[Dave Heal's] Observations & Reports

Why is Mark Suster recommending LegalZoom for startups?

Mark Suster, a prominent venture capitalist with GRP out of Los Angeles, runs a fantastic blog and hosts an equally great weekly segment on venture capital as part of Jason Calacanis’s “This Week In” series. Mark’s also been an entrepreneur and his posts are densely packed with excellent advice and cautionary tales for founders of companies at all stages.

Mark’s one of the few interviewers in this growing genre of long, tech-focused programs (Andrew Warner of Mixergy is also worth checking out, but he has a much different style) who also participates in the interviews as an equal with the VCs and entrepreneurs on the other side of the table. His interview with Mike Yavonditte of Hashable was so good I’ve now watched it twice, and the session with Chamillionaire (whose name I will admit to mispronouncing in my head for the past few years–the “ch” sounds like a “k”) was a revelation.

Anyways, in the interest of shortening the ass-kissing windup here a bit, I’ll just say that I’m a huge Mark Suster fan. Which is why I found it boggling that during one of the sponsor breaks in the show–Mark pauses the show briefly to deliver an earnest radioman-style pitch for a product or company that he believes in and often uses–he was pitching for Legal Zoom and recommending that startups use them for their incorporation and patent/trademark filings.

I’d really be interested in hearing from Mark whether he knows any entrepreneurs that have satisfactorily used LegalZoom for their incorporation (with or without a lawyer’s help). But my understanding is that LegalZoom files the forms directly with the Secretary of State and that you can’t have them sent to you for double-checking by a lawyer or anybody else.

Their super deluxe incorporation package comes with a CD with “over 40 business documents,” but I would be very surprised if those documents covered everything that a tech start-up needs (stock purchase agreements, technology assignment, etc.) or gave any guidance on alternative protective provisions. These kinds of concerns may not be important for Joe Briefcase, the aspiring slumlord who’s forming a company for liability shielding purposes, but making the right incorporation choices is incredibly important for startups. Problematically, LegalZoom, although it offers up a phone number for advice, needs to be careful not to hold itself out as a provider of legal services in order to avoid getting yelled at by state bar associations. And moreover, LegalZoom is arguably doing just that simply by choosing the template forms and crafting the questionnaire that auto-populates the documents. They’ve been the target of a few nastygrams from state bars demanding that they stop providing legal services under the guise of not providing legal services.

I can’t imagine the risk of creating a hash of your pet startup’s incorporation documents is worth the cost savings. If your financials are really that dire, I bet you’d be better off just talking with the folks at your local Secretary of State and saving yourself the $300+ bucks. In the end, incorporation of a company is a serious step that is usually the result of a bunch of people wanting to do something quite complicated, whether that’s obtain funding, issue stock, create & manage intellectual property, hiring employees or contractors or any of the above. And I can say this without conflict of interest as a law-talking man who’s not actually an attorney: this should all be done in consultation with a good lawyer. Don’t try and save yourself a grand or two because you think it’ll be fun and cheap to incorporate using a website that features that guy who represented OJ.

And when it comes to patents and trademarks, what happens when the application is rejected or a reply is necessary? Most patent applications aren’t accepted as filed, so there’s almost always more work to be done. Not having much familiarity with patent prosecution, I can’t be sure, but my guess is that amending a patent application or responding to rejected claims often requires the kind of intricate legal argumentation that is probably best handled by a competent, debt-ridden attorney. I suppose the response might be that you can deal with an attorney at that point in the game and gee look you’ve maybe saved yourself some money. But my guess is it’s pretty easy to bungle one of these applications if you don’t know what you’re doing, so why chance it?

In the end, I’d love to hear from entrepreneurs, tech or otherwise, that successfully used LegalZoom for any of their important documentation. But even a few anecdotes probably won’t be enough to convince me that the risk outweighs the cost savings. Maybe there are some VCs out there that routinely advise startups to do this and haven’t had a deal blow up in their face, but I’d be willing to bet a cheeseburger or two that no reputable VC actually does this.

