The venture math behind $8B valuations and why it's a problem for legal software buyers
Huge valuations sound impressive. Here's the hidden math that makes you an unwitting investor in your vendor's risky bet.
Let’s start with some context: I’m the CEO of a rapidly growing legal tech company. I’ve raised venture capital. I am part of confidential founder groups where I regularly talk to other CEOs navigating the pressures, board conversations, and expectations that come with venture money. I also sell software to lawyers and in-house legal teams, so I see the downstream effects of those pressures.
What most software buyers–in and out of legal–rarely see is how much venture financing shapes the product you end up using.
Whether a company has raised $1M or $300M, and at what valuation, completely changes their incentives and timelines. Specifically, the enormous valuations and funding stacks of many legal tech companies (driven by venture capital structures called “liquidation preferences,” described below) create pressure for high-risk, hyper-growth strategies that often prioritize investor demands over product stability and customer needs, a set of incentives every lawyer or in-house team buying legal software needs to understand.
Venture capital firms expect 90% of their investments to be zeros, yet they all need to try to be a massive success. What that means is many companies burn insane amounts of capital to pursue the big exit, which is risky for a customer betting on them with mission-critical workflows.
So let’s talk about the math.
The Part No One Explains: Preference Stacks
When a startup raises venture capital, it does not just sell equity. It issues preferred stock (stock that sits above the common stock), which gets paid first in a sale (above founders and employees) and comes with special rights.
The most important right is liquidation preference, which means that in a sale, preferred investors get paid first.
The simple version is a 1x multiple. So, for example, if investors have put in $50M total, the first $50M of the exit proceeds goes to the investors before the common stock gets anything.
These stacks can also get complicated:
Each round stacks (Series A, then B, then C), each with its own preference.
Some deals are not at a 1x multiple. It’s common to see 2-3x multiples, meaning, for example, if investors put in $50M, they would get the first $150M of any sale.
Some are “participating,” which means that those investors get the money they put in (multiplied by the multiple) and a share of what’s left.
A couple quick examples show how this changes incentives for founders:
Example 1: “Huge exit,” mediocre outcome.
Company raises $200M across multiple rounds (assume clean 1x preferences).
Company sells for $400M.
Investors take the first $200M off the top. The remaining $200M is split by ownership. If investors own the majority (which is common in later stages), founders and employees can end up with far less than the headline implies. A publicly reported example outside of legal tech is WeWork, where the preference stack (including significant participating preferred stock for its largest investor) meant that even after a massive public bailout and subsequent restructure, founder and employee common stock was rendered virtually worthless to the common shareholders.
Example 2: The bar moves even higher.
Same $200M raised.
Investors have a 3x preference.
Now up to $600M can go to a subset of investors before anyone else gets any money. A $600M sale can leave employees/founders with nothing.
What Huge Valuations Do to Founder and Employee Incentives
Founders Need a Huge Exit to Make The Company Worth Their Time
A $200M raise might not be a huge deal when a company raises at a reasonable valuation, but when that valuation is 150x their revenue (with no profitability in sight), founders are no longer optimizing for building a durable, profitable company. Leadership is now moving toward bigger markets, faster growth, and riskier bets because the “middle” outcomes won’t be a success.
For legal software companies, that could mean they need to expand beyond legal, reframe as “enterprise AI,” chase broader use cases to sell bigger stories to investors, and drift their roadmap away from your workflows toward whatever market looks bigger next. This is why you often see VC-backed legal AI companies saying they serve “professional services”; many are already planning their escape from the more niche problems in legal services. The risk isn’t always that the company goes under; it’s that they pivot away from your use case and/or change pricing to help them clear the preference stack.
When Options Go Underwater: The Loss of Value and Incentive
There is also a second risk to big valuations and stacks: talent risk. When venture-backed companies accept huge valuations, they promise employees generous stock options, a large part of employee compensation. This only works if growth remains absolutely exceptional. If the company’s hyper-growth falters, the value of that stock plummets, and the key engineers and operators (the talent) leave for more stable or lucrative opportunities. The upside that attracted these strong employees disappears.
For customers, this impacts them behind the scenes: critical team members rotating out, engineering teams reshuffled, and institutional knowledge walking out the door.
At extreme valuations, and where companies are inefficiently spending way more money than the dollars they’re bringing in, the company is dependent on future rounds to justify the last one, like a refinancing treadmill.
Final Note on Valuations & Actual Examples
A reasonable valuation, even a very high one, can be justified when a company is on a clear and demonstrated trajectory to hit those targets; however, when a company accepts a valuation that is a massive reach, such as 150x current revenue for an $8B valuation, it completely warps the business’s incentives and creates dangerous pressure.
