Lawyers are being pulled into crypto startups at an astonishing rate. On nearly a daily basis, we are seeing high quality founders/projects seeking to hire lawyers in the space. Over the last month, TechGC has seen no less than ten of our high profile General Counsel members leave unicorn/high-flying companies to join crypto related startups/funds and this seems to be just the beginning.
With the recent regulatory crackdown and the sheer amount of money and number of projects in the crypto space, demand for qualified lawyers is high. Meanwhile, given the required qualifications and the personal risk involved for a lawyer in the crypto space, there are relatively few such candidates.
For those seeking to hire a “crypto-lawyer,” here are some things to keep in mind to structure the roles properly and attract the top talent:
What is the profile of the lawyer I need and what questions should I ask candidates?
1. For Exchanges and other Crypto-Infrastructure Projects: A strong background in securities law should be a top priority, including (most importantly) regulatory experience with broker-dealer and investment advisor regulation. Bonus points for those with experience in online investment and secondary trading platforms and those who can give the history of how certain securities law norms evolved. Ask candidates:
“Is Ether a security? Why or why not?”
“Which securities exemptions are available to us or our customers? Do they need an exemption?”
“What is transaction based compensation and why is that important?”
“What are some of the biggest challenges in operating an ATS”?
“How do we deal with blue sky?"
2. For Crypto Hedge Funds: A background in hedge funds that operate as registered investment advisors would be the typical profile. Ideally the candidate will have been through one or more SEC exams with an understanding of the SEC’s hot button issues. There are a number of novel legal issues in operating a crypto fund as compared to a traditional hedge fund. Ask candidates:
“What do we need to do about SEC registration?”
“How should we handle the inevitable conflicts of interest that arise in this business?”
“How do you think about the SEC custody rule and safeguarding customer assets in this context?”
3. For Venture Funds with a Crypto Strategy: Care will need to be taken to properly separate the crypto business or otherwise comply with the venture capital exemption. In addition to the above questions in #2, ask candidates:
“How can we keep our venture capital advisors act exemption?”
“What disclosures or updates do we need to make to for LPs and governing docs?”
“What can we do in our 20% basket?”
“What is the framework for thinking about spinning off a separate crypto business to maintain our exemption?”
4. For other crypto projects: For projects not necessarily related to the infrastructure and/or operating in the crypto space, hopefully you are looking to build a real company and/or protocol. The focus should thus be on finding a lawyer qualified to help you build this endeavor and not necessarily on the securities/regulatory issues where you can rely on outside counsel. Ask candidates:
“How would you go about selecting outside counsel to handle our token sale / securities issues?”
5. Seek a lawyer with range and the ability to learn. Keeping in mind the foregoing basic requirements, this space is rapidly changing and thus the most important characteristic is the ability to quickly learn, and understand the opportunities created by, regulatory developments. Ask candidates:
If an issue comes to you that is outside of your background/experience, what process do you use to get up to speed quickly?”
6. Regulatory Relationships, Advocacy and Thought Leadership. Look for a lawyer with the interest and capability to be the face of the company with both regulators and the public. Having a visible lawyer can add great credibility with all stakeholders. Ask candidates:
“Tell us about a time when advocated for a legal or policy issue, either publicly or in front of a regulator.”
The questions have obvious answers, not so obvious answers or no answer at all. How they respond to the question and analyze all sides of the issues will shed light on how much experience, ability and interest they have in the space.
How should the role be structured?
The role should be structured to take into consideration the risk a lawyer in the crypto space undertakes while also aligning interests to the extent possible. Regulators have recently taken aim specifically at lawyers in the space, some of whom remain under investigation. For a lawyer, personally being the subject of an investigation or any regulatory action can be the end of a career. To help align incentives and reduce risk:
1. Bring a Lawyer in as a Founder. Just as software startups need a technical co-founder, crypto startups can benefit greatly from a legal co-founder. If a lawyer is brought in as a non-legal founder with corresponding equity and compensation, the lawyer will have their interests aligned with the founders as well as the benefit of their legal knowledge to assist in making business decisions.
2. No Dual Chief Compliance Officer Roles. A lawyer with a dual compliance role is a bad idea for a few reasons, including:
a. Compliance is a separate discipline from legal. Lawyers are good at dealing with strategic issues and cases of first impression whereas fundamentally the CCO is somebody who draws lines.
b. Great compliance people will study the art of the compliance. Compliance is an operational skill, running a scaled program that works organization wide.
c. Independence. There can be a healthy tension in the independence of the CCO role with the GC.
d. It threatens attorney-client privilege. Is it a legal (protected) or compliance (not-protected) communication? That question will come up with any litigation or regulatory review and it may be difficult to rely on attorney-client privilege.
e. It can lead to overly conservative legal advice. The Chief Compliance Officer role comes with additional personal liability, which will again increase the personal risk to the lawyer and thus create an incentive to provide overly conservative legal advice.
For earlier stage companies, a better solution may be to outsource your CCO role to a competent 3rd party provider.
3. Reports to the CEO. It is a huge red flag to many General Counsel candidates if the GC is to report to anyone other than the CEO. To high-caliber candidates, this signals a weak role and view of the General Counsel function.
4. Compensation. Be prepared to pay up for qualified top candidates. Given the risks and relatively low supply of qualified candidates, companies should be prepared to pay a premium and/or bring the lawyer in as a founder with corresponding equity.
How do I find these people?
Word of mouth with personal references remain the best option in sourcing legal candidates while established networks like TechGC and others can help amplify this search. Those seeking lawyers in the crypto space can post your job here for free or reach out to us directly to help find candidates.