The point of this post, incidentally, is not to call Mark out. But he mentions each show that the sponsors are frequently trusted companies with products that he has experience with (although I suspect this might not be one of those cases). And the endorsement I saw didn’t take the form of a generic product blurb, but instead he specifically mentioned trademark & patent filings (and incorporation, if I remember correctly), which struck me as strange. I’m not here to bang my fist on the table and demand answers, but I am curious whether he really thinks startups using these online services is a good idea.

EDIT: Some good resources. HT: @jakewalker

  1. http://www.docstoc.com/documents/legal/
  2. http://www.orrick.com/practices/corporate/emergingCompanies/startup/index.asp
  3. http://www.orrick.com/practices/corporate/emergingCompanies/startup/forms_corporate_formation.asp
  4. http://www.businessinsider.com/legal-documents-for-your-startup-2009 -8

Law School: Now With Less Law?

This is a re-post of a law school column I wrote about 2 years ago this week.

Three of the closing paragraphs from a recent New York Times article on the craptastic legal market:

If the downturn is prolonged, law schools will need to keep tuition and other costs in check so students do not graduate with unmanageable debt. More schools may follow the lead of Northwestern, the first top-tier law school to offer a two-year program.

Law schools may also become more serious about curriculum reform. The Carnegie Foundation for the Advancement of Teaching released an influential report that, among other things, urged law schools to make better use of the sometimes-aimless second and third years. If law jobs are scarce, there will be more pressure on schools to make the changes Carnegie suggested, including more focus on practical skills.

They may also need to pay more attention to preparing students for nonlegal careers. Law graduates have always ended up in business, government, journalism and other fields. Law schools could do more to build these subjects into their coursework.

So let’s get this straight. We’re at a professional school that might have the singular distinction of being described by both students and employers as leaving most of us woefully unprepared to do any actual work on our first day in the office. And the remedy for this is somehow to find a way to crowbar more stuff into the curriculum that isn’t the law?

Channeling, for a second, the male protagonist in Derrick Comedy’s Blowjob: that is the opposite of what is needed. The reason law graduates have always ended up in other jobs is often because they shouldn’t have gone to law school in the first place. For many students, that dual degree is a step towards gaining expertise in a field that will inform their law practice or catapult them to a teaching career. Those 12 credits of Law & “__” classes are merely satisfying an intellectual curiosity. But for others, this desire to do non-law things with their time at law school represents a lifeline thrown to a vision of themselves that they only wish they had the courage to pursue fully. And for others still it turns out that even if you enjoy the intellectual rigors of publicly sparring with Richard Primus over the finer points of constitutional interpretation, you may, surprisingly, not enjoy interminable electronic discovery or combing through an offer document looking for rogue blobs in brackets.

And I’m not merely talking about the petty but pervasive frustrations of any life that involves more than 55 minutes of sustained concentration and is infrequently punctuated by drunken burrito binges and Guitar Hero marathons. (Although, for those law students who have never held a 9 -5 job, having your introduction to the working world be 60-80 hours a week of document review is understandably sub-optimal.)

No, the heart of the matter lies in the fact that many law students are either uninterested in or ill-suited to being actual lawyers. For many, the practice of law, particularly at its lower, more mechanical levels, elicits the kind of marrow-level boredom that unmistakably means that you’ve failed in choosing a profession. Granted, the law is necessarily pyramidal; there is simply a lot of fairly mundane stuff you have to know in order to get to the ecstatic bull sessions that may characterize certain subfields of law as practiced at the highest levels. But being a lawyer is going to be really boring for a lot of people. In some circumstances being bored at work is OK, but it becomes quite a bit less OK when the boredom is a surprise and you’ve just spent 3 years of your life at law school and are severely undercapitalized as a result.

