Investing Billions - E136 Navigating Startup and Venture Capital Legal Risks w/Constantine Karides

Episode Date: February 7, 2025

In this episode of How I Invest, I interview Constantine Karides, a Lead Partner at Reed Smith, to discuss the critical role lawyers play in the startup and venture capital ecosystem. Constantine shares insights on what founders and investors should look for in legal counsel, the leverage model law firms use, and how AI is reshaping the legal landscape. From the importance of choosing the right law firm to navigating legal costs effectively, this episode is packed with actionable advice for entrepreneurs, venture capitalists, and investors.

And so if you show up on a first deal, you get on a Zoom call, and there's you and five other folks, none of whom the client had seen before, wondering what's going on. Oftentimes, startups or even venture funds, depending where they are, aren't going to question the fact that you have all those folks on the call. It can become a pretty expensive endeavor and one that's not answered necessarily. And I don't think it furthers the best interests of the client at all. And the right time to ask that is when you have the leverage, when you're choosing a law firm before, because after that, you're kind of stuck with the firm. Definitely want to do that before you get too far along.

It's hard to pivot and change law firms. There's a lot of costs that goes along with that transition and otherwise, and also sunk in investment. What are the most important questions that startups or venture capital funds should ask their lawyers before they engage with a lawyer? I think it's a little different for each of those two buckets. If I'm a startup, I want to look at my legal relationship as I would a strategic investor. And that is beyond lawyering, what can this law firm or lawyer bring to the table.

There are a lot of lawyers who can paper or put together initial formation documents and negotiate with investors and put together a tax structure that works. And so beyond that what are you bringing to the table? Do you have a network of partners or potential partners for the underlying business? Do you have a network of investors that might be interested in the next round or the current round? Are you well positioned within your law firm to be able to drive value to me if I need to ask you to make concessions on pricing or to try to do alternative fee structures,

which some startups need to do to be able to move forward with an eye towards a broader relationship? startups need to do to be able to move forward with an eye towards a broader relationship. And so I think I would as a startup want to make sure that I have hired a lawyer from a firm that can do the work of course at a high level of quality but also that brings to the table off balance sheet value not just legal services. That you want to make sure that that partner has the right credibility internally to help the startup, double-click that and explain why that's important. Especially if you're dealing with big law, I'm at a big law firm.

Decisions are often not made at the lawyer level when it comes to doing things that are not straight down the middle. And so there's a layer of bureaucracy or even just an inability to deliver on value propositions on one hand, and on the other hand, an inability or less of an ability to deliver the right talent or the right people. If your relationship partner is well placed at a firm, either because they have a significant portfolio of business and are at the higher end of the ownership structure,

or are considered a star in the space, they will be able to, without having to navigate that bureaucracy or even deal with people saying no to them, both deliver the resources that are necessary for the project and also be able to be flexible on things like pricing or other requests that most partners wouldn't. Essentially, the lawyer has leverage internally whether they're bringing in a lot of business or they just have high standings within a firm and they could use that relationship capital.

They could bring in the resources that the startup needs. They could bring in the star guy. Maybe there's a guy or girl that's really good in tax or in M&A when the time comes. They could bring that resource into the company. On the other side, on the cost side, they could be more flexible because they basically have

that reputational capital internally. That's exactly right. And what about venture capital funds? So you're going out, you're talking to these law firms, they all seem pretty much to have a similar pitch. What questions should a venture capital fund ask before choosing counsel? So venture capital fund is looking for for lawyers who are going to be reviewing investment documents in connection with their go-forward investments in portfolio companies. They're also going to be looking for lawyers who can help those portfolio companies grow.

And so some of the same questions and priorities that I just mentioned would apply in that vein. For venture funds, I think it's a little bit different. I think venture funds certainly are repeat customers and our, I would say for law firms, a potential really steady flow of business. And so with that in mind, I think venture funds are looking for really super competent legal assistance.

