Working with Incubators – Risks for Law Firms

The American Bar Association Journal recently released its findings that a number of law firms are targeting the start-up space. Start-ups tend to be energetic, growth oriented and relational.  They also tend to be founded by persons inexperienced with running a company.  This means that the new company is need of legal services and there is not a law firm to unseat.

Some law firms are taking this to the next level by founding incubators and accelerators themselves, offering free advice and legal services at a reduced cost.  The Chicago firm of Foley & Lardner helped start “Catapult Chicago” which offers office space among other perks.  The California firm Wilson Sonsini Goodrich & Rosati took office space in a building with many start-ups already in it.  Other firms from around the country are starting similar programs and even forming pools of firm capital to invest in some of their start-up clients.

While good for exposure and for gaining traction in this space, pursuing incubators as described above is not without its risk.  There are three main topics a law firm should consider when aligning itself with an incubator:

1) Pro-Bono Services.  It is important to verify that pro-bono services are covered by the firm’s professional liability policy.  No lawyer’s professional liability insurance policy is the same.  Each insurance company writes their own policy form which means there is no standardization.  While most malpractice policies include coverage for pro-bono work, it is important to verify that there are no caveats or restrictions.

2) Ownership/Management Interests.  Because an insured cannot sue itself, most carriers take the stance that a company partially owned by a law firm cannot sue the law firm and expect insurance to pay for mistakes.  Most policies begin excluding coverage when the ownership percentage climbs to a mere 10% .  Most policies also exclude coverage if an attorney is a manger, officer or director of another entity.  Before investing in clients or sitting on their boards, a firm needs to understand these thresholds.

3) Claims by the Incubator.  A specific implication of #2 above, if a firm owns the incubator, insurance would not cover claims brought by that incubator.  The danger arises if a start-up sues the incubator for an error.  If the insurance company that insures the incubator decides to subrogate against the law firm that controls and owns and works through the incubator, coverage may not be available and the partners of the firm would have to pay.

While gaining new clients takes creativity and tenacity, it is important to do so with an eye to risk management.  Contact us to discuss ways to better protect your firm.