Personal blog of Yzmir Ramirez

Justin Kan’s hybrid legal software and law firm startup Atrium is shutting down today after failing to figure out how to deliver better efficiency than a traditional law firm, the CEO tells TechCrunch exclusively. The startup has now laid off all its employees, which totaled just over 100. It will return some of its $75.5 million in funding to investors, including Series B lead Andreessen Horowitz. The separate Atrium law firm will continue to operate.

“I’m really grateful to the customers and the team members who came along with me and our investors. It’s unfortunate that this wasn’t the outcome that we wanted but we’re thankful to everyone that came with us on the journey,” said Kan. He’d previously founded Justin.tv, which pivoted to become Twitch and later sold to Amazon for $970 million. “We decided to call it and wind down the startup operations. There will be some capital returned to investors post wind-down,” Kan told me.

Atrium had attempted a pivot back in January, laying off its in-house lawyers to become a more pure software startup with better margins. Some of its lawyers formed a separate standalone legal firm and took on former Atrium clients. But Kan tells me that it was tough to regain momentum coming out of that change, which some Atrium customers tell me felt chaotic and left them unsure of their legal representation.

More layoffs quietly ensued as divisions connected to those lawyers were eliminated. But trying to build software for third-party lawyers, many of whom have entrenched processes and older leadership, proved difficult. The streamlined workflows may not have seemed worth the thrash of adopting new technology.

“If you look at our original business model with the verticalized law firm, a lot of these companies that have this kind of full stack model are not going to survive,” Kan explained. “A lot of these companies, Atrium included, did not figure out how to make a dent in operational efficiency.”

Disrupting law firms proves difficult

Founded in 2017, Atrium built software for startups to navigate fundraising, hiring, acquisition deals and collaboration with their legal team. Atrium also offered in-house lawyers that could provide counsel and best practices in these matters. The idea was that the collaboration software would make its lawyers more efficient than a traditional law firm so they could get work done faster, translating to savings for clients and Atrium.

Atrium’s software included Records, a Dropbox-esque system for keeping track of legal documents, and Hiring, which instantly generated employment offer letters based on details punched into a form while keeping track of signatures. The startup hoped it could prevent clients and lawyers from wasting time digging through email chains or missing a sign-off that could put them in legal jeopardy.

The company tried to generate client leads by hosting fundraising workshops for startups, starring Kan and his stories from growing Twitch. A charismatic leader with a near-billion-dollar exit under his belt, investors and founders alike were quick to buy into Kan’s vision and advice. Startups saw Atrium as an ally with industry expertise that could help them avoid dirty term sheets or botched hires.

But keeping a large squad of lawyers on staff proved costly. Atrium priced packages of its software and legal assistance under subscriptions, with momentous deals like acquisitions incurring add-on fees. The model relied less on milking clients with steep hourly rates measured down to six-minute increments like most law firms.

Yet eliminating the busywork for lawyers through its software didn’t materialize into bountiful profits. The pivot sought to create a professional services network where Atrium could route clients to attorneys. The layoffs had shaken faith in the startup as clients demanded stability, lest they be caught without counsel at a tough time.

Rather than trudge on, Kan decided to fold the company. The standalone Atrium law firm will continue to operate under partners Michel Narganes and Matthew Melville, but the startup developing legal software is done.

Atrium’s implosion could send ripples through the legal tech scene, and push other entrepreneurs to start with a more focused software-only approach.

Seventy-five-million-dollar-funded legal services startup Atrium doesn’t want to be the next company to implode as the tech industry tightens its belt and businesses chase margins instead of growth via unsustainable economics. That’s why Atrium is laying off most of its in-house lawyers.

Now, Atrium will focus on its software for startups navigating fundraising, hiring and collaborating with lawyers. Atrium plans to ramp up its startup advising services. And it’s also doubling down on its year-old network of professional service providers that help clients navigate day-to-day legal work. Atrium’s laid-off attorneys will be offered spots as preferred providers in that network if they start their own firm or join another.

“It’s a natural evolution for us to create a sustainable model,” Atrium co-founder and CEO Justin Kan tells TechCrunch. “We’ve made the tough decision to restructure the company to accommodate growth into new business services through our existing professional services network,” Kan wrote on Atrium’s blog. He wouldn’t give exact figures, but confirmed that more than 10 but less than 50 staffers are impacted by the change, with Atrium having a headcount of 150 as of June.

The change could make Atrium more efficient by keeping fewer expensive lawyers on staff. However, it could weaken its $500 per month Atrium membership that included some services from its in-house lawyers that might be more complicated for clients to get through its professional network. Atrium will also now have to prove the its client-lawyer collaboration software can survive in the market with firms paying for it rather than it being bundled with its in-house lawyers’ services.

