E136: Navigating Startup and Venture Capital Legal Risks w/Constantine Karides

Speaker 1 And so, if you show up on a first deal, you get on a Zoom call, and there's you and five other folks, none of whom the client had seen before, wondering what's going on. Oftentimes,

Speaker 1 startups or even you know, venture funds, depending where they are, aren't going to question the fact that you have all those folks on the call.

Speaker 1 It can become a pretty expensive endeavor, and one that's not answered necessarily. And I don't think it furthers the best interest of the client at all.

Speaker 2 And the right time to ask that is when you have the leverage, when you're choosing the law firm, before because after that, you're kind of stuck with the firm.

Speaker 1 Definitely want to do that before you get too far along. along.
It's hard to pivot and change law firms.

Speaker 1 There's a lot of cost that goes along with that, transition and otherwise, and also sunken investment of time and energy.

Speaker 2 What are the most important questions that startups or venture capital funds should ask their lawyers before they engage with a lawyer?

Speaker 1 I think it's a little different. for each of those two buckets.

Speaker 1 If I'm a startup, I want to look at my legal relationship as I would a strategic investor. And that is, beyond lawyering, what can this law firm or lawyer bring to the table?

Speaker 1 There are a lot of lawyers who can paper or put together initial formation documents and negotiate with investors and put together a tax structure that works.

Speaker 1 And so beyond that, what are you bringing to the table? Do you have a network of partners or potential partners for the underlying business?

Speaker 1 Do you have a network of investors that might be interested in the next round or the current round?

Speaker 1 Are you well positioned within your law firm to be able to drive value to me if I need to ask you to make concessions on pricing or to try to do alternative fee structures, which some startups need to do to be able to move forward with an eye towards a broader relationship?

Speaker 1 And so I think I would, as a startup, want to make sure that I have hired a lawyer from a firm that can do the work, of course, at a high level of quality, but also that brings to the table off-balance sheet value, not just legal services.

Speaker 2 That you want to make sure that that partner has the right credibility internally to help the startup. Double-click that and explain why that's important.

Speaker 1 Especially if you're dealing with big law, and I'm at a big law firm.

Speaker 1 Decisions

Speaker 1 are often not made at the lawyer level when it comes to doing things that are not straight down the middle.

Speaker 1 And so there's a layer of bureaucracy or even just an inability to deliver on value propositions on one hand, and on the other hand,

Speaker 1 an inability or less of an inability to deliver the right talent or the right people.

Speaker 1 If your relationship partner is well placed at a firm, either because they have a significant portfolio of business and are at the higher end of the ownership structure or are considered a star in the space,

Speaker 1 they will be able to, without having to navigate that bureaucracy or even deal with people saying no to them, both deliver the resources that are necessary for the project

Speaker 1 and also be able to be flexible on things like pricing or other requests that most partners wouldn't.

Speaker 2 Essentially, the lawyer has leverage internally, whether they're bringing in a lot of business or they just have high standings within a firm, and they could use that relationship capital.

Speaker 2 They could bring in the resources that the startup needs. They could bring in the star guy.
Maybe there's a guy or girl that's really good in tax or in M ⁇ A when the time comes.

Speaker 2 They could bring that resource into the company. On the other side, on the cost side, they could be more flexible because they basically have that reputational capital internally.

Speaker 1 That's exactly right.

Speaker 2 And what about venture capital funds? So you're going out, you're talking to these law firms. They all seem pretty much to have a similar pitch.

Speaker 2 What questions should a venture capital fund ask before choosing counsel?

Speaker 1 So a venture capital fund is looking for lawyers who are going to be reviewing investment documents in connection with their go-forward investments in portfolio companies.

Speaker 1 They're also going to be looking for lawyers who can help those portfolio companies grow. And so, some of the same questions and priorities that I just mentioned would apply in that vein.