The idea that a law degree is a versatile one−”it’s the Swiss Army Knife of graduate degrees!,” says your Uncle John−while maybe true to a certain extent, is mostly a pernicious piece of self-deception transmitted from one generation of disaffected lawyers to the next. This is all in the interest of making everybody feel better about having taken out ~150k in loans and effectively wasted 3 years of prime life-living time. The truth is that not only is law school probably too long and expensive for people who actually want to be lawyers (unless we decide to make some or all of the third year a mandatory externship/apprenticeship), but it’s certainly too long and expensive for people whose ultimate goal is to do something else. The fact that some journalists are lawyers does not mean that law school is a good idea if you want to be a journalist. More than a handful of novelists and hand models are lawyers, too. These days, lots of hobos are lawyers. In fact, hobodom may in fact be the most likely alternative career path for some of today’s law students.

Current students find themselves entering the contracting legal market in medias res, where “res” equals a giant shitmist of uncertainty and plummeting job prospects. This means that a lot of people who viewed the law as camouflage for their indecision or as a cash-lined waystation en route to a career in competitive log rolling are finding themselves repeatedly kicked in their sensitive bits. And seriously in debt. Lots of debt.

So there’s a related question of don’t we think that there’s going to be something fundamentally wrong with a profession when applicants are discouraged from demonstrating an actual interest in the profession? And that once in law school students aren’t required to have any exposure to the sorts of things they’re going to be expected to do on the job.

Anna Ivey, a former Dean of Admissions at the University of Chicago and now The Authority on applying to law school, gives the traditional advice against turning your personal statement into anything resembling what she calls a “statement of purpose.” But why don’t law schools actually require or solicit something like this? While it might make Sarah Zearfoss’s job more tedious, having an additional essay expressing what people hope to get out of law school and fewer essays about manually masturbating wallabees on the Isle of Man might be a good thing. Maybe if applicants were evaluated, in part, on having thought a little bit about why they’re about to spend 150k of money they don’t have to get a legal education, we’d be one small step closer towards not producing lawyers who hate their jobs.

Because of the barriers to entry in the legal world, law school applicants are unable to get a real up-the-butcher’s-ass view of what being a lawyer actually entails. So, every year, thousands of post-graduates try to get as close as possible by being paralegals at large firms, an experience that miraculously doesn’t dissuade them from going to law school.

Business school students, on the other hand, almost always have prior experience doing something similar to what they hope to do upon graduation and are therefore more than eager to pay for two years of beer bonging, hand shaking lessons, and supervised business card exchanges, content in the knowledge that they’re going to enjoy their job upon graduation.

So, to circle back to the possibility offered up by NY Times piece: the last thing law school needs is less law. Our Law School in particular hasn’t shown any signs of mandating juggling or TV/VCR repair classes, and this is clearly a good thing. And while undeniably shitty for current students, the demise of the idea that law school is a risk-free path to riches for bored humanities majors might not be the end of the world.

HT: Prettier Than Napoleon

Wachoo know about Duke Energy?

Being both a dabbler in environmental law (reading, not doing) and a massive Criterion Collection fan, I’m somewhat ashamed to admit that it took me until a few months ago to realize that the company profiled in Harlan County U.S.A., Barbara Kopple’s fantastic documentary about a protracted coal miners’ strike in rural Kentucky that turned violent, and the Duke Energy of Environmental Defense Fund v. Duke Energy, are one and the same. If you haven’t seen the movie, it’s now streaming on Netflix. Also, if you’re one of the jagweeds that subscribes to Hulu Plus, you’re about to get access to the entire Criterion Collection. Joke’s on the rest of us, I guess. Although, knowing Hulu, your “Plus” subscription will include a mandatory viewing of the entire credit sequence at 1/100 speed before the movie starts. And after it ends. And in between the lines for the production manager and the first assistant director you’ll be forced to watch the entirety of http://www.rottentomatoes.com/m/brown_bunny/”>The Brown Bunny or else your computer will melt and the melting computer will kill you.

[…]

What’s the big deal about EDF v. Duke Energy, you say? Well, telling that story requires a bit of background on The Clean Air Act (1970), the law that heralded the beginning of America’s Golden Age of environmental regulation, which is a thing I actually didn’t make up and runs broadly from the 1970s to the late 80s/early 90s (the 1990 amendments to the CAA were the last major environmental legislation enacted in the US).

