Start-Ups represent a unique subset of clients for major law firms, as they are often unable to pay the fees those firms generally require, but – particularly in the tech sector – hold out the potential of significant profitability down the road. Intrigued by the unique challenges and opportunities for law firms offering their services to these cash-poor but potential-high clients, we invited partners from four prominent law firms in the Czech Republic and Slovakia to share their strategies and experiences with Start-ups with us in the offices of Kocian Solc Balastik in Prague. KSB Partner Christian Blatchford moderated the conversation.
Round Table Participants:
- Christian Blatchford, Partner, Kocian Solc Balastik (Moderator)
- Vladimir Cizek, Partner, Schoenherr Prague
- Miroslav Dubovsky, Partner, DLA Piper Prague
- Lukas Michalik, Partner, Hamala Kluch Viglasky
Christian: Let’s start by introducing ourselves and describing one recent start-up/tech deal we’ve advised on. One matter that worked on recently was for Skoda Auto Digilab, the Skoda accelerator, helping them to commission and acquire a mobile application enabling car sharing. This was interesting for several reasons, in part because the very good technical people on the other side knew absolutely everything about technology, marketing, and how to get this thing onto your mobile phone, but they didn’t really know a lot about the legal side. So we had to slow them down and explain: this is an asset – and this is how you transfer it; this is a share – and this is how you transfer it. We ended up doing a kind of synthetic deal. We did an asset transfer into an SPV and transferred that SPV to our client. There other things too, such as third party services to make the app work, that needed to be transferred to entered into afresh.
Lukas: I am Lukas Michalik, Partner Hamala Kluch Viglasky in Slovakia. Recently we worked with Volkswagen Slovakia. They have the biggest car plant in Slovakia, and they just recently started working with the municipality and an NGO and started to test a car sharing project in Bratislava, consisting of renting a car to specific clients which includes a virtual tour guide through the city. They installed an app in various vehicles that includes pre-recorded tours through Bratislava, where visitors get a guide with the navigation system explaining what they’re looking at. It is a more like a pro bono project – not a huge deal for now – but they are growing it and they plan to develop it further in Slovakia.
CEELM: I assume that a common element is assisting start-ups at discounted rates or pro bono, with the assumption if they hit gold you keep that relationship and make it profitable. Is that correct?
Miroslav: I am Miroslav Dubovsky, Managing Partner at DLA Piper in Prague. We do a lot of technology work here in the Czech Republic and around the world. What we have done recently was an acquisition of a Czech start-up for US technology company Mirantis. What is quite common for those transactions is that the consideration includes payment of part of the purchase price through shares of the parent company which sometimes are publicly traded. This is very interesting and makes the transactions quite complex, because different legal systems and different markets are involved.
Vladimir: I am Vladimir Cizek, Partner at Schoenherr. I would highlight two transactions, although they are very different in nature. The first is our assistance in the planned exit from kiwi.com, an online ticket booking platform, which was unique mainly in terms of its structure and the complex set of relationships between existing shareholders – representing a typical start-up structure with a wide group of investors whose interests are not necessarily aligned. The second would be advising FlixBus on setting up greenfield operations in the Czech Republic, with all this entails, including commercial, corporate, and regulatory advice. FlixBus is unique because of its operational structure, requiring individual legal and regulatory tailoring in each jurisdiction. So, what I’m trying to point out is that start-up advisory is highly diverse, and involves multiple legal practices.
Christian: Do you find start-up clients, who may not have much experience with legal and finance issues, different to work with?
Lukas: Certainly. Our firm has a quite a good share both of strong, developed clients, and start-ups who are beginners in the field. With start-ups it is a completely different story, where you have to adapt your strategy and your fee structure. Everything is quite different.
CEELM: To some extent every client is unique: some of them put more pressure on hourly rates, and some demand alternative fee structures altogether. But are start-up clients even more demanding than other clients? Is this another kind of client, in that way?
Lukas: I think so, absolutely. They look at different fee structures and at completely different setups that law firms are not used to yet. We have had offers, when the potential clients are even willing to offer some portion of their shares.
Christian: Can you do that? Don’t you think it would create a conflict of interest?
Lukas: That is what we are dealing with right now. We haven’t done it yet. We don’t think it is okay, with the conflict and everything. But it is one a way some start-ups are thinking about the fee structure for law firms.
CEELM: Do you get such offers as well, Christian?
Christian: Not really. There are different ways for lawyers to try to get start-up work. Obviously there are reduced rates and deferred payments. Another possibility is that you produce a simple set of documents, like articles of association and subscription agreements, which you then give away as a way for the entrepreneur to get the ball rolling without incurring big legal fees. Have you guys started doing that?