Yes, the relationship partner matters, maybe a little less so than for a startup. And they're looking for partners within law firms that can be flexible and be open to working with portfolio companies they invest in. For me personally, a lot of engagements we have, we have fine relationships with a number of venture funds and we help them with respect to their investments in the series A, C, whatever it is. But the upside of that is oftentimes when they refer you to one of their portfolio companies who's ready to have

a significant transaction, a listing, or even maybe just have to deal with some, you know, unwelcome litigation or things like that. In many ways you're investing into these startups like a venture capitalist or an angel investor might. What are you looking for in terms of these startups to decide, you know, who to take on, who to spend time on? That's a really good question. Me personally and my team does approach startups as we would think about making an investment, but a fund might make an investment. And we also think about, if we were really good at investing,

we would be running venture funds. We're not. We're lawyers. But we do have a sense of what's real or what's not. There's certain hallmarks that are associated with those kind of decision making. Who's their anchor investor? What's the background of the founder?

Does the strategy, at least to us, make sense? And where's the referral coming from? They all add up and you have a pretty good client, potentially, and at the outset, my personal view is, and not everyone follows this approach, is you need to be flexible and malleable and work with them so that they can get into a position to be a really strong company. And that means, in my opinion, not going at them with your 100% max rate and trying to, you know, max bill or bring in a lot of different lawyers who might not be

necessary initially for the project. When we last chatted, you told me about the leverage model that law firms deploy in order to maximize their profits. What is this leverage model? The financial services industry is evolving rapidly. Reed Smith's team of over 200 financial industry group lawyers helps clients navigate the complexities of the sector in an era marked by technological advancements and AI. Reed Smith's lawyers have a deep understanding of market dynamics, legal frameworks, and

regulatory developments, and advise financial institutions and technology companies on financing, lending, investment management, restructuring, insolvency, and litigation. So in its most traditional sense, leverage model is pushing down work to the lowest level of employee or associate in this case that can do the work. And the reality is that's kind of been amended or modified or extended in a way that is really more reflective of the drive and the risk of putting us in a little bit of a bad light, of big law to really drive revenues and profits and rate increases and all those things. So I think what you've seen is a lot of times law firms will staff cases with too many associates, in my opinion, or too many partners even,

with an idea of maximizing, you know, bubble hours and its approach that, you know, I can't stand, it's not something I do in my practice or ever have, maybe to the detriment of my firm, but I firmly believe, I really firmly believe that the best thing you can do for a client and the most lucrative thing you can do as a law firm is to build trust, confidence, deliver a great product, add value to your client, and everything else will flow from that. And so if you show up on a first deal and you get on a Zoom call and there's you and five other folks, none of whom you know the client had seen before, and wondering what's going on,

oftentimes startups or even, you know, venture funds, depending where they are, aren't gonna question, you know, the fact that you have all those folks on the call. It can become a pretty expensive endeavor and one that's not necessarily, and I don't think it furthers the best interests of the client at all.

Going back to that initial question about what's the best, what's one of the best questions a startup can ask is, who's working on my matter? You know, what are they each doing? What's their level of expertise? And make sure you're comfortable with it, because if the answer is, I've got three associates, they're gonna, well, why?

What are they all gonna be doing? I think you're entitled to know that, and you're entitled to know who you work with. A lot of times, the people who are selling you on a deal aren't the people who are working on a deal. And the right time to ask that is when you have the leverage, when you're choosing the law firm before, because after that you're kind of stuck with the firm. Definitely want to do that before you get too far along. It's hard to pivot and change law firms. There's a lot of costs that goes along with that, transition and otherwise, and also sunk in investment of time and energy. You want to have your law firm be an extension of your company or fund, frankly. You want

them to be aligned with your interests. You want them to be pushing forward in a way that helps you achieve your business objective or your investment objective. And you don't want to have to get into a situation where you're leery of speaking to your lawyer because you called up somebody and you're, you know, next day you got a bill for a half hour of time when you thought you were just, you know, calling a friend or a conversation. It's interesting because a lot of these projects that people call you about are hypothetical. So they might be a hundred,, 200, a million dollar engagements for the law firm. Why charge somebody $500 and keep them

