Org Series

How to Build Out a Legal Department

By: 
Trevor Shanklin

Welcome to Part 3 of our Organizational Structure series. In this post, we’ll be focusing on how to build and structure your in-house Legal team.

Why Should You Hire a Legal Team?

Every startup has its own unique legal needs. However, most founders fail to understand the full extent of them. Everything from intellectual property to commercial contracts to corporate citizenship and regulatory risk are all likely to impact your business. The only surefire way to mitigate their impact on your company is to seek out the help of professionals, and it won’t be long until you realize it’s best to have them as a part of your in-house team.

While an in-house Legal team may seem like a luxury only large businesses can afford, it’s actually an important step for businesses looking to grasp tighter controls and ensure a more holistic view of legal risk as well as business strategy. Using outside counsel may be a solution for a while, but eventually the time will come to invest in a proper in-house Legal team.

How is the Legal Team Changing?

The last few years have seen a rise in the status and importance of the General Counsel. While Legal departments have traditionally been siloed from the rest of the company due to the sensitivity of their work, often consulted once a decision was made, recent trends show in-house counsel evolving to become closer to a traditional business partner and viewed in a similar vein as the most trusted C-Suite members. As a result, company leaders are increasingly seeking the advice of in-house Legal team members on matters beyond risk and compliance and moving into business strategy.

This trend has been partly enabled by an increased adoption of automated tooling in the notoriously analog-prone area. Gartner estimates that “by 2024, legal departments will have automated 50% of legal work related to major corporate transactions.” Machine learning has been one of the most impactful tooling items in providing partial support for the routine tasks Legal teams tackle in research, translation and pre-population of documents papers. All this time savings has given Legal teams precious time back to expand their scope and involvement into other areas of the organization.

Amidst this transition, it seems like there are countless factors to consider when building out a Legal team, but what should you take into account for your own purposes?

When Should You Begin Hiring a Legal Team?

While every company is different, from a pure need basis (not through a strategic lens), there are several methodologies that could be deployed in the consideration of when to start an in-house Legal team. These factors include:

  1. Company outside counsel spend exceeds the cost of an FTE legal hire
  2. Company exceeds ~125 employees
  3. Company operates within a highly regulated industry

On point one, Marty Linné, General Counsel at Blueground (formerly General Counsel at StubHub & Intel Capital), states, “If you find that your billable hours from associates working on general matters are routinely taking up 25 or more hours per month,  then it is likely time to consider bringing that work in-house.” In this light,the decision is very much a cost-based approach based on billable hours.  Given billing rates for external associate’s time, if you are regularly using this rate of associate time, you will likely be well in excess of the alternative spend of bringing someone in-house given the premiums charged on the service by outside counsel.

On point two, TruePlan data shows the timing of this first hire tends to occur around 4 years after founding (or between 125 - 175 employees). It’s at this point that companies decide to make their first Legal hire - typically a General Counsel (GC). However, the title shouldn’t be indicative of a hands-off employee, as Linné details, “I don't think you're ever going to bring in a GC as the first hire and not have them without sleeves rolled up well above their elbows and really digging in.” Which is the same trend we’ve seen from other departments, such as Finance and Recruiting, - the first hire in the door needs to be willing and able to set the vision and the drumbeat for their function.

On point three, the type of regulatory scrutiny encountered by your company or industry will accelerate or decelerate your need for a legal team. For instance, if you’re a straightforward B2C SaaS company with a single, lightweight product not handling sensitive information, then you can likely get away with minimal legal work that can be handled via outside counsel. However, if your company operates in a particularly litigious space such as privacy or research, then circumstances will likely force your hand sooner. 

Whatever path you choose, be sure that your first hire is someone who’s seasoned and mid-career with a deep understanding of typical business needs such as intellectual property, contract, tax or employment law. This person will ultimately act as a generalist to scope out the needs of your company from a legal perspective and will thus be involved in quite a bit (i.e, commercial contracts and intellectual property with Sales, employment matters with HR and Recruiting, taxes with Finance).

In terms of what background to look for in this hire, Linné recommends finding someone who is coming from another in-house position rather than a typical law firm, stating, “Making the jump from a law firm to in-house is difficult to make, if they even make it.” Working for a fast-paced startup where risks and liabilities need to be weighed against business pursuits is very different from the representation of a client on a particular or series of matters to eliminate risk altogether.

Once the GC or Head of Legal is in place, they’ll be able to strategize how to build out their department by weighing the pressing legal issues against the strategic needs of the business. This second hire typically comes in the form of another senior legal expert (Senior Counsel or Director of Legal). The reasoning being that the GC will need to lean on the second hire to take over portions of a heavy workload and own a specific focus (e.g., IP, compliance, etc.) so they’ll need someone seasoned and capable of driving by themselves.

Recruiting Hire Number 1 2 3 4
Company Hire Number 125 - 175 225 - 275 325 - 375 350 - 400
Role / Title General Counsel or
Head of Legal
Director of Legal or
Senior Counsel
Paralegal or
Counsel
Counsel
Timing (Yrs) 3.9 5.4 6.6 7.3

The actual specialty of the second hire may be apparent based on the largest remaining gaps following the hire of the GC, but it’s not necessarily a straightforward answer. The GC will need to weigh calculated risk versus the strategic direction of the business to determine the optimal role to bring on. As Jason Kwon, GC at OpenAI, says, “As the General Counsel, it’s just part of the job to constantly assess where the talent gaps are that the organization needs to fill based on constantly updating where the company is today and where it needs to be in the future. And then from there, what legal competencies are you missing – where is the biggest hole?  Different people should come up with different answers because the result also depends on your own strengths and weaknesses.  The most important thing is to start with a deep understanding of the company and the situation, rather than trying to follow any particular best practice.”

