How to Hire Your First In-House Legal Counsel
Founders, Presidents, and CEOs of start-ups, small businesses, or mid-market companies, have all contemplated: when would be the best time to hire their first in-house attorney? The easy answer for a CEO would be to maintain the status quo, which is to say, do nothing. But founders, presidents, and CEO's do not keep their positions by finding easy answers; they do so by finding the best answers. The best answers can be situational, and situations change. So, the question of when and how to hire their first in-house legal counsel is one that responsible CEO’s must revisit from time to time.
Why Do Companies Hire Legal Counsel?
Businesses engage legal counsel to reduce the risks to the business. Inadvertent non-compliance with laws and regulations can create significant financial liabilities for companies in the form of penalties, or damages to others. Without detailed understanding of the rules affecting a business or industry, strategic flaws in business models can lead to loss of market-share, or unanticipated increased expenses affecting long-term profitability. Contracts, leases, and other commercial transactions commit the business to obligations in exchange for value, and if not properly vetted can result in surprise obligations or loss of deal benefits. All these things, and more, drive businesses to engage the expertise of legal counsel to avert risks.
Why Hire In-House Counsel?
Hiring law firms can be an effective way to reduce risks to a business, and even after hiring in-house counsel, most businesses continue to engage law firms. In-house counsel, however, provides several additional benefits.
- First, as the volume of legal work accumulates, in-house counsel can provide some significant cost reduction in overall legal compliance support costs, as a company pays for legal support through an annual salary at a much lower hourly rate than that paid for a typical law firm attorney.
- Second, the in-house counsel is closer to events that may occur, may learn of them earlier than outside counsel would, and reduce their impact on the business through faster response, and in some cases through earlier engagement of attorney-client privilege.
- Third, in-house counsel inherently becomes more intimately familiar with the company, its strategy, the people, their idiosyncrasies and blind spots, and is better positioned to head-off issues before they become problems.
Why Do Some Attorneys Choose to Become In-House Counsel?
Motivations that drive attorneys in-house are many and varied, and some of them misconceived. The best reasons include what legal recruiting firm E.P. Dine has described as “an interest in being closer to the business side.” Other valid reasons could include maintaining continuity with a client and the work – seeing it all start to finish versus the snapshot view of one repetitive part of one type of project for many different clients, which a law firm attorney might see. Although in-house counsel certainly exhibit strength areas in their legal expertise, they also enjoy the opportunity to develop broad experience across many areas of business law, as opposed to law firm attorneys who develop deeper, but narrower, expertise over time. A misconception some law firm associates have is that in-house roles afford a drastically better work/life balance from that of a law firm, but legal recruiter and coach Stephen Seckler of the Counsel to Counsel podcast and Counsel to Counsel blog observes “there is substantial evidence that many in-house lawyers work just as hard on the inside as they did at law firms.” Escaping the criticality of legal work by moving in-house is not realistic, and may lead to dissatisfaction from attorneys who are new to in-house work.
What Kind of Organization Types Should Hire their First In-House Counsel?
I offer 15 threshold criteria that executive teams should deliberately consider, and make a conscious “go/no go” decision on whether or not to hire in-house counsel. Businesses in a specifically (1) government-regulated industry, or businesses with, as the law firm Brooks Pierce describes “shareholders and investors (such as venture capitalists) with (2) different financial stakes and interests,” or businesses with (3) non-uniform contracts with terms that vary significantly from transaction to transaction or a (4) high volume of standardized vendor and customer contracts, are each strong candidates to hire in-house counsel. Other organization types that should consider early hire of in-house counsel include companies which (5) own or lease multiple properties, those which depend upon (6) valuable intellectual property rights, and those which sell a product or service that BCG Attorney Search describes as having “potential to cause (7) great physical, emotional or financial harm.”
When Should Events Trigger an Organization to Hire its First In-House Counsel?
If a business contemplates “(8) going public within the next five to ten years” then Brooks Pierce suggests “it’s time to consider in-house counsel.” If a company’s “sales exceed $10 million per year” ((9) ~$800k/month) ESQ Recruiting has suggested this may be when “hiring an in-house counsel becomes the right solution for a company.” Others suggest that outside counsel legal fees exceeding $500,000 annually ((10) ~$40k per month) should be a trigger. Additionally, whenever the non-lawyer managing outside counsel spend and other legal issues becomes stretched too thin, or is diverted too often from other important work, a business will regain the value of that person’s expertise as part of hiring in-house counsel.
Another threshold trigger can be the (11) number of employees, although the recommended trigger number varies. “A common threshold is to hire a General Counsel when you hit the 100 employee mark,” but as Zoya Afshar, Assistant Vice President, Legal & Compliance at Genpact went on to note when she was with UpCounsel “Other startups have hired a General Counsel as early as 10 employees.” Another approach would be, as Priori Legal suggests, anytime a company (12) anticipates “significantly growing your workforce.” It’s worth noting that significant increases in federal employment-related regulatory compliance requirements occur when companies reach:
- 15 (ADA, GINA, PDA, Title VII of the Civil Rights Act),
- 20 (ADEA, COBRA),
- 50 (FMLA, ACA), and
- 100 (WARN, EEO-1) employees.
So just prior to each one of these milestones, it may make the most sense to reassess the benefit of hiring in-house counsel. If you know an executive for a company with a dozen or more, but less than 100, employees, consider sharing this article with them before they reach the next threshold.
Finally, if a company encounters a (13) serious legal/Public Relations problem that is likely to linger, bringing on full-time legal counsel promptly is warranted, and may be past due. This can lead to a rushed, less deliberate, and more expensive choice which is an outcome that can be inherently sub-optimal.