Speaker 1 For venture funds, I think it's a little bit different. I think venture funds certainly

Speaker 1 are repeat customers and are,

Speaker 1 I would say, for law firms, a

Speaker 1 potential really steady flow of business.

Speaker 1 And so with that in mind, I think venture funds are looking for really super competent legal assistance.

Speaker 1 Yes, the relationship partner matters,

Speaker 1 maybe a little less so than for a startup.

Speaker 1 And they're looking for

Speaker 1 partners within law firms that can be flexible and be open to working with portfolio companies they invest in.

Speaker 1 For me personally, a lot of engagements we have, we have fine relationships with a number of venture funds, and we help them with respect to their investments in the Series A, C, whatever it is.

Speaker 1 But the upside of that is oftentimes when they refer you to one of their portfolio companies who's ready to have

Speaker 1 a significant transaction, a listing.

Speaker 1 or even maybe just have to deal with some

Speaker 1 unwelcome litigation or things like that.

Speaker 2 In many ways, you're investing into these startups like a venture capitalist or an angel investor might.

Speaker 2 What are you looking for in terms of these startups to decide who to take on, who to spend time on?

Speaker 1 That's a really good question. Me personally and my team does approach startups as we would think about making an investment that a fund might make an investment.

Speaker 1 And we also think about

Speaker 1 you know, we're not, we're, if we were good, really good investing, we would be running venture funds. We're not.
we're lawyers, uh, but we do have a sense of, you know, what's real or what's not.

Speaker 1 There are certain hallmarks that are associated with those kind of decision-making. You know, who's their anchor investor? What's the background of the founder?

Speaker 1 You know, does the strategy, at least to us, make sense?

Speaker 1 And where's the referral coming from? If they all add up, then you know you have a pretty pretty good client potentially.

Speaker 1 And at the outset, my personal view is, and not everyone follows this approach, is you need to be flexible and malleable and work with them so that they can get into a position to be a really strong company.

Speaker 1 And that means, in my opinion, not going at them with your 100% max rate and trying to max bill or bring in a lot of different lawyers who might not be necessary initially for the project.

Speaker 2 When we last chatted, you told me about the leverage model. that law firms deploy in order to maximize their profits.
What is this leverage model?

Speaker 3 The financial services industry is evolving rapidly.

Speaker 3 Reid Smith's team of over 200 financial industry group lawyers helps clients navigate the complexities of the sector in an era marked by technological advancements and AI.

Speaker 3 Reed Smith's lawyers have a deep understanding of market dynamics, legal frameworks, and regulatory developments, and advise financial institutions and technology companies on financing, lending, investment management, restructuring, insolvency, and litigation.

Speaker 1 So,

Speaker 1 in its most traditional sense, leverage model is pushing down work to the lowest level of employee or associate, in this case,

Speaker 1 that can do the work.

Speaker 1 And the reality is that's kind of been

Speaker 1 amended or modified or extended in a way that is really more reflective of the drive and at the risk of putting us a little bit of a bed light of big law to really drive revenues and profits and rate increases and all those things.

Speaker 1 So, I think what you've seen is a lot of times law firms will staff cases with too many associates in my opinion,

Speaker 1 or too many partners even,

Speaker 1 with an idea of maximizing bubble hours. And it's approach that I can't stand.

Speaker 1 It's not something I do in my practice or ever have, maybe to the detriment of my firm, but I firmly believe, I really firmly believe that the best thing you can do for a client and the most lucrative thing you can do as a law firm is to build trust, confidence, deliver a great product, add value to your client and everything else will flow from that and so if you show up on a first deal and you you get on a zoom call and there's you and five other folks none of whom you you know the client had seen before

Speaker 1 and

Speaker 1 wondering what's going on oftentimes startups or even you know venture funds depending where they are aren't going to question you know the fact that you have all those folks on the call It can become a pretty expensive endeavor and one that's not necessarily.

Speaker 1 And I don't think it furthers the the best interests of the client at all. Going back to that initial question about what's the best,

Speaker 1 what's one of the best questions a startup can ask is who's working on my matter?