But how should you structure the team following these individual hires?

How Should You Structure a Legal Team?

Following the first few hires, the Legal team will need to begin considering their approach to hierarchical structure - either flat or layered. In a flat structure, all Legal team members report into the General Counsel. This type of structure lends itself to smaller Legal teams as well as those that are composed of general, non-specialized lawyers. This is likely the case for either a company with a straightforward business model in a largely non-regulated space, or one that has less than 400 employees. The following structure is what TruePlan has seen in terms of structure across our own data.

Org chart for Legal Dept

As the Legal team starts to evolve and mature then a layered structure could quickly become deployed. A layered structure allows for the likes of Assistant GCs (AGCs) / Deputy GCs or VPs of Legal to take over specific functions and allows them to build groups within their function (e.g., Product, Capital Markets, Trust & Safety), though specific titles should be driven by the market. This structure can aid in attracting and retaining top level talent for those who are interested in owning specific legal functions in a business. If this approach is taken, then a typical structure could include specific function heads in the form of AGCs (e.g., AGC - Commercial, AGC - Product, etc.) followed by another layer below for Counsel who would report to the AGCs (e.g., Counsel - Commercial, Counsel - Product, etc.).

Through the lens of Legal, this move from a flat to layered structure appears to be somewhat of an evolutionary step moving from early to mature Legal groups. Linné details this in her experience with Intel, “I built out a team at Intel and we got into about two or three more senior lawyers who were part of a team supporting transactions. Even at that point, I still didn't have enough bandwidth to cover the workload. So at that point, I started to get slightly more strategic in terms of going down the food chain to a more junior person, but I had at least some people who could help bring along more junior people.” It’s this viewpoint that startups should take into consideration given the abundance of junior talent that can be leveraged once you have your senior members in place. Linné continues, “Legal is different in many respects, but you also want to be able to show career growth within an organization and have some kind of succession plan lever. So you start to bring on more junior people who can be cost-effective as well as allow for growth and development within the group - whether or not it's giving the more senior people management opportunities, as well as just bringing the knowledge level up for the more junior people.” 

One of the easiest ways to determine where to invest in additional Legal hires (and to build an ROI case for the new hire) is assessing your company’s outside counsel spend. Consulting your data on how much is being spent on a particular line item is the most effective way to determine when the time is right for an additional Legal hire and where they should be focused. Linné states, “Show where the legal spend is and why it’s more cost efficient to bring it in-house. It’s always more beneficial to bring it in-house so people have a more intimate aspect of the business, but, if it’s not numbers driven, then it’s difficult.” As Brian Scherer, CEO of HeyCounsel puts it, “It’s never the easiest way to scale up efficiently since you’re being reactive versus proactive, but using numbers is a great way to get attention of analytical decision makers”.

But this leads to the question, why create an in-house team at all when you could just continue leveraging outside counsel?

In-House v. Outside Counsel

The topic of in-house versus outside counsel is frequently discussed as a component of the overall legal strategy - not in the sense of if, but rather, how you should use them. Outside counsel has their place in the company’s legal strategy as a means of returning leverage to the in-house team. Particularly if outside counsel is leveraged for more mundane aspects of a legal team’s work. As Linné states, “There’s the possibility that a company is looking for its outside counsel only to deal with governance matters or to keep cap tables up-to-date.”

This makes sense given our earlier point about supporting the GC’s evolving role as a strategic pillar of the company. Ultimately, you’re trying to maximize the comparative advantage of your in-house team's intimate understanding of the business along with their expertise. As Kwon puts it, “The functions you leave as gaps are the ones that are lower leverage - it’s really that simple. In those cases, you can fill them with external resources, contractors, etc.”

As the company moves beyond the needs of routine management and into a world of strategic legal endeavors, you’ll need to undertake a more thorough review of your needs. Linné points out, “Do you have any idea of what the legal risks are for the company? If not, you probably need to bring someone in-house pretty soon to understand that. Outside counsel is really intended to cover their own backside and make certain that you're not running into unanticipated risk. So they will give you the full world of risk that you're facing.”

Instead, it’s probably best to leave outside counsel to those activities that are (i) recurring and ongoing administrative functions, (ii) inexpensive enough to not yet justify internal hires, and/or (iii) require local expertise in the jurisdiction you’re operating in. While most companies would ideally like to remove external spend from G&A, it’s unlikely that an in-house team will be able to handle all legal needs that will arise during your company’s life.

Don’t avoid seeking outside counsel when you have an in-house team. It shouldn’t be a binary decision, rather, one used as a means of maximizing your capital allocation.

Closing

In the world of startups, where growth and money-making endeavors are paramount, a Legal team is never the easiest investment decision to make. However, viewing an in-house Legal team through the lens of strategic leverage or reducing outside counsel spend, casts a much clearer picture of the need to bring on a team.

As Kwon closes out, “The most important thing is to understand the company deeply and to never stop learning, and never stop reassessing where the company needs to be. Starting from there ensures you’re making the best decisions in terms of team building. Building a case should be relatively straightforward since if you have this understanding, you should be able to link each hire to the overall strategic goals of the company.”

We hope you enjoyed this article. If you haven’t already, please read our past posts on building out Finance and Recruiting Teams. Look out for the next installment, where we will provide a thorough review of building out another team.

If your team is growing, TruePlan can help. Book a 15 minute demo to learn how.

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