. information:

"In the wake of EDF Ventures subpoena demanding information about one of its critics on controversial VC-rating site TheFunded, more scathing commentary about the Ann Arbor, Michigan firm has come to light. for example, the commentator targeted by EDF says the firm has "very harsh deal terms." But does that criticism hold any water? Not really, according to the analysts at VC Experts, who examined four of EDF's recent deals and found "nothing to out of the ordinary or harsh."

"VC Experts looked at anti-tampering company Arxan Technologies' $15 million third round, medical device company ValenTX's $6 million first round, Xtera Communications' $52 million second round and Biosurface Engineering Technologies' third round. They used a proprietary algorithm called the "cost of capital benchmark," which ranks deals on a scale from "fully company friendly" to "fully investor friendly." It turns out the deals were all over the place: Arxan's deal was rated much more investor friendly than the industry standard, ValenTx's was rated much more company friendly and the other two deals were in between.

"All the data really shows is that some startups got good deals and some didn't -- it's hard to draw conclusions about EDF's 26-company portfolio from four deals alone. But it's worth reemphasizing VC Experts' point that there was nothing out of the ordinary."

7. Same as No. 6, but On Pre-Money Valuation . VC Experts, in its Key Investment Trends portal, takes the deals reported in the PWC Money Tree Survey each quarter, segregates them by region and industry sector, and gives the client (at the click of a mouse) pre- and post-money valuations. In both venture and buyout investing, the final decision is often based on the 'money see, monkey do" concept,[11] particularly in venture. Even the most experienced investors, after due diligence and all the other tests they run through to reach the goal line on valuation, inquire (as best they can) on what others in the venture business are paying pre-money for, e.g., San Diego bio tech companies in Phase 2. Without reliable data on comparables, the fund is relying on anecdotes; clients, both the buy and sell side, should, and can in my world, be able to access the comparables, averaged and presented in analytically friendly formats. (P.S. Another commercial: While there are competing surveys on valuation, the Key Investment Trends data on comparables is the most comprehensive, and is based on government findings.)

For a polemic arguing that the information and data identified in Sections 6 and 7 above is content a responsible practitioner/participant cannot do without, see the Q&A in Appendix B.

8. Answers To The Perennial Questions: Do You Have Flexible Billing Arrangements? Can You Help Me Find Investors? If there are two questions a lawyer should be able to answer . in fact, anticipate . they are summarized in the headings of this double section.

(a) Flexible Billing. As the decibel level on runaway expense grows, the bloggers chorus is demanding that law firms break away from billable hours as the benchmark for invoices. Of course, on many occasions firms do so . contingency arrangements; fee estimates; fee caps. My thought is, again, to take the initiative . to refer, in selected cases, clients to a menu of alternatives, again before the engagement commences. Then, while most law firms offer flexible billing arrangements, they are below the counter; you have to ask. In fact, the job of suggesting a specific billing arrangement, an alternative to the conventional billable hours protocol, is frequently left up to the client. The law firm is reactive, prepared to entertain a client's request and negotiate the terms thereof, but not proactive. That is to say, it is rare to find a firm which will present a new client in advance with a menu of alternative billing arrangements and invite the client to pick one or more for discussion.

That, in my view, is a dirty shame. The law firm should have a better grasp on what a particular assignment will cost than the client, since the law firm is in the business of providing the service and calculating/forecasting the expenses associated therewith. The law firm's reticence on that score, however, is understandable, particularly when the client asks for a fixed fee or a fee "cap" for the assignment. As I explain to my clients when asked for a cap, the source of our learning on caps is typically a regression analysis which tries to extract data from apples-to-apples comparables in the firm's data base . necessarily comprised of so called "plain vanilla" transactions in the same general category as the upcoming matter. The problem, as I further explain, is that it is very rare when any transaction these days turns out to be "plain vanilla". Accordingly, the firm winds up looking like a shady installer of aluminum siding, who quotes a fee at outset and then starts charging for "unexpected" extras.