Speaker 1 You know, what are they each doing? What's their level of expertise?

Speaker 1 And make sure you're comfortable with it because if the answer is I've got three associates,

Speaker 1 well, why? What are they all going to be doing?

Speaker 1 I think you're entitled to know that and you're entitled to know who you work with. A lot of times the people who are selling you on a a deal aren't the people who are working on a deal.

Speaker 2 And the right time to ask that is when you have the leverage, when you're choosing the law firm, before because after that you're kind of stuck with the firm.

Speaker 1 Definitely want to do that before you get too far along. It's hard to pivot and change law firms.

Speaker 1 There's a lot of cost that goes along with that, transition and otherwise, and also sunken investment of time and energy.

Speaker 1 You want to have your law firm be an extension of your company or fund, frankly. You want them to be aligned with your interests.
You want them to...

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Speaker 1 To be pushing forward in a way that helps you achieve your business objective or your investment objective.

Speaker 1 And you don't want to have to get into a situation where you're leery of speaking to your lawyer because you called up somebody and you're, you know, the next day you got a bill for a half hour of time when you thought you were just

Speaker 1 calling a friend or a conversation.

Speaker 2 It's interesting because a lot of these projects that people will call you about are hypothetical. So they might...
be a hundred, two hundred, a million dollar engagements with a law firm.

Speaker 2 Why charge somebody $500 and keep them from kind of discussing opportunities for you? It seems very short, short-term.

Speaker 1 You just kind of said it in exactly the obvious way.

Speaker 1 What can come out of a client calling you? Only good things.

Speaker 6 Worst case, they engage you.

Speaker 1 There's nothing lost by having conversations with your client and encouraging them to speak with you, or prophylactic counseling or what have you.

Speaker 1 You know, certain things that shouldn't be unbalanced, billable stuff, in my opinion.

Speaker 2 When I spoke to the Reed Smith operations team, they told me, their words,

Speaker 2 Constantine's a rainmaker. We hired a full-time person just to help him with his relationships.
You obviously have an ability to bring in a lot of business.

Speaker 2 Tell me about your philosophy and how does that philosophy differ from the typical lawyer?

Speaker 1 So

Speaker 1 I'm fortunate. I've been doing this a long time now.
This is my 30th year of practice. Over that period of time,

Speaker 1 what I've learned is that

Speaker 1 engagement on a personal level

Speaker 1 with your client, people who leave that client or several people who leave that client in a way where they trust you to look after them.

Speaker 1 One of the things that I think clients like as lawyers, yeah, if they have great in-house counsel and they have a little

Speaker 1 thought out, they're much more focused on, you know, I want the very best lawyer to do X, Y, and Z. And we deliver that in certain areas.

Speaker 1 But more generally, they want to know you're looking after them. That I've got this great lawyer, this great team, that I can go to bed at night knowing that my documents, my transactions, any

Speaker 1 risk I have is being managed in a way where they're not just looking to make dollars off of me, but they're looking to advance a deeper personal connection.

Speaker 1 And so I've been fortunate to have become really close friends with many of my clients.

Speaker 1 And I think it's that personal touch and being available to them all the time that has served me very well.

Speaker 1 That results in probably

Speaker 1 not

Speaker 1 being the most aggressive biller or the most interested in in setting up, you know, all sorts of ways to price and set different prices.

Speaker 1 But I don't care because I think in the long run, we do better, they do better.

Speaker 2 You have parties that you throw when your companies have big milestones. You are very social with your clients.
Talk to me about kind of mixing your business and professional life.

Speaker 6 Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.

Speaker 1 I've always been kind of an outgoing kind of a person. So I've always loved, you know, I've always loved getting people to laugh.

Speaker 1 I like to feed people, I like to have them at my dinner table and get to know them, frankly.