Vladimir: I would say we are ultimately seeking different benefits in advising start-up structures. We aren’t really looking at share acquisitions. What we may actually be looking for are start-ups that we want to work with and ultimately help develop their product further. This is basically what we are looking into right now with our NewTech team in Vienna. This brings me to the other point – obviously the start-ups scene itself works completely differently in Prague compared to other places. It’s all driven by location. The experience is different, say, in Vienna and Prague in terms of the business opportunities, but in terms of legal products (packages) and the knowledge – these are fully transferable.
CEELM: I was wondering whether the Czech Republic and Slovakia are more alike in terms of the tech and start-up markets than the Czech Market is with Austria. Is Austria a different animal, or are they on the same level?
Vladimir: Well, Vienna and a couple of other cities. It is a city-driven exercise.
Miroslav: You need to look at it from a broader perspective, because start-ups are actually any company, not only FinTech. All the start-ups are having the same issues and need similar know-how. And if you look in the region and FinTech only then I believe that the Czech Republic is one of the strongest markets, which is driven through the technical schools that we have, and people specifically involved in technology.
Christian: Do you find, when these potential clients come to you – a lawyer with a large network of connections – that you can help them out by putting them together with people who may be able to provide financial backing or further know-how? Are you able to provide them with benefits through your contacts, not just legal know-how?
Lukas: Yes, in a lot of cases the people that come to seek our services are technical people or IT specialists. They are often not familiar with what is required to run a complete business and so they have questions like, “how do I do accounting?”, and they come to us as to service providers who can help connect them to other people who will help the with all the requirements for running a businesses. In addition to that, sometimes they also want to learn how it works with local politics, the municipality, how to apply for grants and fund and we try to get them to meet responsible people in this area. We have the contacts and try to put them in touch, even if they are small.
Miroslav: Basically what we have seen is that they start with friends and family, so they usually acquire all the know-how about legal, tax, IPO, and everything by themselves, and only then, when they are able to progress to a certain level, will they search for more complex providers. In the early stages, at least, they try to use their friends, or tools provided by their universities or on the web. Only once they develop to the stage when they can really seek external help are they willing to talk to a more established counsel, to help them with everything from production and management to financing, legal, and accounting.
Christian: Yes, I think there is a missing link here that is present in other places, which is a developed venture capital market. Between friends and family on the one hand and a private equity disposal or IPO on the other I don’t see a lot venture capital. There are of course family offices of high net-worth individuals, but you wouldn’t necessarily call it venture capitalism.
Miroslav: I do see a lot venture capital but it is not structured. There are individuals developing start-ups in the region, and the first seed money comes from them.
Christian: Have any of you worked for a start-up for long enough to test whether a client stays loyal when they make it to the next stage? Do you have experience of helping somebody out at the beginning only for them to go somewhere else for more sophisticated work?
Vladimir: In my opinion that connects with the previous question. We are an international law firm, and that means that from the local start-up perspective, they will not come to us for legal support in the first round. But I may be on their radar in the second or the third round, because at that point the founders or investors are ready for more comprehensive advice. Ultimately, the initial contact will either depend on personal connections or loyalty.
CEELM: That leads to the question of how you identify which clients you’re going to work with?
Christian: We are quite conservative and haven’t been actively pursuing start-ups so far, but people have come to us, and they have stayed with us and we have stayed with them. You get involved professionally and also emotionally. For example, we helped a start-up ten years ago called House of Wine. They import South African wines and now they’re the third largest in the country. And that kind of became an emotional thing: you know the founder, and you know the product. We helped set them up. And now we handle their corporate stuff, some employment stuff, whatever they need for their day-to-day business.
CEELM: Some of those clients must never actually pay off, in strictly financial terms.
Christian: They generally do. We may not be doing IPOs or huge transactions for all of these clients, but we are happy to help them with their day-to-day needs.
Miroslav: Of course, it’s worth pointing out that probably all of us work more for the investors than for the start-ups themselves. Because it is difficult to get to start-ups until a certain stage.
CEELM: Is that right? Do you all tend to work more with the investors than with the start-ups?
Lukas: Well, our firm works usually in the early stages with start-ups. We can choose, and as I said sometimes choosing the right start-ups to work with is a bit emotional, sometimes the deals come from friends and acquaintances. Of course the “bigger” work is with the investors.
Christian: If you had to describe where this kind of work comes from, what would you say? Where do you get the work? How do you get the work?