Thus, I have found, after long trial and error, it can be constructive for the law firm to be proactive and expose a menu of alternative billing arrangements . caps in some cases to be sure, with the escape clauses which are so often triggered (at least in my experience) but with other options as well. For an exemplar of what I have in mind, see the following link to my personal website. ( This does not mean that either I or the firm will agree to a specific billing alternative. The base case remains, particularly in the litigation area and indeed in a number of other sectors of the business, billable hours. That said, however, there are special cases where special arrangements can be and should be discussed . and, in the appropriate case, negotiated. For example, I am prepared to depart from the typical monthly billing modality; although it requires some extra effort, I will render, in a given instance, information statements weekly. The idea is that this adds an element of client control to the process, control which can avoid typical sticker shock when the monthly bills come in. By looking at a weekly statement and seeing, as is customary, a computer print out of who did what in connection with the assignment, the client can react by saying something to the effect that: "Well, I don't think I need this area investigated. I am willing to take a business risk. Let's drop the research project I see building up and switch to other aspects of this transaction." Billable hours, and monthly invoices, are still the norm; but, the addition of control by the client can make the relationship a good deal smoother.

In short, an engagement letter specifying, e.g., the billing method is an ethical requirement laid down by State bar associations. The letter, which often runs several pages, is for the benefit of both the client and the law firm. It is a document that should be discussed in detail. What I like, as I have related, is to give the client some material for discussion prior to drafting the heart of the engagement letter . the way the charges are to be computed . by showing clients in advance the menu; then (as per the leitmotif of this entire piece), the discussion can start from an elevated plain.

(b) Finding Money. There is a feeling in the lay community that lawyers, particularly those at major national and international law firms, should be in a prime position to assist a client . typically but not exclusively an emerging growth company embarked on a trip, as I put it, "from the embryo to the IPO" . in its relentless, never-ending search for investment capital. When a client comes to see me and leads off with that thought, my initial remark is as follows:

"If anybody in the law business ought to be able to assist you in finding money, I suspect it should be I, based on the number of years I have spent in this business. Frankly, I do not know how to find money for companies; if I did, maybe I would get out of this business and get into that one. Since I do not know how to do it, I suspect no lawyer does either, or at least nobody I know of. The takeaway from the prior statement is that those lawyers who pretend they will help you find money, in order to induce you to hire them, are often, to put it politely, fudging the truth."

After that noble declaration, however, we then get down to business, which means that I am prepared, as are most of us, to perform a "traffic cop" service. That is to say, we try to help our clients, when they are looking for investors, by pointing in various directions and suggesting likely people to contact . both principals and agents. We do not charge for that service; if we did, we could be required to register as broker/dealers in securities, and I do not believe any major firms have so registered. Nonetheless, an unpaid traffic cop is a valuable ancillary service and, once in a while, it pays off.

All that said, again in the spirit of client empowerment and productivity, I am in the process of working with VC Experts to upgrade the material in The Encyclopedia of Private Equity and Venture Capital on sources of capital, particularly angel capital. The fact is that there is a plethora of information available on the web which gives the name and contact information for a number of potential capital sources.angel groups as they are called; venture capital clubs holding monthly meetings; business plan competitions; commercially sponsored events at which companies present, with (presumably) investors in the audience; venture funds specializing in early stage opportunities, including the membership roster of the Community Development Venture Capital Association; university sponsored venture funds, often staffed . and, indeed in some cases, managed . by students at the university's business school, etc. Currently The Encyclopedia of Private Equity and Venture Capital contains directory type information on several (not all, as yet) of these categories. We are in the process, however, of taking the material up several notches.

We will, of course, continue to print directory type information on, say, angel clubs and/or link our subscribers to the sources which, mainly online, publish directories of angel clubs and like organizations. The next step, however, is what we think will make the facility particularly useful. We are in the process of probing each of these organizations.the angel groups, venture capital clubs, etc., and asking for the type of information which a consumer, i.e., our client is likely to want. First, of course, the contact information and the special requirements, if any, of the organization for over-the-transom submissions. What industry sectors are of particular interest?; what stage must the company have achieved in order to make the submission worthwhile?; what is the maximum investment amount likely to be available?; the minimum? Any fees involved?

The next set of queries will be, we think, of critical importance to entrepreneurs who have come to realize how much time (and time is money) this process takes . the organization's track record. That is to say, how many deals have been successfully closed through the good offices of the organization and/or its members? What is the total amount of capital which has been invested, with the organization as the fulcrum in the process? The average size of such investments? Please break out the number of investments by calendar year.