“We’re making these changes to move Atrium to a sustainable model that provides high-quality services to our clients. We’re doing it proactively because we see the writing on the wall that it’s important to have a sustainable business,” Kan says. “That’s what we’re doing now. We don’t anticipate any disruption of services to clients. We’re still here.”

Justin Kan (Atrium) at TechCrunch Disrupt SF 2017

Founded in 2017, Atrium promised to merge software with human lawyers to provide quicker and cheaper legal services. Its technology can help automatically generate fundraising contracts, hiring offers and cap tables for startups while using machine learning to recommend procedures and clauses based on anonymized data from its clients. It also serves like a Dropbox for legal, organizing all of a startup’s documents to ensure everything’s properly signed and teams are working off the latest versions without digging through email.

The $500 per month Atrium membership offered this technology plus limited access to an in-house startup lawyer for consultation, plus access to guide books and events. Clients could pay extra if they needed special help such as with finalizing an acquisition deal, or access to its Fundraising Concierge service for aid with developing a pitch and lining up investor meetings.

Kan tells me Atrium still has some in-house lawyers on staff, which will help it honor all its existing membership contracts and power its new emphasis on advising services. He wouldn’t say if Atrium is paid any equity for advising, or just cash. The membership plan may change for future clients, so lawyer services are provided through its professional network instead.

“What we noticed was that Atrium has done a really good job of building a brand with startups. Often what they wanted from attorneys was…advice on ‘how to set my company up,’ ‘how to set my sales and marketing team up,’ ‘how to get great terms in my fundraising process,’ ” so Atrium is pursuing advising, Kan tells me. “As we sat down to look at what’s working and what’s not working, our focus has been to help founders with their super-hero story, connect them with the right providers and advisors, and then helping quarterback everything you need with our in-house specialists.”

LawSites first reported Saturday that Atrium was laying off in-house lawyers. A source tells TechCrunch that Atrium’s lawyers only found out a week ago about the changes, and they’ve been trying to pitch Atrium clients on working with them when they leave. One Atrium client said they weren’t surprised by the changes because they got so much legal advice for just $500 per month, which they suspected meant Atrium was losing money on the lawyers’ time as it was so much less expensive than competitors. They also said these cheap legal services rather than the software platform were the main draw of Atrium, and they’re unsure if the tech on its own is valuable enough.

One concern is Atrium might not learn as quickly about which services to translate into software if it doesn’t have as many lawyers in-house. But Kan believes third-party lawyers might be more clear and direct about what they need from legal technology. “I feel like having a true market for the software you’re building is better than having an internal market,” he says. “We get feedback from the outside firms we work with. I think in some ways that’s the most valuable feedback. I think there’s a lot of false signals that can happen when you’re the both the employer and the supplier.”

It was critical for Atrium to correct course before getting any bigger, given the fundraising problems hitting late-stage startups with poor economics in the wake of the WeWork debacle and SoftBank’s troubles. Atrium had raised a $10.5 million Series A in 2017 led by General Catalyst alongside Kleiner, Founders Fund, Initialized and Kindred Ventures. Then in September 2018, it scored a huge $65 million Series B led by Andreessen Horowitz.

Raising even bigger rounds might have been impossible if Atrium was offering consultations with lawyers at far below market rate. Now it might be in a better position to attract funding. But the question is whether clients will stick with Atrium if they get less access to a lawyer for the same price, and whether the collaboration platform is useful enough for outside law firms to pay for.

Kan had gone through tough pivots in the past. He had strapped a camera to his head to create content for his live-streaming startup Justin.tv, but wisely recentered on the 3% of users letting people watch them play video games. Justin.tv became Twitch and eventually sold to Amazon for $970 million. His on-demand personal assistant startup Exec had to switch to just cleaning in 2013 before shutting down due to rotten economics.

Rather than deny the inevitable and wait until the last minute, with Atrium Kan tried to make the hard decision early.

Law firms have little incentive to build or buy software that will save their lawyers time because they often bill clients by the hour. Tasks like tracking down legal documents, extracting key information and drawing up hiring offers or funding term sheets add up to make lawyers expensive, even if they’re constantly repeating mindless busy work.

That’s why legal startup Atrium is so exciting — even though it’s developing tech that might seem boring on the surface. After raising $75 million from Andreessen Horowitz and General Catalyst while growing to 400 clients, today Atrium is announcing its first customer-facing products.