Speaker 1 You know,

Speaker 1 just as we've gotten to know each other, it's great. When you kind of peel that initial layer back, you're much more likely to want to do something together, right?

Speaker 1 The kind of facade or that, you know, veneer we all have.

Speaker 1 When that goes away, it's a much better way to develop a relationship business or otherwise.

Speaker 1 And so it's become part and parcel of what I do. I love to host big dinners.

Speaker 1 You can call them networking dinners or just a bunch of like-minded people or friends, and that generally is good for business, for sure. I love going to ball games.
I love going to concerts.

Speaker 1 And so I always like to have big,

Speaker 1 not entourages, but big groups of people going.

Speaker 1 And, you know, when people are outside of their professional,

Speaker 1 you know, day-to-day,

Speaker 1 They're just like we were when we were kids, right? You're just hanging out and you're getting to know each other and and it's a much better forum

Speaker 1 to start talking about things in a way that can lead to business relationships because frankly it I had not and ideally and I'm at a point in my career thankfully where I can do this you want to work with people you like on the legal side or you you

Speaker 2 so or you or you have this like especially post-COVID I feel like everybody's behind zooms there's less interaction and you know we're we're wired evolutionarily for when we lived in 150 person tribes and i think people are really struggling from that.

Speaker 2 I think that's why you're seeing some of these mental health issues in society. So I think it's really powerful what you do.
What mistakes did you make on early on in your career as a lawyer?

Speaker 1 That's a great question. I think one of the things I decided early on in my career was

Speaker 1 working at a fairly big law firm out of law school was kind of a tiring and exhaustive

Speaker 1 process, still is, maybe even worse.

Speaker 1 And that wasn't something I wanted to do in perpetuity, so I decided pretty quickly that until and unless I I developed my own client relationships, I'd be, you know, working for the man, kind of, so to speak.

Speaker 2 No leverage. You would just be trading your time for money.

Speaker 1 But in order to kind of make that leap into starting to generate my own business, do anything for anybody, basically, was not in a position to be selective.

Speaker 1 And so probably took on a lot of work and a lot of clients that in hindsight were probably bad ideas. with people that I probably didn't respect.

Speaker 1 Not that they were doing anything unlawful or but just like jerks or assholes, you know. And so

Speaker 1 you get into that web and that lasts longer than you'd want it to, even if it's your own client per se. So that's one thing.

Speaker 2 Talk to me about AI. How is AI affecting the legal profession?

Speaker 1 So in time, I think it's going to have a very prominent and significant role in performing a lot of the legal functions that are more rote and repetitive.

Speaker 1 I think there's

Speaker 1 the beginning of that.

Speaker 1 Not so much yet in big law firms or even regular law firms. I think

Speaker 1 plaintiffs' firms are the first, I think, to really kind of lean into AI.

Speaker 1 And they're doing so if they're class action firms in terms of figuring out algorithmic approaches to

Speaker 1 onboarding plaintiffs at a cheap price. And that's a big part of the game that those guys play.
and they do it very lucratively.

Speaker 1 They are also pretty proficient in

Speaker 1 reviewing documents but not in a way that I think the courts prefer so it's maybe like a first cut review. Most courts are leery of AI involvement.

Speaker 1 You know, people got in trouble for having briefs drafted by AI even though the briefs weren't that bad. So

Speaker 1 AI is emerging

Speaker 1 probably slower than people think. It's definitely slower than the people who've developed the AI for law would like.

Speaker 1 And there's resistance always to change within any profession. And I think the legal profession being the most resistant, it's probably the most protective.

Speaker 2 AI is not as widely used in the legal profession. It's not as widely adopted in litigation.
Why is that?

Speaker 1 It will be.

Speaker 1 It's just not moving

Speaker 1 as quickly as people think it might

Speaker 1 maybe should be moving. Our firm

Speaker 1 has taken a deep dive into this, and we're already introducing AI in certain aspects of

Speaker 1 our business, the way we handle a for-profit business, and also in different parts of our legal services. And we're doing it in two ways.
One is we're looking to engage with,

Speaker 1 do test runs with

Speaker 1 the best or who we think are the best or who are advised are the best best AI legal providers. And we're sorting through that presently.