In short, we are surveying, as a champion of the consumer/client, each of the firms and organizations listed in the directory and asking the above (and other) pointed questions. If they do not answer, we will post the fact there has been no answer. If they do respond, we will list the response. The idea is that, particularly at the early stage when finding money can be enormously difficult, this resource should be a time and expense saver. The law firm doesn't get paid for the reference . except for a pat on the back that it is meeting the client halfway.

In that connection, clients often look to their lawyers for help in engaging firms who do find money . placement agents. Leaving aside the issue of who is the right placement agent, and there are several reliable directories existing on the web, the issue is what are the "industry standard" or "market" terms of a placement agent's engagement. It is hard for a start up to figure out that metric. However, the chore of providing the requisite information . the averages, the highs, the lows, medians and means . on this score has been made a good deal easier by the SEC's decision to publish Form D filings online. We are in the process of collecting that data and massaging it so as to add to the "deal terms" surveys we publish at VC Experts. Other vendors will follow suit, I expect.

9. Training The Clients on Their Responsibilities. Enhancing efficiency and, the consequence saving of expense, in the responsibility of not only the lawyer but also the client. A case in point. I opened my computer recently and found that I had 12 email messages from my clients, a pair of talented and energetic (and hopefully) successful entrepreneurs essaying a large project involving a lot of financial engineering. I responded by pointing out to them the institution of emails is a mixed blessing. Years ago, when emails first came into vogue, a very savvy sometimes client of mine, Steve Gilbert pointed out that people would assume that an email, since it is a transient message, was no more significant than an oral conversation. You would delete the email just as you would hang up the phone; whatever was said goes away. Indeed, instant messaging is reminiscent of the party-line, as people talk amongst each other in groups.

Needless to say, Gilbert was right; there are a number of people who fell into the trap and are now doing hard time in prisons around this country. A document request, including emails, in any criminal or civil litigation typically pops up something that is embarrassing, and assumes importance all out of proportion to the issue sub judice. The reason for my ragging on this point is that clients have to be educated to be sparing in their dealings with counsel . to limit the encounters to matters of importance. This is counterintuitive in a sense. As Charles Fried noted years ago in a piece entitled as I recall, "The Lawyer as Friend," in many instances counsel assumes the role of the client's therapist. All well and good . except that, with billable hours as the ruling metric, therapy at up to $750 an hour is expensive.

10. Final (for now) Point. Finally, (and I use the term "finally" advisably because I am continually thinking of ways to try and streamline the process, which wind up in a progression subject to Bartlett's version of Moore's Law), I have a bone to pick with consultants in the law business who are advising their law firm clients to make ends meet by cutting down on "infrastructure," expenses not "directly related" to the creation of billable hours. For example, firms are routinely advised by consultants to cut down the number of secretaries. All young lawyers type these days and documents are filed and indexed digitally; voicemail works as an answering service; trips can be planned and arranged online; a central word processing source can handle dictation and/or voice recognition software is becoming more manageable. Why, then does any lawyer need more than, say, one-fifth of a secretary?

I disagree, at least in my case. My "secretary" has been with me for 22 years and, of course, is a vital element in client service. She handles any number of matters . opening engagements, scheduling meetings, filing certificates, billing, retrieving documents at the client's request. All matters which, if I were responsible, would run up hours at my billing rate (don't ask), which either the client or the firm would, in effect, pay for. Clients routinely call her versus me to get something done; they know they are saving money . and getting the job done faster. She is rarely unavailable and turns out enormous work product; without her, I would be much less efficient and responsive. As far as firm expenses are concerned, I bill clients for her time spent on their matters, just as I bill my own. And, my clients are only too glad to pay. Routinely, clients will suggest "clerical" duties be assigned to junior associates, with lower billing rates. I agree . but in turn point out that a first rate, experienced secretary is often better at certain "clerical" issues than is a lawyer fresh out of law school.