Atrium Records creates a collaborative file locker for you and your lawyer so you always have access to the latest versions of corporate documents. Atrium Hiring automatically generates hiring offers and contracts from details you add to a form, and tracks everyone’s approvals and signatures.

Atrium Records

Rather than having to pay for these tools separately, they come as part of a subscription to a bundle of Atrium’s legal services, with special projects like counsel through an acquisition costing extra. This business model incentivizes Atrium to work as efficiently as possible instead of bilking hourly rates, and build tools to eliminate less-skilled work or assist with common corporate duties. That’s allowed it to speed up legal work on incorporations, financings, M&A and contract negotiations.

“One of the reasons we partnered with Andreessen Horowitz on the last round [a $65 million Series B] was we really align with the way they approach venture capital,” Atrium co-founder and CEO Justin Kan tells me. “Marc’s initial observation was . . .  let’s not just provide capital but also other services like a talent network. We have kind of done the same stuff. Not only are we helping people with the legal stuff they want to get done but with the other stuff surrounding it.”

Atrium CEO Justin Kan at TechCrunch Disrupt SF 2017

For example, Atrium’s Fundraising Concierge service provides assistance to startups for defining their narrative, setting up investor meetings and generating fair term sheets. Atrium has to date aided startups with raising more than $1 billion, from seed rounds of $200,000 to huge $50 million rounds

Developing drab but useful software for enterprises is a drastic shift for Kan. He pioneered life vlogging by strapping a camera to his head at his startup Justin.tv that eventually blossomed into Twitch and sold to Amazon for $2 billion. It’s been quite an adjustment for Kan going from making video-game-streaming consumer apps and angel investing to Atrium. “Two years. It has been an interesting and crazy ride. I wanted to get back to starting companies. That was the fastest learning I’d ever had. But I forgot learning means failing a lot,” he says with a wry smile.

Whatever tribulations they required seem worth it now that Atrium’s new products are ready. Atrium Records improves on the clumsy status quo where clients have to dig through emails from their lawyers hoping to find the most up-to-date versions of important corporate documents. If they can’t, they wait around after emailing their lawyer who has to hope they remember where they buried that term sheet or cap table in their firm’s file tree. This messy process can rack up billable hours, lead to data mismatches and let important signatures or approvals fall through the cracks.

Atrium Hiring

Kan says he’s seen some grisly situations. “You never signed your equity documents so you actually have no equity in this company. And now that there’s financing, there could be a taxable event. There’s often surprisingly serious problems that happen.” Atrium’s senior product manager Sahil Bhagat walks me through how Atrium can help clients avoid an issue like, “Maybe you hired 10 employees but didn’t update your cap table and then you’re hiring the 11th employee but you don’t have any equity to grant so you have to go through the hassle of increasing your options pool.”

Atrium Records acts like your searchable legal Dropbox. The startup works with your last law firm to ingest your documents around equity, taxes, employees and IP, and make sure they’re all up to date. Machine learning extracts critical data about financings and cap tables so that’s instantly available in the Atrium dashboard and you don’t have to dig into the original docs. Plus, you don’t have to pay for lawyers or paralegals to do that manually. And your lawyer can build a task list of documents for you to edit or sign so you always know what to do next, which is a relief when you’re wrangling approvals from all your existing investors.

Atrium Hiring operationalizes one of the biggest founder time-sucks. Instead of writing hiring contracts from scratch each time, you fill out a form and use menu selections to set the salary, share count, vesting schedule and offer expiration. Looking across its anonymized data set of contracts, Atrium can recommend the best clauses and most common set ups, like four-year vesting with one-year cliffs. You can see the status of the contracts every step of the way, from drafting and finalizing to getting employees to accept.

Kan tells me Atrium’s goal is to continue building on its archive of more than 100,000 legal documents to develop aggregated pools of data clients could opt into. If they’re willing to share their salary data, vendor contract pricing and more, they’ll get access to that of Atrium’s other clients. “You’ll be able to see if you’re on the high end of being paid by Salesforce for a contract,” Kan explains. That’s a much more data-driven approach than when most lawyers just think of the last few salaries they saw for that position and give you a rough average.

“Being able to tell what the market norms are is a powerful negotiating tool.” The startup has even been offering its tips for free as part of fundraising workshops it uses to attract clients. The challenge for the company will be ensuring efficiency doesn’t mean cutting corners.

Atrium has grown to 150 staffers split between legal practitioners and its product team in its two years since launch. Kan is trying to build a culture where everyone cooperates, unlike infamously cutthroat law firms where partners can compete for cases. He hopes that talent will stick with Atrium because it’s deleting the most tedious parts of their jobs. “No one wanted go to law school to review 1,000 hiring docs.”