from kind of discussing opportunities for me? It seems very short term. You kind of said it in exactly the obvious way. What can come out of a client calling you? Only good things. Worst case, they engage you. There's nothing lost by having a conversation with your client, encouraging them to speak with you, or prophylactic counseling, or what have you. There's nothing lost by having conversation with your client encouraging them to speak with you, you know, or prophylactic counseling or

what have you, you know, certain things that are or shouldn't be on balance billable stuff in my opinion. When I spoke to the Reed Smith operations team they told me their words, Constantine's a rainmaker, we hired a full-time person just to help him with his relationships. You obviously have an ability to bring in a lot of business. Tell me about your philosophy and how does that philosophy differ from the typical lawyer? So I'm fortunate, I've been doing this a long time now. This is my 30th year of practice. Over that period of time, what I've learned is that engagement on a personal level with your client, people who lead that client,

or several people who lead that client, in a way where they trust you to look after them. One of the things that I think clients like as lawyers, yeah, if they have great in-house counsel and they have a little thing thought out, they're much more focused on, you know, I want the very best lawyer to do X, Y, and Z. And we deliver that in certain areas.

But more generally, they want to know you're looking after them. That I've got this great lawyer, this great team, that I can go to bed at night knowing that my documents, my transactions, any risk I have is being managed in a way where they're not just looking to make dollars off of me, but they're looking to advance a deeper personal connection.

And so I've been fortunate to become really close friends with many of my clients. And I think it's that personal touch and being available to them all the time that has served me very well. That results in probably not being the most aggressive biller or the most interested in setting up, you know, all sorts of ways to price and set different prices, but I don't care because I think in the long run, we do better, they do better.

You have parties that you throw and your companies have big milestones. You are very social with your clients. Talk to me about kind of mixing your business and professional life. Thank you for listening. To join our community and to make sure you do not miss any future episodes,

please click the follow button above to subscribe. I've always been kind of an outgoing kind of a person. So I've always loved, you know, I've always loved getting people to laugh. I like to feed people. I like to have them at my dinner table and get to know them frankly. Just as we've gotten to know each other, it's great.

When you kind of peel that initial layer back, you're much more likely to want to do something together, the kind of facade or that veneer we all have. When that goes away, it's a much better way to develop a relationship business or otherwise. And so it's become part and parcel of what I do. I love to host big dinners. You can call them networking dinners

or just a bunch of like-minded people or friends, and that generally is good for business for sure. I love going to ball games. I love going to concerts. And so I always like to have big, not entourages, but big groups of people going. And, you know, when people are outside of their professional, you know, day to day,

they're just like, we were when we were kids, right? You're just hanging out and you're getting to know each other and it's a much better forum to start talking about things in a way that can lead to business relationships because frankly, and ideally, and I'm at a point in my career thankfully where I can do this, you want to work with people you like on the legal side or you have this like... Especially post COVID, I feel like everybody's behind Zooms, there's less interaction and, you know, we're wired evolutionarily for when we lived in 150 person tribes

and I think people are really struggling from that. I think that's why you're seeing some of these mental health issues in society. So I think it's really powerful what you do. What mistakes did you make on early on in your career as a lawyer? That's a great question. I think one of the things I decided early on in my career was working at a fairly big law firm out of a law school was kind of a tiring and exhaustive process.

Still is. Maybe worse. And that wasn't something I wanted to do in perpetuity, so I decided pretty quickly that until and unless I develop my own client relationships, I'd be working for the man, so to speak. No leverage. You would just be trading your time for money. But in order to make that leap into starting to generate my own business, do anything for

anybody, basically, was not in a position to be selective. And so probably took on a lot of work and a lot of clients that in hindsight were probably bad ideas with people that I probably didn't respect not that they were doing anything on law floor, but just like jerks or assholes, you know, and so You get into that web and that lasts long longer than you'd wanted to Even if it's your own client per se so That's one thing talk to me about AI.