We saw this with Theranos raised hundreds of millions at a $9B valuation based largely on promises rather than working technology, and the gap between valuation and reality ultimately drove the fraud that followed. Another example is Quibi, which raised $1.75B and launched with enormous fanfare but shut down after just six months when it couldn’t justify its valuation. Arrival, the EV startup, went public via SPAC at a $13B valuation despite having no revenue and minimal working prototypes; it’s now essentially worthless after burning through billions trying to catch up to its own hype.
When the Math Breaks: Recent Cautionary Tales
Legal teams are not buying social apps. You’re buying software that should last for a long time, and will probably be very hard to extricate yourself from. As a result, when you choose a vendor, you are implicitly choosing its incentive structure and becoming an investor. A company that must become an $8B outcome and is optimized for investor liquidity has very different priorities than one that needs to build a trusted business in the legal field.
This is not theoretical. We have already seen this movie play out in legal tech.
Atrium
Atrium is the cleanest example of capital structure shaping outcomes. Founded by Justin Kan, Atrium raised $75 million to reinvent the law firm as a venture-backed, tech-enabled business. Even with that capital cushion, they couldn’t generate revenue that matched their costs, couldn’t cover the cost of the large team, and never found a solid product-market fit. The problem wasn’t intelligence or talent (I’ll leave that to insiders to debate)—it was incentives.
After a major pivot, it became clear there was no credible path to an outcome that could justify the capital raised. The company shut down.
Customers were left scrambling, employees were laid off, and the product didn’t matter anymore.
LawGeex
Atrium isn’t an isolated case. LawGeex raised ~$50 million to automate contract review with AI, famously claiming their system outperformed lawyers on NDA issue spotting (94% v. 85% accuracy in benchmark studies). However, they failed to reach durable product-market fit and had to add human labor to make the product work.
Revenue didn’t scale to match the company’s capital structure, and LawGeex eventually cut staff, split parts of its business into separate offerings, and was absorbed into another legal tech company.
Robin AI
Most recently, Robin AI raised over $70 million on the promise of AI-first contract intelligence. Growth didn’t match the capital deployed or investor growth expectations. By late 2025, the company failed to close a planned $50 million funding round, triggering layoffs and a fire sale. As another cautionary tale, the path to massive revenue growth and market dominance was far slower and more capital-intensive than initially projected, which led to this failure to meet aggressive growth milestones and, ultimately, closure.
But Wait: Sometimes Big Valuations Actually Make Sense
Not every large raise is a mistake. There are companies where high valuations are earned, not assumed and prayed for.
Clio is a great example.
Clio built dominant market share in a clearly defined category, generated substantial recurring revenue, and expanded methodically into adjacent products their customers already wanted. Their valuation is anchored in real adoption, real cash flow, and a credible path to becoming foundational infrastructure for a massive segment of the legal market.
In these cases, capital accelerates something that is already working. Companies that fit this pattern share the same traits as Clio:
Deep penetration in a core market
High retention over many years
Expansion that follows customers, not just hype
Valuations that track real revenue, not ambition alone (don’t get me started on “Contracted Annual Revenue”)
That’s very different from raising ahead of traction and hoping scale will appear later.
A Note on Companies Like Gavel
At Gavel, we’ve raised about $10 million at a valuation that’s anchored to revenue. For our customers, this means:
We don’t need to chase growth that breaks the product
We can price rationally
We can invest in depth, accuracy, and reliability
We can say no to markets and features that don’t serve legal teams well (the market we’ve been focused on for over 5 years)
Most importantly, it means we’re building a company designed to exist for the long term.
The Question to Ask Your Vendors
For a venture capital firm, 90% of investments not working out may be fine, but for a legal organization, that same portion of mission-critical software being shuttered or sold cheaply is problematic.
The next time you evaluate legal software, ask a simple question: What kind of outcome does this company need in order to succeed? If the answer requires an extraordinary event they’re not close to achieving, you’re taking on more risk than you think. If the answer is steady revenue, real customers, and a sustainable business, you are probably in safer hands.Thanks for reading Dorna Moini's Legal Tech Notes! Subscribe for free to receive new posts and support my work.
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About this newsletter
I’m Dorna Moini, a former Big Law attorney who practiced for nearly a decade, last at Sidley Austin. I started Gavel after building automation tools to support parts of my own practice, starting with a consumer app that helped domestic violence survivors navigate the legal system. That work showed me how much of legal work is rules-based and how much better it could be with the right technology.
Today, I’m the founder and CEO of Gavel, an AI and automation platform that law firms and in-house teams use to automate document drafting and contract review through our two products: Gavel Exec and Gavel Workflows.
In this newsletter, I share practical notes on legal tech and how lawyers can use automation and AI to build better, more scalable practices.
Key questions to ask legal tech vendors
In your next legal tech demo, ask the company what problem they are obsessed with, and what problems they’ve said no to. Focus is the best signal.
EvaluatingAI vendors? Check out part one and part two of my AI vendor security assessment. You can download the free checklist here.
What I’m reading
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