Monday Morning Dead Horse Beating

I will start off by saying that the legal industry’s business model sucks. The billable hour isn’t good for lawyers or clients, and while many have tried, we haven’t yet come up with a viable alternative. Lawyers are expensive, and we are often only brought in as a last resort when things have gotten out of the client’s control, which makes the impact of our cost feel that much worse for the client. I always feel a great sense of satisfaction when I can help clients out of a tough situation, but then feel bad when I have to send them what is often a larger bill than I’m sure they would like. I know my value, but they don’t always. And that’s ok–I’m not in the position where I feel like I need to justify my worth to clients who don’t get it–but I can’t help but feel frustrated that they don’t know what they just got.

The clients who would benefit the most from solid legal advice from the start are often those who don’t have the funds to pay for it. I get it.  So enter the startups who are nobly trying to commoditize the legal industry to help bring the law to those who don’t feel they can afford it. LegalZoom, Clerky, and now StartUpDocuments, are in this space. I will just say this very predictable and oh-so-cynical-sounding phrase: you get what you pay for.  I am sure I sound like the old guard protecting my cherished bill-by-the-hour-and-screw-the-client territory, but it’s just true. If you’re cool with living with the result of incorporating your business–your baby that you plan to grow and nurture into a thriving example of your hard work and intellect–for $279 dollars, alright. But understand that all you are getting for that is a form.  And for some, that form will be just right and exactly what they need. For some, if they had spent two hours with a lawyer at $400/hour, that lawyer might have told them that they need to be in a Delaware c-corp. That’s $800. Then that lawyer might have drafted the documents and sent that individual on their way. That’s another $1500 (and used to be MUCH higher, btw).  If that person skipped the lawyer part and paid $279 for document incorporation through one of these legal startups, they’d be better off. But they got lucky.

The problem with many of these startups, and the reason actual lawyers are still valuable, is that the client doesn’t always know what they need. I hate to sound patronizing, but it’s just true. I may go to the doctor’s office thinking I have it all figured out, but I might have been way off on my initial assumption of what was wrong with me, which then skewed the rest of my analysis. It’s the same for law. These companies market their product to “startups.” Well, what if you’re not a startup in the way that they mean it? You might be starting a new business, and perhaps you’re even seeking a seed round, but does that put you into the relatively narrow definition of “startup” as that term is now used? What if you’re in an industry where it would be absolute stupidity to be a c-corp (real estate, oil & gas, etc.). If you get that initial analysis wrong and then incorporate as StartupDocuments suggests–as a Delaware c-corp–then you are screwed if you decide to change your tax status later. A conversion to a partnership will be a deemed sale of all of your company’s assets. A deemed sale is a very, very bad thing if you’ve built up some value. Basically it is a sale for tax purposes, meaning you’re taxed on the gain, but it’s not a sale for your bank account’s purposes. You haven’t sold anything, but the IRS says you have, so you have to pay tax on the gain without actually receiving any proceeds from a sale with which you could pay the tax. Bad news. That’s just one example of many in the list of things that can go wrong from bad incorporation advice.

So maybe the Delaware c-corp is the right choice for you. But oops! You didn’t realize that you actually needed more than one. There is often a benefit to separating intellectual property from other assets of the company, particularly when you might want to sell the operating assets but retain the IP to collect a royalty stream. Well, in an asset-for-stock transaction, you can do that sale on a tax free basis (either a “C reorganization” or a “forward triangular merger”), assuming you have housed the IP in a separate entity. If you haven’t, you’re at the mercy of the buyer to agree to an “A reorganization,” which many won’t due to the requirement to assume seller liabilities. If you can’t get that straightened out with the buyer, you’re looking at gain on the receipt of buyer’s stock you’re receiving in the sale, but no cash with which to pay the tax on that gain.

And just one more comment on internet lawyering in general: Someone I met at a startup event here in Austin called me the other day to ask about reincorporating his company in Texas from California. He had been doing internet research on how to do it, and had come up with something that was essentially a corporate dissolution and then reincorporation in Texas. This would have been detrimental from a tax perspective, when there’s a much easier, tax-free way to accomplish his goal. We had that figured out in 15 minutes on the phone, after he had done hours of online research.

Bottom line is that it is almost always worth your money to spend just a little bit of time with a lawyer before engaging in any DIY or docs-in-a-box legal work. At the very least, the lawyer will help you identify your needs and the path to a solution.  It’s up to you at that point to determine if you think the lawyer will continue to bring enough value to your situation to justify the additional costs. If you don’t think they will, then at least you can say you’ve made that decision in confidence, and you’re only out a couple hundred bucks. If you think they will, then you’ve probably just saved yourself thousands of dollars in repairative legal work, despite the fact that the bill will be more than the cost of the docs-in-a-box.

Try this one weird trick for professional growth!

In any high-pressure professional career, failure isn’t an option. We are taught that we have to execute every task, every project, with laser precision and succeed each time at completion. There is no room for error. The best professionals in our chosen careers–those whose articles, white papers, and blog posts we read religiously for guidance–have made it to their stations because of their flawless execution of tasks throughout their careers. This is what the rest of us must do to get where they are.