The Clean Air Act is important because it is arguably the first environmental law with the express goal of protecting human, not merely environmental, health. Its declared purpose is to “protect and enhance the quality of the Nation’s air resources so as to promote the public health and welfare […]” In 1977, Congress amended the CAA to attempt to give the EPA greater authority to maintain air quality. The amendments required newly constructed sources of pollution to obtain permits that would ensure compliance with the national air quality standards (NAAQs!) promulgated in Title I of the original Act. This New Source Review (NSR) was the subject of the case brought by the EDF, EPA and others against Duke Energy.

From the opening paragraph of the opinion by Justice Souter:

In the 1970s, Congress added two air pollution control schemes to the Clean Air Act: New Source Performance Standards (NSPS) and Prevention of Significant Deterioration (PSD), each of them covering modified, as well as new, stationary sources of air pollution. The NSPS provisions define the term “modification,” 42 U.S.C. § 7411(a)(4), while the PSD provisions use that word “as defined in” NSPS [emphasis added], § 7479(2)(C).

Wait, don’t fall asleep, this is actually kind of interesting! So the US sued Duke Energy, accusing them of, inter alia, violating the PSD scheme/provision of the CAA. Between 1988 and 2000 Duke had made 29 modifications to its coal-fired electricity-generating doohickeys in order to extend the life of the units and allow them to run longer each day. The important point being that the changes did nothing to increase the hourly rate of emissions. But because they allowed the units to run longer each day, this obviously increased the amount of pollution emitted each day, fortnight, year, etc.

But the PSD regulations issued in 1980 by the EPA said that a power company has to obtain a permit (which Duke did not do) every time it makes a physical change that leads to a significant net emissions increase. More from the Court’s opinion:

First, the regulations specified that an operational change consisting merely of “[a]n increase in the hours of operation or in the production rate” would not generally constitute a “physical change or change in the method of operation.” § 51.166(b)(2)(iii)(f). For purposes of a PSD permit, that is, such an operational change would not amount to a “modification” as the Act defines it.

Second, the PSD regulations defined a “net emissions increase” as “[a]ny increase in actual emissions from a particular physical change or change in the method of operation,” net of other contemporaneous “increases and decreases in actual emissions at the source. “Actual emissions” were defined to “equal the average rate, in tons per year, at which the unit actually emitted the pollutant during a two-year period which precedes the particular date and which is representative of normal source operation.” § 51.166(b)(21)(ii). “[A]ctual emissions” were to be “calculated using the unit’s actual operating hours [and] production rates.” Ibid.

Third, the term “significant” was defined as “a rate of emissions that would equal or exceed” one or another enumerated threshold, each expressed in “tons per year.” § 51.166(b)(23)(i).

And the Court’s summary of these three regulations:

(a) The Act defines modification of a stationary source of a pollutant as a physical change to it, or a change in the method of its operation, that increases the amount of a pollutant discharged or emits a new one.

(b) EPA’s NSPS regulations require a source to use the best available pollution-limiting technology only when a modification would increase the rate of discharge of pollutants measured in kilograms per hour.

(c) EPA’s 1980 PSD regulations require a permit for a modification (with the same statutory definition) only when it is a major one and only when it would increase the actual annual emission of a pollutant above the actual average for the two prior years.

So, to review, the NSPS definition of a “modification” requiring a permit refers to hourly emissions, which the Duke Energy upgrades did not change. The PSD definition of “modification” is defined by a cross-reference to the NSPS definition but also, as we saw above, refers to an annual “net emissions increase.” The part of the Clean Air Act at issue, 7411(a)(4), doesn’t refer to time at all. The annual v. hourly debate is/was entirely one of the EPA’s regulatory gloss. Duke Energy, it seems to me, actually had a reasonable case that this is confusing as hell. Certainly it was the kind of case that I would not have predicted would lose unanimously in the Supreme Court.

There is a cross-reference in the definition, so it doesn’t seem entirely clear to me that the EPA can change the definition of what kind of pollution increase makes something a modification without addressing the cross-referenced definition, which the EPA has explicitly said refers to hourly emissions. The Court ruled against Duke on this particular argument by noting that the different regulatory programs involved require or at least permit different interpretations of the same words. They also said that the language of the cross-reference, which says that “construction […] includes the modification (as defined in 7411(a)) of any source or facility” is inclusive and not exclusive. Essentially, it doesn’t say “shall be limited to.”