As this piece concludes, a confession/concession is in order. The preceding narrative, arguably, fails to give adequate recognition to the episodic efforts of many lawyers and law firms to institute and implement what I am abbreviating as Client Connectivity, although not (as far as I am aware) ever using that label. Thus, for example, VC Experts offers a so-called Starter's Kit,[12] a compilation of forms and analysis for entrepreneurs as they contemplate the first steps in the journey from the embryo to the IPO. and so do a number of other law firms, including as just one example, Sullivan & Worcester. I would argue that the VC Experts material is the most comprehensive; but I cannot prove that proposition and, in fairness, I need to acknowledge thoughtful efforts in this regard on the part of Sullivan et al. Further, Sarah Reed, the General Counsel at Charles River Ventures, has spent years persuading the venture capital community to cooperate on a suite of model forms which are currently maintained on the National Venture Capital Association's site and are widely used. Go to and take a look; a lot of firms swear by these forms. Moreover, not infrequently individual lawyers, Ed Miller at Sullivan & Worcester, for example (and of course, yours truly) routinely suggest client-friendly concepts and structures which are designed to solve challenging problems in the industry.[13] Moreover, client flash reports and newsletters are available online to all through e.g., Securities Mosaic, Insights, and on the web sites of the firms themselves; see, e.g., the Advisory series and the VC Experts Buzz of the Week.

In short, the landscape is by no means bereft of anecdotal evidence of Client Connectivity.[14] The thrust of my polemic is, however, that those of us who love this profession need to stimulate ourselves and our colleagues to focus much more intensively on the myriad ways to improve Client Connectivity. We are not taking anywhere near full advantage of the opportunities offered by the revolution in communications technology experienced globally during the past several decades. In order to blunt the rising tide of criticism and turn the situation to our advantage as responsible professionals, we need an exponential increase in our efforts in this regard. VC Experts is, of course, not the only answer, nor should it be. However, it is an answer, a good faith attempt at an answer, I maintain. And I recommend the resource as one material step on the road to a significantly better relationships between the profession and the client community.

[1] Elinson, "VC Slams Attorneys on Salaries, Overlawyering,", 6/4/2008.

[2] Suskind, Transforming The Law: Essays on Technology Justice and the Legal Marketplace (Oxford Press, 2000).

[3] Goldman Sachs Global Investment Research - June 4, 2004.

[4] For a proposal on standardizing statutory language, see Allen & Outa, Better Organization of Legal Knowledge, 1969 U.Tol.L.Rev. 491 (1969). For application of standardized language for legal drafting see Sprowl, Automating the Legal Reasoning Process: A computer That Uses Regulations and Statutes to Draft Legal Documents, 1979 AM.B. Found. Research]. 1 (1979).

[5] VC University offers over 40 streaming video lectures and self-paced tutorials, which can be used efficiently . i.e., not on the client's nickel . to train young associates.

[6] To illustrate: My client wants to organize a private equity fund . an expensive (legal fees on the low six figures) enterprise . with, in today's universe, a significant chance of failure. The trick, in my case, is to furnish, at the outset of the relationship, a digital kit made up pre-selected VC Experts material for the client's review, consisting of: annotated model forms, soup to nuts; the latest Thomson VC Experts Houlihan Lokey survey of "industry standard" deal terms for the transactional documents between the GP and the LP; an article on how to save cash as the fund is being organized; a questionnaire which focuses the members of the GP on the issues (long neglected) they face in memorializing their internal relationships; an analysis of the impact of the so-called "hurdle" on the GP's economics; and a free pass to rummage through Book 10 of The Encyclopedia of Private Equity and Venture Capital for easily searchable data and analysis which serve to answer, in advance, client FAQs. By giving clients a head start of this nature, the law firm should be able, given an inquisitive and experienced client, to reduce the invoices substantially; I'll hazard a guess of, say, $20,000 to $30,000 on a typical mid-six figure bill. The client is not asked to take out her own appendix; but she can make the say in the hospital shorter and the bill lower by preparing herself and her associates.

[7] I have a bunch of these in my files, to which I am adding routinely, and (why are you not surprised) the feature will be up shortly on VC Experts.

[8] The argument for checklists, draws again on the medical analogy. A crusader in the health care industry has made a compelling case that checklists in the operating room cut down errors and save lives. Experienced surgeons, like experienced lawyers, typically scoff at the idea of checking off routine procedures as the operation progresses. Their experience and skills are such that a checklist is, in their view, puerile; that said, the fact is that even with the most experienced practitioners to charge, checklists cut down errors, hence, the idea that, in the MAC/MAE area, a checklist is long overdue.