Where in the Organization Structure should a Company's First In-House Counsel Sit?
At the outset, it is important to remember that the in-house counsel’s client is the company, and not the CEO or any other company executive. In a corporation, the Board is the embodiment of the client, while in a sole member LLC the sole member/founder/CEO can be this personification. A direct reporting relationship to the embodiment of the client is not required, but the reporting relationships should not impair the in-house counsel’s access to, or communication with, the personification that directs the business decisions. In larger more complex organizations with more senior, experienced counsel, reporting to the CEO, with unfettered access to the Board, makes the most sense.
Smaller, less complicated business legal structures can tolerate a lesser reporting relationship, to a COO, or CFO for example, especially where the in-house counsel is more junior, and there is some expectation that the business’s legal needs will grow with the business and more experienced counsel will eventually be brought in to lead a legal department that will report to the CEO, and the junior attorney will be brought into that department.
How Should an Organization go about Hiring its First In-House Counsel?
There are really three options available:
- Do it yourself.
- Leverage relationships with the company’s outside law firms.
- Engage a professional legal recruiter.
These are not mutually exclusive options, but depending on time available, a company's options may be limited.
The DIY option really should begin at or near the company’s inception and requires an openness and commitment of time to meeting and staying in touch with attorneys who might be viable candidates as a company gets off the ground. By keeping a running list, as the company approaches each of the many triggers (15, 20, 50, or 100 employees, $40k per month in legal bills, or $800k/month in sales), a responsible CEO should make a conscious, deliberate decision to pull the trigger and pursue a hire, or not.
If a CEO hasn’t been able to commit the time to develop adequate counsel relationships, but still wants to make a conscious, deliberate decision as each trigger point approaches, it makes sense to communicate with the primary service provider for each of the law firms the company has engaged and enlist their help for suggestion of possible candidates. They will each have a vested interest in proffering a successful candidate with hopes to retain or expand their share of legal work as the company grows.
Sometimes a startup CEO has the view that “lawyers are a bug, not a feature” and that type of bias can sour the hiring process. In such cases, it may be necessary to hire a legal recruiter to manage the project, and distance the executive from the candidates until near the end. However, even when the CEO is fully on-board, a knowledgeable in-house or outside recruiter, especially one with first-hand experience hiring an in-house counsel for a small or medium sized business, can offer valuable insight in the selection process.
Who Should an Organization Hire as its First In-House Counsel?
There are at least three kinds of experience to consider when hiring a company’s first in-house counsel.
- Legal experience.
- In-house counsel experience.
- Business experience, including before law school.
Although a startup may be tempted to save money and hire a less experienced, or even newly minted, attorney, the fact is that corporate law departments, even when hiring more junior positions, generally prefer to hire more experienced attorneys with around five-plus years of legal experience. For a solo, first in-house counsel, breadth of legal experience, particularly in commercial and employment matters will be extremely helpful. Regulatory compliance experience and/or intellectual property law experience can be important as well, depending on the industry.
Prior in-house counsel experience would be quite helpful. The shift from being the business revenue-generator that attorneys are for law firms to a business cost-center can be a difficult and unsavory experience for some attorneys. Prior in-house experience would remove that risk from the equation. Prior “in-house experience indicates that the attorney has experience managing outside counsel and controlling legal bills.” With that said, an attorney who has already worked on company matters while with one of the company’s outside counsel provides the benefit of some familiarity for the company, as well as some of its employees, and so should also be considered.
Good business sense is necessary for any successful in-house counsel, and according to Bob Fleischacker (pictured right), an experienced first in-house counsel himself, the first in-house counsel for a company needs enough “business acumen to generate creative solutions within the confines of the law.” Corporate experience that predates law school “demonstrates that the attorney is accustomed to working closely with managers and finding workable business solutions.”
In any smaller business, the ability of managers or executives to fill multiple roles is a great advantage to the organization. A first in-house counsel who can handle collateral duties, such as regulatory compliance, EHS, HR, or IT, means that the company has an attorney on staff when it needs one, but it is not paying for idle time when it does not. This is because the attorney can apply their other skills to the business when they are not lawyering. In small companies, the most effective in-house counsels’ “responsibilities often also cover non-legal roles, such as employment/HR, insurance, compliance, and risk.” For this reason, anytime a company contemplates hiring for one of these collateral roles, consideration should be given to combining the role with an in-house legal function.
Takeaways
If you are the CEO of a small to mid-size business that has not yet hired its first in-house counsel, consider sharing these potential triggers with your executive team, so as the company approaches each of these triggers it can make a conscious deliberate decision to consider hiring its first in-house counsel:
- 15 employees,
- 20 employees,
- 50 employees,
- 100 employees,
- shareholders or investors with different financial stakes and interests,
- taking the company public within 5 years,
- product or service with the potential to cause great physical, emotional, or financial harm,
- proposed new regulations potentially significantly affecting the business,
- non-uniform or high volume of contracts,
- multiple property ownerships or leases,
- development of, or investment in, valuable intellectual property rights,
- hiring a human resources manager, insurance/risk manager, regulatory compliance manager, EHS manager, engineering support, or MSP IT manager,
- $40k per month in legal bills,
- $800k/month in sales, or
- a serious legal/Public Relations problem.
John Buckley is a licensed attorney, registered professional engineer, and certified compliance and ethics professional. He has served as the first in-house counsel to three separate businesses, and he offers his advice and talents to executives considering taking that eventually necessary step for their business through his consulting business, Opt for Change, L.L.C. He recently observed that he has “never known a company to implode because they hired in-house counsel too soon, but I have seen many suffer because they waited too long.”