Vladimir: It is primarily linked to the areas we’re known for as a commercial law firm or where we traditionally provide legal advice, like corporate, financing, or IP law. In those areas I would say we naturally know who to talk to and people know you.
CEELM: Do you also try to attend conferences, Vladimir?
Vladimir: Yes, from time to time. We were just discussing the CEE M&A and Corporate Financing conference in Vienna by Mergermarket. When I looked at the investors there, I saw interest in Serbia, Bulgaria or Romania. And to answer one of the previous questions about where we get clients: sometimes investors just come through connections and recommendations.
Christian: Have you ever agreed to meet with somebody and give an hour of your time answering questions, with no fee? What I mean is, somebody is open enough to say “I’ve got an idea and I would like to talk about some legal stuff.” And then you say, “OK, come in and we’ll have an hour and a half for a chat.”
Lukas: It never happened to me apart from some friends and acquaintances. We do give free advice but it is not often that people come to firms and say that will not pay you and ask for two hours of your time.
CEELM: I assume you mean that for friends and family you do it, but less so for strangers calling you up and asking for free advice?
Lukas: Certainly not just friends and family – it would be acquaintances as well. I do it for people I know, with whom I have at least some sort of connection, and I do it as a show of good will.
Miroslav: I assume all of us do it to a certain extent. If someone calls me randomly, and I don’t know him, I would talk to him and give him advice on the spot –and then I would see after that initial meeting whether it is progressing or not. It is an opportunity cost.
Christian: I can imagine a long line in the street in front of your office. (laughter). Turning to another subject: Once we have got the start-up job, are there special skills and knowledge that we need? Are we giving our junior lawyers training in these skills?
Vladimir: As long as they can use all iPhone functions they will probably fit in (laughter).
CEELM: You assume your lawyers are smart enough that they can answer any questions that may arise?
Vladimir: Well, what I meant was that those potential clients probably know me or know of us because of our past work or because of a recommendation, so they will probably be aware of our capabilities. I believe that as long as I understand the basics of a product, I can work with that. At the end of the day, we are lawyers and we can’t understand all the engineering and technical details, but our advice still has to work for those products.
Miroslav: I agree with Vladimir, because at the end of the day what you need is corporate advice, some financing advice, some IP, etc. and then perhaps a lawyer with know-how from the technology sector and the industry. I have the benefit of being in a global firm and have access to latest know-how in those areas. At the end of the day I believe we all are able and capable.
Christian: I think this is very true. Once you identify all the bits and pieces of the deal you just have to arrange them in a certain way and explain a bit more how everything works, but in essence you are dealing with nothing new.
CEELM: But I could imagine a 60-65 year old partner frankly not being good at this kind of work. Does it require youth, and familiarity with modern technology that perhaps older lawyers don’t have?
Miroslav: Of course start-ups are associated with the younger generation, but generally they require fairly standard assistance. At the same time, young high-tech guys often prefer to receive legal services in a different way – much more broad than just connecting it to the start-up scene. And of course they prefer to operate differently and deal with the lawyers from the same generation. So this is an issue for any law firm, but is not limited to start ups – just a different generation.
Lukas: I was going to say that start-up clients are not a lot different than other clients. They have their vision and their business idea, they communicate to you in certain jargon that you have to understand – and that requires a certain skill-set, which is actually having the right business understanding. I am lucky that most of my colleagues have this and also nowadays young lawyers are familiar with modern technologies, so it goes hand in hand. But they are not lot different from other clients.
CEELM: Do you find start-up clients skeptical about traditional ways of doing business, or do they want a more conservative lawyer?
Vladimir: I believe it depends on the particular start-up. If you talk to a financial investor behind a start-up project, this will most likely be a rather experienced person, who wants a clear-cut answer. If you talk to the founders of a start-up project, the expectation is that the legal advisor should point out what they need in order to get their project off the ground. If the project is at point A and it needs to get to point B, I need to provide guidance on how to get them there. So I am taking an almost project management role, which is what is so different from five to ten years ago. Clients actually are looking for comprehensive advice, and by comprehensive I don’t mean financing, but rather “tell me what I should do and guide me.”
Christian: Tech does involve a lot of jargon, and that can be difficult for lawyers to understand. But if both sides say, “it basically means ABC,” then certainly we can understand each other. When we were closing a tech acquisition, I asked the guy on the other side, who developed the product for our client, “what is your product?”, and he thought it was the app on his phone. I turned him around and showed him a table full of documents and said: “for me, that’s your product.” There are two perspectives of the same thing.
Miroslav: What was his response and his reaction?