[9] For an example currently in The Encyclopedia of Private Equity and Venture Capital, see Section 6.1.1. A paper explaining the project in some detail, with an Appendix setting out model clauses which demonstrate how, in my view, words can be saved, see, Buzz of the Week [date]. Herewith an example from the Appendix:

Section 3.8. Ownership and Status of Stock. Exhibit 3.8 sets forth the number and par value of the shares of stock that the Company is currently authorized to issue, has Company's authorized, issued, has outstanding and has reserved for issuance upon conversion of shares of Convertible Preferred Stock into Common Stock. All the outstanding Common and Convertible Preferred Stock either is, or upon issuance and payment therefor[9] in accordance with this Agreement, all of the outstanding shares of the Convertible Preferred Stock will be, validly issued in full compliance with applicable law, fully paid and nonassessable. All the outstanding Common Stock has been issued in full compliance with applicable law. None No shares of the shares of the Common Stock or the Convertible Preferred stock are held in the Company's treasury. The Common Stock and the Convertible Preferred Stockholders are not entitled to cumulative voting rights, preemptive rights, antidilution rights and or registration rights under the '33 Act, except as provided herein or in the powers, designations, rights and preferences of the Convertible Preferred Stock contained in the Certificate of Designation. The Common Stock and the Convertible Preferred Stockholders have the preferences, voting powers, qualifications, and special or relative rights or privileges set forth in the Certificate of Incorporation. The Company has outstanding no options, warrants or other commitments to issue or to acquire any shares of its capital stock, or any securities or obligations convertible into or exchangeable for, its capital stock, except for the conversion provisions of the Convertible Preferred Stock, nor, except as contemplated hereby, has it given any person any right to acquire from or sell to the Company any shares of its stock. There will be no agreement, restriction or encumbrance respecting the sale or voting of any shares of the Company's stock (whether outstanding, or issuable upon conversion or exercise of outstanding calls) except for the offering and sale of Convertible Preferred Stock pursuant to this Agreement. Except as set forth in this Agreement, the Company has no obligation to register any of its presently outstanding securities or any of its securities which may thereafter be issued under the Act of 1933, as amended (the "'33 Act").

149 words eliminated. 13 Added. Net reduction: 136 words.

[10] This system is written up in Bartlett, "The 21st Century Term Sheet," 21 Venture Capital Review, 15 (Spring 2008).

[11] On the question of how VCs typically arrive at valuations, the answer, as per data compiled by Vivian Fu and reproduced online in The Encyclopedia, 59% of the investors in early stage transactions use the comparable transaction method. In fact, Vivian's material is highly useful for companies and funds stuck with IRC 409A and FAS 157 responsibilities . survey evidence on how VC valuations are arrived at. In unity there is strength.

[12] With the VC Experts kit, named The Vision of Venture Capital - Start Up Kit, you get the forms and the commentary which give the basic metrics on this business . how to find capital; how to value your company; how to draft a business plan and an executive summary; what the jargon means when the wise guys are talking past you in a meeting; the fundamentals of the no angel round; dealing with key employees an/or placement agents, if any; non-disclosure agreements; intellectual property issues; management option plans; choice of incorporation vs. organizing a limited liability company, etc.

[13] One of Miller's contributions in that regard is currently being posted as a VC Experts, Buzz of the Week. His thought, as is mine, see The Encyclopedia, Section 3.5.7, is to attack the age old problem facing entrepreneurs, i.e., "Dilution, Dilution, Dilution" (see Buzz of the Week 8/28/2007). And, Carl Kaplan, an old hand like myself, has also published a number of helpful game plans on how clients can overcome challenges, Buzz of the Week, 2/17/2004.

[14] For that matter neither is the healthcare sector; thus, Montefiore Medical Center, where I have long served as a independent trustee, has constructed at significant cost an MIS system entitled, "Clinical Looking Glass."



John Doe, Corporate VC


Joseph W. Bartlett


August 2008


Issues to consider when negotiating the term sheet

Comments on CARRIER Draft Term Sheet (copy attached) dated September, 2008: "Top Ten" (nine in this case) issues to consider, customized for this transaction.

1 Should there be a no shop, no solicit clause in the term sheet, which will be binding? From the investor's standpoint, this is often a preferred way to proceed. It avoids the contingency that the Company will "shop" the terms offered by, in this case CARRIER, with other potential investors and pick the winning number. This is viewed as a problem for investors, because they will be wasting their time and money on a process which they did not realize would be, in effect, an auction.

