The Breakdown

Explaining Southern California's economy

LegalZoom IPO: Be afraid, lawyers! Be very afraid!

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38298 full

Glendale's own LegalZoom filed for an IPO on Friday. Okay, so it's not quite Facebookian in value. Whereas Zuck & Co. are aiming to raise $5 or $10 billion, LegalZoom, which has been around since 1999 (making it about 3000 years old, in Internet years) wants to bring in only $120 million. But don't be fooled by that seemingly modest valuation for a company that's been around since the halcyon days of Web 1.0. LegalZoom could be poised to partake in one of the most significant disruptions American business has ever seen.

The legal professional is being totally re-arranged by the economic downturn. Law firms have imploded. Law school grads — who used to be able to bank on fat salaries in exchange for 100-hour work weeks at big firms, if they attended top programs (and they needed the big bucks to pay off their hulking loans) — are struggling to find jobs. Law is no longer the often-boring but generally reliably lucrative escape hatch it once was for decades of career-confused liberal arts majors. 

And LegalZoom is right there to capitalize on the shift. A shocking detail from the company's S-1 filing with the Securities and Exchange Commission: 20 percent of limited liability companies formed over the last decade in California "did so through LegalZoom," according to TechCrunch. California is obviously one of the key states in the U.S. for business formation. And one in five businesses is doing its LLC with LegalZoom?! What that says to me is that LegalZoom has tremendous potential to be the small-business legal-service provider of choice for basic processes that don't require an actual lawyer. And maybe, eventually, those that do (see law-school-mageddon, above).

This could be what LegalZoom's management is thinking, given that one of the potential risks the company listed in its filing is "our business model is evolving from a transaction model to a combined transaction and subscription model, and our existing and new customers may not become subscribers." In this case, by "risk," I mean "opportunity." Beyond satisfying its investors — who have put $100 million into the company, including a big raise of $66 million last July from Kleiner Perkins, one of the biggest name venture capital firms in Silicon Valley — LegalZoom is likely thinking about moving past one-shot deals with consumers toward long-terms legal-services subscriptions, eliminating the need for attorneys for basic (and possibly not-so-basic) legal work.

I have some experience with LegalZoom, having used the service to do a basic will. I also have some experience with filing legal documents the old-fashioned way, when I did a DBA back in 2004. The latter consumed days. LegalZoom helped me get the job done (albeit for a fairly simple document) on the former in about an hour.

There's no reason why the kind of service that LegalZoom is offering can't expand to fill the void that a changing economy is creating in the traditional legal sector, which in any case can't afford to employ lawyers to do what amounts to sub-paralegal work. 

One potential issue for LegalZoom: The more it penetrates the traditional legal market, the more it's going to run afoul of state laws restricting legal services to actual lawyers. The company has already settled a class-action lawsuit in Missouri, in which it was alleged LegalZoom misrepresented its capabilities. It's unclear whether the company did, or whether users misunderstood what they were paying for.

In any case, when you mess with lawyers, it's reasonable to expect to get sued. Early and often.

There's an old joke that asks, "What do you call 100 lawyers at the bottom of the ocean?" and answers "A good start." Lawyers have been with us in the U.S. literally since the beginning. They've been loved and loathed in seemingly equal measure. The President is one. But their centuries in the sun may be drawing to a close.

No date was set for the IPO. Expect it to come in about two or three months, depending on how the markets are doing. And note that Morgan Stanley, the bank that's become the underwriter of choice for tech IPOs (see: Facebook), is leading the offering.

Follow Matthew DeBord and the DeBord Report on Twitter.

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