Although the Court ultimately skirted the issue of how the EPA should determine whether something is routine maintenance, it did essentially ratify the EPA’s broad power to implement and enforce the New Source Review program, which you may have never heard about but is a rather big weapon in the government’s fight against air pollution.

Now that I’ve saved you the time of having to read the opinion for yourself (unless you’re the kind of person that reads entire legal opinions), head on over to Netflix and watch the movie about Duke Energy’s more evil and cynical side. I promise you it’s more interesting than New Source Review. It’s even more interesting than the Hollywoodized trailer below.

If Great Literature Was Written By Law Students

Song of the Gunner by Walt Whitman

1

I raise my hand, and sing myself,

And what I assume nobody should assume,

And all I read in Hornbooks will be shared with you.

 

I never loaf or smoke a bowl,

I preen and gloat at my ease observing ev’ry post-hoc fallacy.

Torts class, every atom of my life, form’d from this toil, this school.

 

Born here of lawyers born here from gunners the same, and their

parents the same,

I, now twenty-three years old, talking begin,

Hoping to cease not till death.

 

Meads and nap’d drools forsaken,

Non-latin phrases shunned for what they are: plebes’ language, verboten.

My ardor for precedents made, I wish to share at every hazard,

Thoughts unchecked without creative energy.

 

I Am Charlotte Simmons by Tom Wolfe

G. Edward Terwilliger began twisting Charlotte’s nipples as if they were radio dials, simultaneously palpating her soft palate with his tongue, alternately flexing and relaxing the tip with strokes in a ratio that matched the vote distribution in Heller. District of Columbia v. Heller 128 S. Ct. 2783 (2008). Flick flick flick went the tongue, but it was the delicate dance of his thumb and forefinger that occupied his cerveau, was his bailiwick. Suddenly, like a flash of fluorescent light, he remembered the 20th anniversary edition of Men’s Health that his roommate had slipped under the door earlier that afternoon as he was preparing to deliver a world-historical bowel movement into the toilet’s gaping white porcelain maw.  Brown it was, inert with extinguished life, an ex post indictment of an entire day’s worth of time wasted at student org meetings.

There, on page 36 of his mind, a firm reminder to vary the deployment of one’s sexual arsenal with each new conquest. God forbid the rest of the females in Law Firms & Legal Careers catch on to his lack of imagination. Mutatis mutandis, Terwilliger retreated deep into his mind, reached deep into his quiver – oh god! And now she quivered in kind! It must be fate!  – and, caressing the entire dimpled terrain of her areola, traversing back and forth between its murky surface and the milky white mammary tissue that spread out beyond it in invisible axial rings, looking very much like the surface of Venus on a summer solstice’s eve… – and he lovingly explored her breast with the élan of Marco Polo making his way to Asia, finally pressing triumphantly on her nipple and then waiting, mouth agape, for what that venerable periodical assured him would be Her Best Orgasm Ever.

Just then, like the Mighty Colorado at its confluence with the Green River, a wash of acetylcholine overwhelmed her synaptic cleft and she reared back like a horse frightened at full gallop. “Will you still love me tomorrow when your blood is no longer saturated with the eponymous Iced Tea from Long Island?.” she asked. “I’ll never keep you at arms length,” he whispered. “Your five-pointed highlighter is poking me,” she groaned. “I’m sorry,” he said, and removed his pants.

 

The Law Student’s Odyssey by Homer

 

LEEWS, speak to us now of those study techniques

that assure him a top 1/3 finish after managing

to suck his bank account Dry.

He came to see

some undergrads’ panties, maybe learn the common law.

 

While drunk at Rick’s his spirit suffered many torments.

And he fought to buy a Shark Bowl and take some co-eds home,

but though he wanted to, he could not get their digits—

They all replied and said they had no phones, the fools.