2 The Series A Preferred often is redeemable at the option of the holder after, say, five years. The idea is that, while registration rights do not work to stimulate the founder to put the company up for sale or otherwise provide an exit for the preferred stock holders, the threat of turning the preferred stock, an equity security, into a debt security is often enough to get the founder (who is always thinking that prosperity is just around the corner) off the dime and agree that the Company be sold . in this case, perhaps, to a strategic partner such as CARRIER.

3 Non-cumulative dividends is not a market term. Again (see above), the idea is that the Company should be rewarded (or not penalized) for achieving milestones which will place it on a pathway to an exit within a reasonable period of time. The second way, somewhat more elegant than the redeemable preferred, (which is never redeemed in accordance with its terms), is a cumulative dividend which will count not only if the Company is sold but upon an IPO. The thought is that the founder and the equity holders (angels, friends and family) who are pari passu with the founder or founders, will be stimulated, in order to avoid dilution, to get the Company into play as soon as it is ready.

4 On the anti-dilution provisions, it is customary, as I have indicated, to use these provisions as a backdoor way of empowering the preferred stock to keep a cap on the dilutive effect of the option plan. What you say is that any grants to employees in excess of, say, 15 percent of the outstanding will trigger the anti-dilution provisions.

5 I do not pay much attention to the registration rights agreement, except to focus on one point. When and as the holder of preferred (presumably a significant holder of common stock after the IPO) wants to sell in an underwritten offering, the Company will indemnify the underwriter and will pay the expenses of the registration, other than the underwriter's compensation. The point is that the time to get that obligation, supported by fresh consideration, is now . rather than at some subsequent date.

6 Interestingly enough, one reason to eschew registration rights is that the registration rights provisions cut both ways, because the 180 day lockup is traditionally contained therein. However I am confident that, if we ever get IPO's going again, the underwriter would insist on a lockup for CARRIER.

7 On employee vesting, the question often arises whether the preferred stockholders, as consideration for their fresh infusion of cash, can insist on "reverse vesting" of the founder's shares. This is a draconian provision, often viewed as insulting by the founder; but, if there is a possibility that the founder might take off if times get tough and perhaps work for a competitor, it is a provision to consider.

8 A typical provision of closing is to tie up the key employees with non-competes or, in California, golden handcuffs.


This memo focuses on the quantitative analysis, versus gut feel, as venture transactions in this country are negotiated, wordsmith and closed. I contend that the abundance of data in today's environment makes it critically important that venture capitalists, entrepreneurs and their advisers "get it right" when, for example, the Series A round is negotiated. To illustrate what I have in mind, allow me to use, as I often do, exposition in a Q&A format.

Question: You make the claim that the IT revolution has made a compelling case for fundamental changes in the way lawyers and other professionals, plus their clients, plan, structure, negotiate and close financial transactions. Pretty bold. Please justify.

Answer: Glad to. Let me take, as an example, the Series A round of financing in the venture capital context. I will illustrate by contrasting the old way of going about our business with what I argue is the 'New Way' . the New Way compelled by the advantages it holds out to all parties involved in the process.

Question: "Compelled" you say? Pretty strong language.

Answer: Consider the old, indeed in many cases existing, metrics of a Series A round financing. The investor, in this case a venture capital fund, drafts a term sheet with the assistance of its counsel and presents it to the Company seeking capital. The term sheet contains terms the venture fund has used many times in the past, and, accordingly, deems appropriate on the basis of that familiar pronouncement, "This is the way we have always done it." The pre-money valuation offered to the Target and its owners is arrived at as much through intuition and gut feeling as any academically approved model. Given that the Company is, for example, only approaching cash flow break even and the projections assume the typical hockey stick curve, the VC managers deem it generally a waste of time to go through the valuation methodologies they learned in business school; discounted cash flow does not work in the absence of reasonably predictable cash flow. Issuer's counsel pushes back on the deal terms, and the founder argues that the Company's prospects are so rosy the pre-money valuation should be elevated. After a good deal of parry and thrust, the term sheet comes out somewhere in between the investor's "gut" and the issuer's "gut," as mediated by the opposing counsel . who claim they have been around the track many times.

Question: Well, what's the matter with that? It has stood the test of time.

