While the legal documentation that VC-aspiring tech startups should use to form themselves has become relatively standardized (the forms that various law firms use generally say the same things), it is far from commoditized. By that we mean that it still is a highly specialized (niche) form of documentation that is very different from what is used by “small businesses.”
A coffee shop or plumbing company is going to incorporate itself with dramatically different documentation than a tech startup. For that reason, the most popular “automated incorporation” companies are a poor fit for startups. LegalZoom, Rocket Lawyer, and ZenBusiness should generally be avoided. They are for small business, not startups.
That being said, there are some automated formation companies that we’ve seen many startups use successfully and safely. Clerky and Stripe Atlas are the most popular, and can be typically used for a few hundred dollars. Like any automated tool, they have limitations; most notably a lack of flexibility in customizing the terms. Founders should ensure that the terms they’re signing up for really fit their context, because no automated, fully standardized tool can work for every market situation.
For startups looking for a cost-effective formation, but with more “hands on” guidance and customization than is available with an automated tool, most law firms that specialize in startups have “fixed fee” packages. Costs are typically $3,500 to $5,000, perhaps a bit more if it’s an expensive “BigLaw” firm. While we are encountering far more companies that start out with Clerky or Stripe Atlas, the majority of our clients still opt for a slightly more customized fixed-fee formation.
One important thing to understand is that for elite law firms, including boutiques, fixed fee formations are generally a kind of loss leader. These firms always have more demand from potential clients than they can realistically fulfill. For that reason, expect the firm to do some “vetting” of your business before they choose to work with you. Much like an investor, they’re going to assess your long-term prospects to determine whether taking that initial “loss” on the formation is worth the long-term time investment.
For more on this topic see: Startup Legal Fee Cost Containment (Safely)
