My advice to startups is to manage your legal costs.  I generally earmark no more than 3% of revenues for outside counsel costs. Law firms, by their own structure, are only motivated by the number of hours they can bill.  Associates are forced to bill as much as possible, for that is how the Partners monitor the performance of the associates — the more hours they bill, the fatter the profit margins.  I can count on one hand the law firms which I find that provide the best value for their work.  As corporate counsel, I have discharged law firms where I did not receive the best value.  I myself have written contracts and I know how long it takes, as an example of my understanding billing time management by attorneys.

So a start up can be killed with legal bills. As corporate counsel, I did monitor those expenses, I negotiated with law firms, I always sought the best lawyers for the dollar.  I myself worked for law firms and corporations. There is an advantage having this experience to help control these legal expenses.  Someone described me as a businessman’s lawyer — I thought of the cheapest, fastest means to get something done.  But you don’t find that type of lawyer across the board.   

I sympathize with JG’s experience with the poor performance outside counsel. I generally spot those things way before I hire the lawyers. My advantage is that I am able to recognize the value. I wouldn’t kill all the lawyers.

Re Romney, my limited understanding is that his Private Equity firm was primarily a financial investment vehicle, with “consulting” a secondary consideration, to the extent the could improve their financial performance with a particular portfolio company. Also, I assume most of the companies in which Private Equity becomes involved are pretty decent in size and tenure – not startups.

So my rule is not so severe — true, one looks at value.  Some consultants have nothing at stake and provide useless advice.  The compensation for such conditions is simple — minimal fees bolstered by equity of some sort.  Maybe if the usage is too much, then hire that person full time. But  a company must move forward with the limited capital under its belt and there are instances where a consultant is very much needed for the Coase’s “firm” to exist.  

And do all consultants provide little or no value? Mitt Romney came from Bain & Company, a consulting company, and their clients’ savings derived from their consultancy were invested in Bain Capital, a VC.  Romney was appointed as the MD for the VC fund. It was enough savings and capital growth that earned Romney over $200 million.  So some consultancy does seem to work.