Costs for Legal Advice | LegalZoom CTO Eddie Hartman

I just want to get through a little bit more of this material because I think we've got some interesting stuff for you guys. So when we started LegalZoom, we assumed that the most important thing was that we help you set up your business and then quickly get out of it. So this was the big idea. Let's get you a rush job. Let's incorporate you as quickly as possible. Let's get your filings as quickly as possible because in some states this can take months and months to get done. What we discovered is that actually There's a big set of legal needs that come after the fact. And in fact, the legal needs that you have when you start are nothing compared to the legal needs that you'll have later. So just as an example, maybe when you set up, you're like, yes, you know, I know that I'll need to hire people, but I don't have anyone yet. Yeah, I need a place to work out of, but I don't have anything yet, or I'm in a, you know, I'm in a WeWork. Yeah, I understand that there's some regulatory work that I need, but I'm just gonna get incorporated to start with, or I'll set up my LLC. Yeah, I understand that I'm going to have tax down the road, but come on, I'm not making any money today, so who cares? And in terms of financing, honestly, it's only the money that I have in my bank account and the little bit of money that I could convince my friends to give me. That might be how you start, but as you go down, you discover that your legal needs get bigger and bigger and bigger. So you're going to actually have to have employment agreements. Down the road, you're going to have to have a corporate handbook and a reason why you terminate people. Otherwise, you are going to get sued, particularly in a place like California. And by the way, then you're going to need to think about your lawsuit defenses. How are you going to do it? What agreements did you have in place to limit their ability to sue you? And what's fair, by the way? Similarly, your friends may have given you money on a handshake, but down the road, especially as you work with larger investors, you're going to need to think about these contracts. You're going to need to think about what you're giving them in exchange for their investment. Not just in terms of rights, but in terms of paperwork, contract agreements. So it becomes very complex. If you then decide, hey, you know what, leasing this building is not working for me, I need to actually own the building, or I need to own an office space, that becomes incredibly complicated. So your legal needs actually become larger and larger over time. So companies like LegalZoom, we moved from just selling you documents. Hey, we'll do your will. Hey, we'll do your incorporation. Hey, we'll do your trademark, into saying, no, no, no, look, we'll be there for you for the long haul. And I would urge you, if you're thinking about a law firm or whoever, to think about that long haul. As you just heard, many people will give you a free initial consultation. If you go to places, many of the law firms in the area will even give you initial work for free. They'll give you thousands of dollars of initial work. And the reason is because they want to be there for you for the long haul. If that's you, really think about whether these are people you want to work with and if they're running it like a business. Ask them if they use technology, because technology will bring down the bill. Ask them, you know, okay, well, are you the partner and you're talking to me now because you want to begin the relationship? Will you still be on this later, or will you assign someone to me who's only been at this for a year or 2? Because that happens. So think about things in the long term. Don't think about things in the short term. Because understand that your legal needs will increase over time. They'll get much more complex. And you need to make sure that these are people that you not just trust, but like, right? And that you're going to get what you want for the money. Because you may find that you spend the same money with a law firm whether or not they give you their top-flight service or their bottom-drawer service. It's all about what you ask and insist on. Good. By the way, little secret, anyone will give you a free consultation. Anyone. And they'll also usually give you a few free hours, too, if you ask for it. If you don't ask for it, then they'll charge you. So a little bit about lawyer fees. Everybody, I think, has seen this at some point, right? Supply and demand. We assume that there's a market clearing price. This is what you should charge. Demand, you know, as the price goes down, I want to produce less. As the price goes down, I want to buy more. Okay, in the middle they meet. This is where people want to produce, where people want to buy. This is not what we have today in law. We have this. There is a lot of supply. Let me ask you, does anyone here have a friend who's been to law school? Raise your hands. Does that person have a job right now? Do you? Keep your hand— yeah. There are a lot of lawyers out there looking for jobs. Why? Because we also know that there are a lot of people out there looking for legal help, right? Many of us would like help from lawyers, and there are so many unemployed lawyers. So why does this happen, right? And there are a lot of different reasons, but just looking at this graph and realizing that we don't have a market clearing price means that there's something called friction. Friction is what explains the difference between here and here, right? Why is— why are we not finding a common point? Now, there are a lot of reasons which I would get into if this were a different lecture or if you were in my class at Stanford. I'm not going to bore you and you don't have 5 weeks to spend with me. But I'll tell you what I will do. I want to talk about just one of them and why it's important. To drill down on this a little bit and how bad the mismatch is, this is actual data from a legal billing company called Clio. So they looked at a lot of firms, small firms. They found that these firms billed on average $232. Let's just use $200 because it's easy to make calculations. And what they found is that based on the amount of money that these firms made, they were only looking for 572 hours a year of work. Now, how many hours are in a work year? Does anyone know off the top of your head, roughly? 2,000. Roughly 2,000, right? If you're working, you know, 40 hours a week, 50 weeks a year. By the way, no lawyer in the world works 40 hours a week, right? None of you work 40 hours a week, right? But let's just say As a fiction. Let's say these lawyers only wanted to work 9 to 5, Monday through Friday, 40-hour work week, 50 weeks out of the year, 2 weeks for vacation. That's very American. 40 times 50, 2,000. How many did they actually bill? 572. How many of those hours actually gave them money as opposed to just free advice or something? 494. And how many did they collect on? 390. What that works out to is even if you're employed as a lawyer, you're actually only working 18% of the time, 19% of the time and making any money at all. This doesn't work for any profession. This certainly doesn't work for law. So why aren't things changing is a question that really anyone should ask. I want to show you this. So this is from a great set of data from Georgetown. This is the number of hours that lawyers work, okay? This is the billable hours. It's about 120 hours per month. And notice that it's pretty constant. And the reason that it's pretty constant is you just can't get the lawyers to work any more than this. This is the rate progression. Note that the rates have gone up. They go up much faster than GDP. They go up about 5% per year. So I'm working the same number of hours. I'm charging by the hour. And the amount that I charge per hour goes up. Number of hours the same. Rate goes up. The amount of money that I make is flat, if not down. How is that mathematically possible? Does anyone have a guess? They collect less for the hours they work. I mean, there's less hours where they actually make money. So these are the hours where they make money, and this is the rate that they're charging for them. It's simple. They are reducing the number of hours that they are actually working. This is the number of hours they're actually working, which is flat. This is the rate, which is going up. This is this doesn't include cost yet. This is revenue. What is the last one? The last one is a question mark. This is the this is the amount of money. This is top line revenue, which is this times that. How can this times that be this? Right. Yeah. They do not charge for every This is what they charge. These are only the hours they're charging for, billable hours. Oh, tax? Let me just show you the answer. It's that this is the rate that I put on my bill. I'm going to charge you $1,000 an hour. The actual rate is lower. This is what they collect. If you ask for a discount, you will get a discount. The problem is that most people don't ask unless they're big. Big corporations, they know to ask for discount. Look, that is how because you multiply this times this, this would go like that. You multiply this times this times this, you get that. So guys, ask for the discount, right? They expect you to. Well, they don't expect you to. They expect their bigger customers to, and they know that they have to give it. They know that if their rates are increasing faster than GDP, they can't possibly expect. people to pay. After all, that would rapidly snowball out of reality, and it is, by the way. I know lawyers who are charging $1,200 an hour, and usually they're on teams of 6, right? So, and by the way, they'll never tell you how many hours. Which leads me to the question,