Answer: Think about the New Way for a moment.

First, on the subject of price, both parties reference and work from the data presented by Key Investment Trends materials in the VC Experts Data Center. See Exhibit A, a quick and dirty illustration of what you can find.

Question: So in your view, comparable transactions should drive the bus?

Answer: Information of this sort should be the starting point for any discussion of pre- and post-money valuation. In 99 cases out of 100, this is the best and most reliable hard information the parties can access. It is based on official government filings; it is up to date and comprehensive; it includes more data points than any other source. To be sure, once this material has been absorbed, the discussion is not closed. Markets can get it wrong; look at what's happening today in the public markets. But, there is no conceivable excuse for not accessing this data as a starting point on the pre- and post-money calculations. The best minds in the accounting profession believe that value is best established by "marking to market." The KIT feature is the most trustworthy "market" data available; there is no justification I can detect for ignoring it.

Question: Is that all? I've heard you lecture that the "value" of any security is driven not only by the ostensible and apparent price, but also by the deal terms.

Answer: Exactly. The second leg of the three legged stool is exposure to the VC Experts Series A Deal Terms Surveys. These show the "market" cum "industry standard" incidence of various deal terms, based again on official government filings and sliced and diced according to region and calendar quarter.

Question: And, you claim this establishes the "market" so that all hands should mark their deal terms to a synthetic "market?"

Answer: No, not at all. The compelling aspect of this data source is that it is a reliable guide if and to the extent the parties agree that the deal terms should be "industry standard." And it defuses the adrenalin of hyper-competitive lawyers who fill the room with loud claims that, "We always get this term." "Well, we never give it!" If the parties decide to diverge from the "industry standard," they know what they are doing. In fact, VC Experts publishes a graph so that the parties can compute their proposed deal against a matrix which ranges from 'investor friendly' to 'issuer friendly.' See Exhibit B.

Question: If the deal is issuer friendly, does that mean a venture fund lacks clout?

Answer: Curiously, no. According to a paper (currently a work in progress) by a colleague at the Cornell Business School, the more successful venture capitalists frequently go easier on the deal terms than some of their less experienced peers in the business. In my view, the best in the business (going back to my mentor, Bill Elfers) typically focus their precious time on analyzing and researching the business proposition, versus arguing about full ratchet vs. weighted average. That said, the point is that the parties should be in a position to track the deal terms against the industry averages, so that such data is out and on the table, so to speak. If it is important to mimic the "industry standard," then this information makes it a cinch to accomplish that objective, if it is agreed to depart from the "industry standard" then this information enables the parties to figure out how far their desired terms in fact do depart from the averages.

Question: Is that it? You said a three legged stool.

Answer: And I meant it. The third leg is again, material presented by VC Experts and internally referred to as the Ola Algorithms, based on the work of Prof. Ola Bengtsson, the above mentioned colleague of mine at Cornell. Ola has helped the VC Experts professionals develop. This data is based on a series of break points and tied to a spectrum of potential exit valuations. The charts illustrate the economic impact of specific deal terms, the ones we have been discussing and which appear generally in Series A financings, on the ROIs of the fund vs. the issuer. You can figure out what each deal term, accordingly, is worth to you, depending on the exit valuations you find likely.

Question: But what good does this do you if you are, say, the owner of the issuer, a/k/a the founder? What if the VC fund, as it often does, drives the bus on deal terms?

Answer: It is critical to your negotiation strategy. Let's say there are eight significant deal terms in the term sheet which the venture capitalist has presented. You know, as a matter of human nature, that when you push back, you are only going to be able to persuade the other side to agree to your position on, say, three of those terms.

Question: Which ones do you push back on?

Answer: Well, you can go with your gut if you like. But, you're a lot better off if you access the information that indicates which three of the eight will have the greatest impact on your outcome, depending on the exit valuations you deem likely.

Question: This is all very esoteric, is it not?

Answer: Not at all. How can you hold your head up as a professional in this field unless you at least review and evaluate the data contained in each of the hypothetical stool's three legs? Ignorance may be bliss; but ignorance cannot be defended in this context, when real money is changing hands and outcomes are affected by the choices made at the outset of the relationship.

Exhibit A

Exhibit A

Exhibit B

Exhibit B

Joseph W. Bartlett, Special Counsel,

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