Digitalthink: Start-Up

DigitalThink: Start-Up

1a.           How should Goettner choose a lawyer and an accountant?  

                Goettner is on the right track in attempting to sign up a top-in-class lawyer and accountant. We agree with the sentiment that being represented by first-rate professionals is the best way to give a professional appearance to a fledgling business.  Regardless of the choices Goettner makes in the end, both Rosati and Kelm seem to offer a lot of things a start-up like DigitalThink needs; principally the help with valuation and financing.  While things like incorporation and a solid business plan are important for a startup, a solid business plan isn’t going anywhere without the funding to put it into action. Whether Goettner decides to go with Rosati (and/or Kelm), he should be seeking out professional relationships that can help him on the valuation and financing front. He has already reached out to some Venture Capitalists on his own with no success; he needs the introductions and the tee-ups that lawyers and accountants in the start-up space can provide.

                While Goettner is on the right track and has met two highly praised service providers he should go the extra yard and seek out additional lawyers and accountants, merely for comparison.  Rosati and Kelm might both be the best he can hope to hire but he won’t know that until he plays the field a little bit.  He can get a feel for whether what Rosati is offering is the norm or whether it is extraordinary; Rosati’s reputation does carry weight but a good reputation doesn’t mean he will automatically be a good fit for DigitalThink.  Addionally, Goettner clearly has reservations about the equity take that Rosati is asking for; Goettner might find that another reputable law firm offers everything that Rosati is offering but isn’t requesting to become an equity holder.  Finally, Goettner needs to ask the uncomfortable question about billing; this will be a business relationship and it seems somewhat wreckless to do business without knowing the terms under which the business is being conducted.

                On the accountant front, Goettner again needs to get past his unease and ask Kelm if Deloitte would like to take DigitalThink on as a client.  Given that Goettner has subsequently contacted Kelm for advice, he clearly trusts his expertise; why not ask to become a client?

1b.           What “deal” makes sense between a startup and a service provider like a lawyer?  

                We think that the way Rosati has things structured is a fair proposition; he is willing to take on down-side risk in the sense that he is willing to take the risk that he might not get paid; he will forego payment for services if the start-up fizzles out. At first glance this might seem awfully charitable but make no mistake, this is simply a business practicality; “you can’t squeeze blood from a stone.” Rosati is merely hedging his bets with this structure.

In our mind, his request is reasonable; he is promising not to kick a downed horse but asking for a small token for this promise. Additionally, a deal like this can serve to strengthen the commitment from the lawyer; with an arrangement like this the financial incentive for the lawyer to go the extra step is greater. The “valuation” of a deal like this comes down to the founder(s) of the start-up; does the founder(s) feel like 1% equity is too much to ask? Would they prefer to just be on the hook for billings even if their venture fails? Again, that question can only be answered by the founder(s) but we feel that this relationship isn’t out of the realm of reasonable.

                Another great way to structure service payments is the approach Kelm (Deloitte) takes whereby they have a scaled billing rate.

1c.           Should Mario Rosati and John Kelm work with DigitalThink?

Rosati should definitely work with DigitalThink; he seems to have a very lenient approach and DigitalThink seems to have passed through his three filters.  Honestly, Rosati appears to have taken the VC business model and loosely applied it to his law firm, throw a lot of things at the wall, choose the ones that stick and ride them up, or until they fall.