Fix the fee.

You’d never go to a dentist who charges by the hour for a root canal. And yet fund managers engage counsel for offering documents on that basis all the time. Let’s unpack the rationale for that behavior.

I’ve already dispensed with the misguided excuses that “the fund pays” and “that’s what the law firms require” in my post “Every dollar matters.”

What’s left?

THE ILLUSION OF EFFICIENCY

One half cogent explanation might be, “The hourly rate permits me to only pay for what I use.” While that’s appealing in theory, it operates like a blank check in practice. Law firm compensation models rarely reward efficiency. So don’t rely on it.

The hourly rate shifts execution risk from the lawyer to the client — the one party least able to evaluate it. Preparing offering documents is, or should be, routine for your counsel. With that experience, they’re far better equipped than you are to estimate the work required, especially if you’ve developed a strong term sheet or summary of terms.

The other justification comes down to fear.

THE POOR QUALITY FALLACY

‘If the fee is capped, they’ll cut corners.” The very fear that your counsel might shortchange you raises a fundamental issue of trust. If you don’t trust your counsel, find someone you do.

Beyond trust, lawyers are bound by professional rules requiring them to give you their best. Anything short of that brings the possibility of career-ending consequences: bar complaints, malpractice claims, and reputational ruin. These are powerful motivators.

WHEN HOURLY MAKES SENSE

The short answer is “rarely.” Even if the task seems episodic, like a side letter, the analysis remains the same. Yes, counsel doesn’t know how many turns there will be, or how “aggressive” investor counsel will be. But that’s like paying your dentist more for every extra tug on a stubborn tooth. Again, you and your counsel can mitigate the fee risk through a term sheet (yes, even for a side letter). But the equities of the situation don’t change: your counsel is still better positioned to assess the risk — not you.

THE TAKEAWAY

You’re a fiduciary for your investors’ funds, whether invested or expensed. You’d never tolerate a portfolio company CEO or a property manager telling you to “just trust me” on salaries or fees. Demand no less from your counsel. Fix the fee.