Man! It was really hard to write that with a straight face! It’s true, though, that failure isn’t an option–it’s a necessity. Everyone fails, and they do so many, many times in all aspects of their lives. Sure, successful completion of a task reinforces something that you’re doing right, and that’s important. We need the confidence that comes from knowing we’re on the right track. But failure is hands down the best teacher there is. When you fail, you feel like the world is ending. Like you are the biggest moron on the face of the planet. You question your abilities and what you thought you considered your expertise and knowledge about whatever it is you failed doing. You beat yourself up and are seriously thinking that maybe whatever credentialing agency issued your professional license must have mistakenly overlooked your obvious flaws. Your internal monologue goes something like this, “Well, I sure fucked that one up. Let’s see, what else can I use this degree for? Because clearly I should not be a  [insert profession here].” You feel like nobody can trust you to do anything right, and that you can’t trust yourself either. You second-guess everything. You wait for the other shoe to drop, because if you messed up these couple of things, surely you messed up twenty others that just haven’t yet revealed how truly unqualified you are.

Yes, failure produces a really horrendous and unbearable internal monologue. Add to that the disappointment of those who were let down by your failure. Your boss, coworkers, clients–there’s never just one person your failure affects. So while your brain is yelling at you and telling you how much you suck, so are these outside parties. Right after failing, you just want to crawl under a blanket and hide. You think of how nice it would be to just buy some acreage in Montana and live off the land, with nobody to disappoint but yourself.

Yeah, failure sucks–which is why it’s so great, assuming you use it as a tool for growth rather than let it beat you down. The best way to fail is to say, “Fuck you, Failure! I’m going to make you my bitch!” It’s like in those movies where the hero takes the villain’s weapon that he’s using to destroy the earth, and instead tinkers with it a bit and ends up saving the planet and destroying the villain. That’s what failure done right can do. We destroy the villain by making sure we don’t make the same mistake again (although in all likelihood, we might). We save the planet by using our experience  to grow personally and to help others learn from our mistake. The personal growth comes only when we acknowledge that failure is a part of learning, and it’s not something to fear, nor is it necessarily a reflection of our abilities, our drive, or our suitability for a particular career. We grow from failures when we don’t let it overshadow all of the positive elements we bring to the table, and we don’t let it shake our confidence permanently. And then if we want to really double down on our conquering of failure, we use it to teach others so that our mistake is not only valuable to us, but to others who might find themselves in the same position down the road.

Failure works as a teaching tool if we don’t run from it. When we fail, we have to acknowledge and accept the failure, and then figure out why we failed. There are root causes to failures which must be identified. Sometimes it takes multiple failures to start to see a pattern. When that happens, its important to work to understand the failures. This may require some quiet time to allow reflection, but in order for reflection to be successful, we have to be over the “beating yourself up” phase, so that we don’t try to justify the failure or explain it away. We have to be prepared to embrace it, and to be prepared for all the yucky feelings that might involve. It’s really, really hard. But just like working out a muscle, that momentary pain only makes us stronger and better prepared for the next time. In addition to reflection, we have to be willing to seek analysis from those who watched us fail, or who were affected by our failure. This will also suck, big time. It’s the whole “You let me down” thing all over again, but this time directly to your face. Just remember, you are a muscle! This makes you stronger! But not in the CrossFit way, because that shit is bad for you. In the yoga sort of way. I mean, Destroyer of the Universe pose is pretty uncomfortable, but dammit if it won’t make you strong as hell.

All of this is easy for me to say and to tell someone else to do. For whatever reason, I’m able to shake off those initial feelings of utter incompetence pretty quickly and launch into the “let’s learn from this so I hopefully don’t do it again” phase. I don’t know who gets the credit for that, but I’m thankful that’s how I’m built. I realize that not everyone is that way, and many people are opposite to the extreme. I look at my daughter, who is 6, as an example of someone who doesn’t handle failure well. She has a hard time trying new things because she wants to be a master immediately, which is rarely the case, of course–she’s 6. Six year olds have only mastered whining and saying inappropriate things at exactly the wrong time.  She didn’t want to sign up for soccer because, having tried it once and not been the best in the group, she decided she was bad at it. Maybe it’s hard to appreciate the learning process at six years old, but it’s definitely an issue for her. Hopefully with our guidance she’ll eventually come to learn the value of failing, and will ultimately become more comfortable with it and its role in success.  For now, though, she has very high expectations for herself, which is good, but her self-confidence is tied up in immediately meeting those expectations on the first try, which is not good (for her).  So we have to work on getting her comfortable with failure, and divorcing failure from her self-esteem.

I know there are plenty of adults out there with the same issue. There is a definite spectrum of being comfortable with failure, and each end probably has a hard time telling the other how failure is appropriately handled. So maybe I’m just one asshole at one end of the spectrum making gross generalizations about failure that won’t translate to those at the other end. In that case, I’ve failed at this post.  In any case, I’d love to hear input from how others approach failures–minor and major–and what the outcome was, both in terms of personal growth and professional growth. I welcome your comments, stories, experiences, etc. in the comments.