So he feasted on the burritos of Panchero,

God of Post-Bar Food—that’s how was snatched away his chance

of sleeping without distress. So now, son of Mass Produced Study Aids

tell us his fall from glory, starting anywhere you wish.

Embracing Your Inner Idiot

When J. Robert Oppenheimer left Harvard College and went to study experimental physics at the famous Cavendish Laboratories in Cambridge (England), he showed up and was, for the first time, surrounded by lots of people that were better than him at something. This is the guy who ended up knowing more about quantum physics than all but a handful of people in the US by the age of 25.  The same man who in the early 1940s helped figure out how to harness the recent discovery of nuclear fission and build an almost unimaginably destructive bomb out of comparatively tiny amounts of material.  Which is to say that he changed the course of the 20th century.  Oppenheimer was by all accounts a certifiable genius, but he was clumsy enough in a lab that he was apparently unable to conduct the high level experiments that he wanted to pursue.  He was so thunderstruck by this realization that he became depressed and suicidal.

What’s the point of all this, you ask? Well, this little parable is meant to illustrate one of the ineluctable facts of life: you are not as smart or good at stuff as you think you are.  Most of us, however, do not need didactic stories from the pre-Internet days to hammer this point home.  The closely related corollary is that at some point in your life–and for many of you law school is that point–you will in fact realize that you are not as spectacularly, effortlessly brilliant as your Mom led you to believe.  But the good news is that you can’t, and don’t have to be, good at everything.  What matters is what you do when confronted with these abrupt confirmations of your own vulnerability, inadequacy, ultimate meaninglessness, untreatable athlete’s foot, etc.

Oppenheimer ended up moving to Germany to become a golden god of theoretical physics.  Those of us with slightly more pedestrian brains don’t have that option.  But all but the very lucky or delusional will have to make similar choices.  We can either plow ahead, camouflage our deficiencies and become consumed by desperately trying not to be found a fraud, or we can embrace our own particular level of incompetence and harness it.

I know there’s a special kind of marrow-level sadness that accompanies the end of what, for many of us, was a prolonged period of adolescent self-regard.  But there are few people who go on to do great things without abandoning this egoistic perception of their own intelligence.  Even if you’re the second coming of Eve Brensike-Primus, there’s value in assuming the position of the dull student and asking questions accordingly.  Hell, even Socrates is believed to have said, “As for me, all I know is that I know nothing.”  Now, you can quibble with the meaning of the phrase in context all you want, but I’m choosing to give the middle finger to the intentional fallacy and use it here in accordance with its popular deployment in countless self-help books.

For all their faults, many of the students often derided as gunners are on to something.  The first year of law school is full of collections of simple words that give way to entire subfields of incredibly complex scholarship.  Some of it is probably so much tenure-track onanism, but scholars in these areas aren’t completely inventing all of the difficulties in deciphering phrases like “to regulate Commerce.” The law isn’t rocket science, but neither is it tiddlywinks, and a merely superficial understanding of a deceptively simple concept will frequently manifest itself further up the pyramid where the really interesting and important stuff is happening.  So, follow the lead of your local gunner: take a foundational concept and assume, if necessary, that you’re too dense to understand it.  Ask questions, break it apart, roll it around up there.

To unburden oneself from this idea that you either immediately get something and are smart or don’t and are a moron is really liberating.  There’s no shame in failing to understand something the first time around.  In fact, I would argue that a kind of willed idiocy is a virtue.  This can obviously be taken to an extreme, and I wouldn’t recommend walking into Kroger and demanding to know why Grape Nuts have neither grapes nor nuts.  Some of our zany language’s logic-defying quirks are in fact better left a mystery.

But there’s a reason why that annoying, extroverted person in your Spanish class was able to learn things much more quickly.  For better or worse, they weren’t worried about looking like a buffoon, like they didn’t know something.  And most areas of study are the same way.  If you can get rid of your preconceptions about what you’re supposed to be able to effortlessly understand and stop worrying about how that might directly reflect on your intellectual capacity, you will find a measure of comfort and, paradoxically, self-belief in the embrace of your own idiocy.