Speaker 1 We also have our own tech subsidiary, which we've had for a while, that has really been at the forefront of making things like discovery or discovery and litigation or due diligence in big corporate transactions much more proficient and inexpensive.

Speaker 1 And it's actually been a good business for us. They've been developing their own proprietary AI for those functions and others.
And so between the two, we think we're going to be right there.

Speaker 1 And we're not hesitant to deploy it or use it.

Speaker 1 But I think it's still several years away from being a mainstay

Speaker 1 day to day in a significant way.

Speaker 1 And when it does happen, I think it'll happen

Speaker 1 broadly

Speaker 1 as opposed to, oh, that firm's doing it, that firm's doing it. You know, big law tends to run as a herd.

Speaker 1 And so when it happens.

Speaker 2 Is that clients pushing firms to use AI?

Speaker 1 I don't think clients are pushing for AI just yet.

Speaker 1 They want to make sure that

Speaker 1 the technology is appropriate, that the industry accepts it, that there is no resistance by the bodies that overlook the legal profession in terms of using AI.

Speaker 1 And I think the people who drive decision-making in law firms are more my generation, right, in the 50s or so.

Speaker 1 maybe not as quick to move to a new technology as somebody in their 30s or their 20s or something like that.

Speaker 2 But you have the internal political capital to kind of push the technology.

Speaker 1 I'm not sure what it does fully in terms of the law firm models that we've talked about and others.

Speaker 1 On the one hand, it's going to potentially replace a number of the associates you need,

Speaker 1 and it'll replace it in a way that should be cost-beneficial to your client.

Speaker 1 But then it should open up the opportunity for

Speaker 1 the work or the advice or the high-level strategy that we provide

Speaker 1 to

Speaker 1 metastasize and become much larger. So, you know, some firms are, well, if I lose 100 associates and I can't build them in the way that we talked about,

Speaker 1 how do I make that up? Or where's the profit going to come from utilizing this technology? And I think the profit is there.

Speaker 1 I think the profit is geared more towards let's talk about how we're going to help you structure this startup or this investment. You know, these are things that are not,

Speaker 1 at least for the foreseeable future, replaceable by AI just yet.

Speaker 2 Anytime you drive down costs, you get more startups started and more funds started, and it expands the pie. So we've seen some counterintuitive kind of results of driving down costs.

Speaker 2 Oftentimes these businesses get much bigger.

Speaker 1 That's been the history of technology, right?

Speaker 1 People get afraid it's going to end this or end that, and it ends up

Speaker 1 usually, and maybe I will be different, I don't know, in creating more opportunities for everybody.

Speaker 2 What would you like our listeners to know about you, about Reed Smith, or anything else you'd like to share?

Speaker 1 Thank you for that question.

Speaker 1 Well,

Speaker 1 I would like your viewers to know that

Speaker 1 engaging lawyers can be a really great part of their business. And getting the right lawyer can be extremely additive.

Speaker 1 to the growth of their business for the startups and for the you know GPs can be really strategic in helping them see around corners on investments and things like that. And that, me personally,

Speaker 1 and you know that,

Speaker 1 I really like to think I put myself completely,

Speaker 1 make myself completely available to clients and bring with it not only the years of experience I have, but the network that I've developed, the approach we discussed, and a really solid team as well.

Speaker 2 And how can people reach out to you?

Speaker 1 They can

Speaker 1 email me at C Caritas, C-K-A-R-I-D-E-S at readsmith.com, or they can, I guess, LinkedIn is

Speaker 1 probably a little bit of an older

Speaker 1 way to reach me.

Speaker 2 Well, Constantine, you've been a great friend, and thanks for jumping on the podcast.

Speaker 1 Thanks for having me.