Thomas Morsch, J.D.
Clinical Professor of Law and Hochberg Family Director, Small Business
Opportunity Center,
Northwestern University School of Law
In many ways, lawyers and entrepreneurs make strange bedfellows. Lawyers tend
to be risk-averse while entrepreneurs often embrace risk. Lawyers look to the
past, reading cases and citing precedent, while entrepreneurs try to read the
future and do the unprecedented. Law firms are built on predictable billings
while entrepreneurial firms are unpredictable.
Such "mismatches" can frustrate successful entrepreneurship. Lawyers are
crucial to the entrepreneurial process, but many are neither trained nor
inclined to contribute to it as they could, while many entrepreneurs find it
difficult to get the legal services they need. Fortunately, there are ways to
bridge this gap.
I have spent forty-five years in business law, as a practitioner and an
educator. Currently I direct the entrepreneurial law clinic at Northwestern
University. The Kauffman Foundation has supported this clinic and others like
it, where law students can learn by working directly with small or emerging
enterprises. That work is part of the effort to bring lawyers and entrepreneurs
together.
But let's begin by understanding the forces that divide them.
Where the Disconnects Arise
Creating a company is both a business process and a legal process. Every
decision, from the form of legal entity chosen to the details of the contracts
that are made, can affect the company's ability to succeed. Thus, it makes sense
to engage a lawyer early and, yet, that is where the disconnects also begin to
show up.
What the entrepreneur typically brings to the table is a mindset grounded in
persistence and optimism. What the lawyer often brings is a mind filled,
literally, with worst-case scenarios. Lawyers learn their profession by studying
court cases, which are stories of disputes over things gone wrong. And so, the
lawyer tends to feel that the most urgent issues to be dealt with are legal
problems, while the client places them on the list of "things to worry about,"
but much lower on the list than drafting a business plan, building a management
team, and finding the money to move forward. In this context the entrepreneur
may soon begin to see the lawyer as the "anti-entrepreneur"— as someone not
sufficiently enthusiastic about the venture, more interested in identifying
problems than solving them.
The awkward situation is compounded if the lawyer turns out to be
under-qualified. Representing an entrepreneur means that one must be familiar
with a wide range of legal issues—those relating to contract law, intellectual
property law, tax law, regulatory law, and real estate law, to name just a few.
The lawyer must know the difference between a "C" corporation, an "S"
corporation, and a limited liability corporation and, above all, be able to
negotiate and draft simple and understandable contracts with employees, Web site
designers, and a host of others. Few sole practitioners or small law firms have
all of these skills.
Large law firms have the necessary expertise but are more interested in
representing established companies with proven products or services.
Then comes the final dilemma. Even if an ideal law firm is found, its fees
may be beyond what the entrepreneur can pay. In Silicon Valley and elsewhere,
there are firms willing to work for a share of equity if the client has a record
of success with other ventures. But rarely will they take an unproven
entrepreneur on that basis, and many law firms will not do it at all. They may
have genuine concerns that it is unethical, or imprudent, to invest in the
client's business. Or they may simply favor the risk-averse strategy of working
for core clients at fixed hourly rates.
The overall result has been a wide-ranging series of disconnects in the
marketplace for entrepreneurial law, with lawyers variously being unappreciated,
unprepared, or just unavailable.
Steps to Bridge the Gap
Fortunately, the situation is now improving on several fronts. Mindsets are
shifting, and the system of legal education is beginning to shift, as well.
As entrepreneurial ventures have grown more important to the U.S. economy,
lawyers have become more sensitive to entrepreneurs' legal needs and how to
serve them. Many entrepreneurs, in turn, have become more understanding of the
roles their lawyers play in guiding them through the thickets of issues they
face. Sophisticated clients have learned that it is their responsibility to
decide what legal risks can be assumed: They are not brought to a dead stop by a
lawyer's cautionary statements, nor do they let those statements go
unheeded.
Meanwhile, entrepreneurship programs and "small business" clinics have been
started at many of the nation's leading law schools. (One of these is the
Business and Entrepreneurship Law Program at the University of Missouri–Kansas
City, encouraged and supported by the Kauffman Foundation.) Such programs are a
new concept for law schools, which traditionally have placed a higher value on
theory than practice, and which always have been more concerned with producing
good trial lawyers than good business lawyers. But following in the steps of
engineering and business schools, more than forty American law schools,
including Chicago, Pennsylvania, Northwestern, and New York University now
include entrepreneurship courses in their curricula.
A complete program usually will include a classroom component to introduce
students to practical aspects of entrepreneurial law, such as contract drafting
and venture capital, along with a live-client clinic in which students provide
legal services to small business owners and social entrepreneurs. At some
schools, the services are free. In other cases, fees are charged, but always at
a fraction of what it would cost to obtain comparable services from a law
firm.
These programs are at most ten to twelve years old. In some ways, they are
already successful, but in others they are still evolving. From the law schools'
perspective, the programs satisfy a demand from students for learning that is
more closely related to the work they will do. For the clients, services that
were once out of reach now are available.
One limitation, however, is the narrow nature of the clientele. The clinics
have typically been geared to serving small business owners, as distinct from
innovative entrepreneurs developing new products or services. While the work has
been worthwhile, it has done little to assist—or to give students experience
with—the kinds of ventures that can be most challenging and most valuable. This
is changing. At my law school, for example, a growing number of clients are
students from our graduate business school who are personally invested in doing
something new, and faculty from our engineering and medical schools who are
developing new technologies.
These innovative clients raise new issues, as a university-based clinic faces
a conflict in taking them on. Providing vigorous representation can put the
clinic into an "adversarial" relationship with the university, which claims an
ownership interest in the innovations of its faculty and students. Thus the
clinicians' loyalty is, at least theoretically, divided between their client and
their employer. Personally, I believe this problem can be solved on a
case-by-case basis and should not inhibit a law school clinic from serving
clients associated with its own university. If it does, there are still plenty
of innovative entrepreneurs who need assistance. A clinic can find them at other
colleges and universities, at business incubators, and in the economy at large.
Fundamental Change
The ultimate challenge is re-thinking legal education entirely. Most law
school curricula continue to be highly theoretical, and to emphasize litigation
as opposed to business: Law students spend almost all of their first year
reading court decisions, as they have since the 1890s.
Substantial revisions, arguably long overdue, are likely in the next few
years. My law school has convened a working group to evaluate our curriculum;
our pedagogy; and the proper balances between theory and practice, and
litigation and business. Other law schools have done the same. In an influential
study released in March 2007 titled, Educating Lawyers: Preparation for
the Profession of Law, the Carnegie Foundation urged every law school to
take a fresh look at itself with a view to moving in a similar direction.
Although there is resistance to making law schools look "more like business
schools," this is the way things are headed. The changes will benefit
entrepreneurs, as well as law students and firms that hope to represent them.
The lawyer's role in the entrepreneurial process will be enhanced, with the
lawyer becoming more of an informed facilitator and less of an outsider who is
oft perceived to be at cross-purposes with the entrepreneur. This will be a
win-win situation for all.
