I thought I’d take Younoodle’s Startup Predictor for a test drive and therefore I had it value this blog. Younoodle is an online entrepreneur community and its “Startup Predictor” estimates what a startup company’s value will be in 3 years. (Hey if blog networks are getting VC funding, this blog is practically a “startup.”)

I had to fill out a somewhat lengthy questionnaire to get the valuation estimate. The questions seemed to be heavily focused on the education and experience of the startup’s team. Of course, it’s proper to do that since the team implements the startup’s idea (and ideas alone are worthless). But I felt that questions about revenue, market segments, web traffic, etc., were either not asked or asked without detail.

In the end, the Startup Predictor estimated that this blog would be worth $2,340,000 in November 2009 (as I started this blog in November 2006). If that’s the case, I have a lot of work to do.

Think back to the last time you wrote a business plan for a startup. Do you recall your estimated expense for legal fees? $1,000? $10,000? $0?

How much to spend on legal fees is a common issue for startup companies with more than one correct answer. However, there are a few factors that suggest your startup should loosen up the purse strings.

Back in my college days (post-Prodigy, pre-Google), I wrote a business plan for a Web 0.01 startup company and allocated a meager $500. I had no idea what I’d be getting for that $500, but I figured my business plan software included the “legal fees” entry for a good reason and I did not want to leave it blank.

Fast forward to today. Going to law school, running my own startup company, and now representing dozens of other startup companies hasn’t led me to the exactly-how-much-to-pay-your-startup-lawyer magic number. Instead, I’ve learned to spot the issues that suggest a startup company should be spending more rather than less on legal fees:

(1) Number of Founders: If your startup is going to have more than one founder, this would indicate you’ll need to add to your legal fees total. Establishing and documenting the co-founder relationship is one of the most important aspects of a having a successful startup company. I wrote a previous blog article regarding startup co-founders.

(2) Raising Capital: If you plan to raise capital from any third party, whether from your mother or Oak Investment Partners, your must increase your legal fees. No exceptions.

(3) Public Company - No, I don’t mean a “publicly-traded” company. Rather, the more your startup will have a public presence, the more you will need to spend protecting your startup company from infringers (such as trademarks, etc.) and other 3rd parties.

Guy Kawasaki provides us with a real-world example of how much startup legal fees may run. Guy paid $4,824.13 in legal fees when he started Truemors. And his legal fees included the following:

-Trademarking Truemors
-Drafting a Terms of Use
-Discussion of copyright, liability, infringement, IP, and insurance issues
-Organizational resolutions and bylaws
-Stock purchase agreements

Guy’s post also has some wise advice about how much to spend on startup legal fees:

You could do less legal work and do it cheaper, but if you ever want to raise venture capital much less go public or get acquired for more than scrap value, this is not the place to save a few thousand bucks.

While Guy paid $4,824.13, I do not recommend using his number as a benchmark for your legal fees. There are too many variables to consider which are both internal and external to your startup company. Thus, I am hesitant to even provide a range of estimated startup fees. But if you consider the three issues (number of co-founders, raising capital, and public company), you will know whether paying your startup lawyer a larger amount is warranted.

A reader emailed me asking: How do I know I have found a great startup lawyer?

And judging by this blog’s most frequent search keywords, you may be asking yourself that question, too.Evaluating your startup lawyer (or any lawyer for that matter) can be a difficult task because a lawyer’s work product tends to be intangible. That is, if you hired someone to build you a bookcase you could test its craftmanship in a matter of seconds. Not the case for the startup lawyer that typically deals in Word and PDF. Therefore, it’s good idea to evaluate your startup lawyer in the following ways to determine if you have found a keeper.

Go Small. Lawyers from small law firms, particularly in the 1-5 lawyer range, tend to make the best startup lawyers. In addition to usually being more cost-effective, small firms tend to understand the mind of the entrepreneur since they are not that far removed from being a startup themselves. Most large firms will of course disagree and attempt to appeal to entrepreneurs by looking 21st century. Typical dog and pony show. Seek an attorney that will truly understand what you are going through as a startup. It’s tough to do that if your office is on the 25th floor and a car service takes you home from work.

Referrals to Other Professionals. A great startup lawyer will suggest you seek the advice of other professionals. Whether the referral is for an accountant, financial planner, banker or even a lawyer in a different specialty, a great lawyer will recognize your non-legal needs in addition your legal needs. Your lawyer should want to help you assemble a professional team as it increases the chances your startup company will succeed. A short-sighted lawyer will try to keep all of your capital earmarked for professional fees with him or her. But the lawyer with a long-term vision for your company would rather you spread your initial professional fees around (even if it means billing less initially) with the thought that your company will then be more likely to succeed.

Prioritizing Your Legal Needs. Finally, a great startup lawyer needs to prioritize your startup company’s legal needs, lay them all out on the table and say something like “these issues HAVE to be addressed now, these issues can wait for now but must be taken care of eventually.” Your startup company will have a number of legal needs and since startup funding tends to be scarce, handling all of them will likely not be feasible initially. A great startup lawyer will rank your legal needs, get the most important issues handled and the navigate you through the rest of the list as your capital allows.