How is AI affecting the legal profession? So in time, I think it's going to have a very prominent, significant role in performing a lot of the legal functions that are more rote and repetitive. I think there's the beginning of that. Not so much yet in big law firms or even, you know, regular law firms. I think plaintiff's firms are the first, I think, to really kind of lean into AI. And they're doing so if they're class action firms in terms of figuring

out algorithmic approaches to onboarding plaintiffs at a cheap price and that's a big part of the game that those guys play and they do it for real incredibly they are also pretty proficient in reviewing documents but not in a way that I think the courts prefer. So it's maybe like a first cut review. Most courts are leery of A.I. involvement. You know, people got in trouble for having briefs drafted by A.I. even though the briefs weren't that bad. So A.I. is emerging, probably slower than people think. Definitely slower than the people who've developed the AI for law would like.

And there's resistance always to change within any profession. And I think the legal profession being the most resistant, it's probably the most protective. AI is not as widely used in the legal profession. It's not as widely adopted in litigation. Why is that? It will be.

It's not as widely adopted in litigation. Why is that? It will be. It's just not moving as quickly as people think it might, maybe should be moving. Our firm has taken a deep dive into this, and we're ready introducing AI in certain aspects of our business, the way we handle a for-profit business, and also in different parts of our legal services. And we're doing it in two ways. One is we're looking to engage with,

do test runs with the best, or who we think are the best, or who are advised are the best AI legal providers, and we're sorting through that presently. We also have our own tech subsidiary, which we've had for a while, that has really been at the forefront of making things like discovery, or discovery and litigation, or due diligence

in big corporate transactions, much more proficient and expensive, and it's actually been a good business for us. They've been developing their own proprietary AI for those functions and others. And so between the two, we think we're gonna be right there, and we're not hesitant to deploy it or use it.

But I think it's still several years away from being a mainstay day to day in a significant way. And when it does happen, a mainstay day to day in a significant way. And when it does happen, I think it'll happen broadly as opposed to, oh, that firm's doing it, that firm's doing it. You know, big law tends to run as a herd. And so when it happens- Is that clients pushing firms to use AI or?

I don't think clients are pushing for AI just yet, you know. They want to make sure that the technology is appropriate, that the industry accepts it, that there is no resistance by the bodies that overlook the legal profession in terms of using AI. And I think, you know, the people who drive decision-making in law firms are more my generation, right, in 50s or so. So maybe not as quick to move to a new technology as somebody in their 30s or their 20s or something like that. So you have the internal political capital to kind of push the technology. You know, I'm not sure what it does fully in terms of the law firm models that we've talked about in others. You know, on the one hand, it's gonna potentially replace

a number of, you know, the associates you need, and it'll replace it in a way that should be cost beneficial to your client. But then it should open up the opportunity for the, you know, the work or the advice or the high-level strategy that we provide to metastasize and become much larger. So some firms are, well, if I lose 100 associates and I can't build them the way that we talked about, how do I make that up?

Or where's the profit gonna come from utilizing this technology? And I think the profit is there. I think the profit is geared more towards, let's talk about how we're going to help you structure the startup or this investment. These are things that are not, at least for the foreseeable future, replaceable by AI just yet. Anytime you drive down costs, you get more startup started and more funds started, and

it expands the pie. So we've seen some counterintuitive kind of results of driving down costs. Oftentimes these businesses get much bigger. That's, I mean, that's been the history of technology, right? People are, people get afraid it's gonna end this or end that and it ends up usually, maybe it will be different, I don't know,

in creating more opportunities for everybody. What would you like our listeners to know about you, about Reed Smith, or anything else you'd like to share? Thank you for that question. Well, I would like your viewers to know that engaging lawyers can be a really great part of their business. And getting the right lawyer can be extremely

additive to the growth of their business for the startups. And for the, you know, GPs can be really strategic in helping them see around corners on investments and things like that. And that me personally, and you know that, I really like to think I put myself completely, make myself completely available to clients and bring with it not only the years of experience I have,

but the network that I've developed, the approach we discussed, and a really solid team as well. And how can people reach out to you? They can email me. That's CKARIDES, C-K-A-R-I-D-E-S at reedsmith.com where they can, I guess, LinkedIn is probably a little bit of an older way to reach me. Well, Konstantin, you've been a great friend and thanks for jumping on the podcast.

Thanks for having me.