In the last couple of weeks, IP Draughts has been helping a high-tech company to obtain some further investment (a few hundred thousand pounds). We were asked to cap our fees at £5,000 on the basis that the investor’s lawyers were agreeing to the same cap and were using some “standard” documents for the transaction.
The documents have now been agreed and, much to our surprise, the total billable time on this matter is likely to be within the cap. Past experience suggests that, more often than not, capping fees is a mug’s game for the lawyers concerned, as too many aspects that can increase costs are outside an individual lawyer’s control. We have seen transactions where one or both parties or their lawyers took an inflexible stance or a “Rolls Royce” approach to negotiating every clause at great length, where the negotiations stopped and restarted several times, and where the parties’ expectations were too far apart. We have also seen parties who worked out their priorities and negotiating positions in “real time”, rather than planning ahead. We have seen parties who wanted to be educated about the significance of every clause. All of these features tend to increase the amount of legal costs.
So, what was different on this occasion, which kept the legal costs under control? Several aspects, including:
- The investor’s lawyer had agreed to cap his fees at £5,000. We have recently seen transactions where the investor’s legal fees have been more than 10 times this amount, for investment in an early-stage technology-based company. In our view these amounts are disproportionate, and inevitably lead to greater legal costs on the part of the company’s lawyers. The investors need to take charge, simplify and standardise their expectations, and instruct their lawyers not to take every point that presents a potential risk. Only if this is done can the lawyer be confident about keeping legal spend to a minimum. The investors also need to choose the right lawyers. Using a leading, blue-chip firm for an investment of anything less than, say, £10 million, is almost certain to be wasteful of legal costs.
- The transaction used template agreements. Of course, this is no guarantee that the contents of the templates will be acceptable to the company and existing shareholders. As might be predicted, the draft agreements in the present case did include some distinctive provisions that reflected this particular investor’s priorities. In most areas, though, the documents were relatively straightforward and this made it easier for us to point out those areas where we felt the investor was taking a different approach.
- Our client was experienced and willing to take decisions. Once we had pointed out an issue to our client, he had the necessary skills and experience to take a view on whether the issue was one he wanted to pursue and how he wanted to pursue it. This saved a great deal of our time, which might otherwise have been spent in (a) explaining numerous points in detail to our client, and (b) if the client wished to pursue them, negotiating them line-by-line with the other party. It also helped in this case that our client and the investor had a good relationship and were able to discuss points in a reasoned and reasonable way.
Would we do it again? Perhaps. Before doing so, we would want to assess whether the parties, their lawyers, their documentation and their approach to negotiations were all aligned with a low-cost, efficient approach.