Christian: I think he was much happier about his phone than fifty pieces of paper.
Vladimir: Sometimes you may also have problems with cultural perceptions. For example, we worked on a project with a German financial investor who was unfamiliar with the Czech commercial environment. The expectation was that we would complete in hours tasks that in actuality require months of approvals. It takes time to explain these realities, return to these points repeatedly, and manage their expectations.
CEELM: What are of the peculiarities of these markets legally and culturally in terms of getting funding? Are these good markets to be a tech start up in? Or, in general, are the Czech Republic and Slovakia not ideal markets to start up a business in right now?
Christian: Getting a bunch of people together, maybe getting some office space, or sharing office space, that is pretty easy. Miroslav mentioned the very good technical education people get in these countries. I think it is a good place for tech start-ups. That may not be true for a more traditional business, in pharma or something.
CEELM: Might it be different in pharma than in tech?
Christian: If a market is regulated, if I need to get my stamps from various government agencies, I imagine perhaps in other countries it’s easier.
Lukas: From the perspective of tech start-ups I don’t think it is a bad environment. I think it is quite good, once you pass the initial stage, where you have certain formalities and bureaucracy.
CEELM: And funding is generally available?
Lukas: It is not that difficult, there are some options.
CEELM: Miroslav mentioned that venture capital is not as readily available here as it is in some places.
Miroslav: No. It is available, but not in the institutional way. If you are looking for VC funds, there are only few, but the capital here is coming through various individual sponsors –wealthy individuals.
Lukas: The same applies to Slovakia. We have these strong investors, and they take things that interest them and they invest there, but they don’t have specific funds structured for these investments. They do it personally, and from their other individual business structures.
CEELM: Is your role ever helping the start-ups connect with potential investors? Is that something you do? If someone comes to you with an idea and says, “where should we go to find the start-up capital we need?”, can you help them with that?
Vladimir: It is absolutely part of your job, of course. If you can connect people, it doesn’t cost you anything and you stand to benefit from the relationship that may be formed. I try to do whatever I can to help.
Christian: We have spoken a little about tech. Are there any other sectors which you work in for start-ups, where you can actually apply knowledge and skills you acquire?
Vladimir: I think the vast majority of our expertise is transferable. Looking at last year, we extensively applied the knowledge acquired in the GDPR enrollment process in several tech start-up projects that rely heavily on the handling of data (such as customer data) as their core asset. Overall, this was a troublesome process, since clients did not consider this aspect to be vital, but our data protection experience was crucial in these cases.
David: How big is the start-up sector for your firm? How much pressure is management exerting on you to develop this practice, and how much of your time do you spend thinking of ways to generate this sort of work?
Christian: I don’t think the firm focuses on it as a special case. I would say that the client that I mentioned in the beginning is one of my key clients and I do my best to move with them and to allocate them the time and energy they need.
David: So there is no major initiative at the moment to expand it, but is it something the firm is more aware of now than it was ten years ago?
Christian: Yes, it is something that is happening and growing.
Lukas: We see the potential there, and our lawyers seem to be becoming interested in this area and we think it is growing and we believe it will be good and essential business in the future.
CEELM: Is there a sense that you would like to hit a home run – to find the next really big hitter that you can be associated with? Is that always the goal?
Lukas: No, I would not say so. To get to the point when you acquire a client it becomes a home run, there is such a long period that you usually forget about it by the time it happens.
Vladimir: We are putting more effort into this now. Our Vienna M&A team has been successfully positioning itself in the start-up scene for a couple of years now, and we are obviously trying to export their knowledge.
David: You mean they are trying to export this Vienna project to other markets?
Vladimir: Yes, certain knowledge is transferrable. I believe we are three or five years behind Vienna in terms of accelerator platforms. Here, if you want to talk to someone, to seek financing and potential investors, you have to talk to three, five, ten people or a couple of family offices. I find that this is different in Vienna where there are structured platforms, and a couple of my Vienna colleagues are working closely with them to generate high-potential business opportunities.
CEELM: Do you see a change in the Czech Republic though? Do you see it moving in that direction?
Vladimir: I hope to see such accelerator platforms taking root here as well, but I don’t see things moving in that direction, yet.
Miroslav: I am not sure I agree with you. I believe that it is not so bad here, because there are hubs that are very actively working with start-ups, so I’m more optimistic. And definitely we are not behind Vienna.
On that optimistic note the conversation drew to a close. CEE Legal Matters thanks Christian Blatchford and Kocian Solc Balastik for hosting the gathering.
This Article was originally published in Issue 5.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.