3 hours Ago
Shakespeare famously said, “Let’s kill all the lawyers,” in his play, Henry VI. Well folks, if we did that, who do you think is going to paper your first venture capital series seed preferred stock priced round? And no, ChatGPT is not going to save you. Unfortunately, you are going to need your own legal eagle because the VC investor has his own legal eagle, and you don’t want to get pecked to death.
I recently sat down with my favorite corporate startup deal lawyer, and I asked him how much it typically costs to close that kind of financing. He gave me a number, I choked on my tuna sandwich, and let it suffice that the number had “high fives.” I asked him why.
Herewith some reasons. First time founders are unsophisticated. To save money, the founder picks a “business lawyer” who has never done a venture financing but is related to his ex-wife and assures our founder that this is a no brainer and he can do the job.
Then that lawyer wants to understand every term that he has never seen before and wants to argue about them to prove to his client that he is aggressively looking after his best interests. Note, he was the lawyer who negotiated the above-mentioned divorce. The investor also has a lawyer who has to impress his client.
So the two legal eagles start to peck. And our founder, who admittedly is brilliant at software or AI or medical devices, decides that he wants to go to law school on this deal and wants to understand, wants to learn, and that leads to potentially arguing about stuff that is either meaningless or so far in the future that his grandchildren will be in college. For example, “drag along rights.
” Of course there are issues that do matter. For example, board representation, voting rights or liquidation preferences, etc., but in the end, if your company drives meaningful revenue, those issues will be mostly irrelevant.
Eye on the prize, focus, show me the money. First Time Founder Financing Rule No. 1: Hire an expert who has done this multiple times.
Do not try to go to law school on this deal. In the investor/financing universe, there are a baseline set of “market terms,” and if both sides know them, it will make it easier to get the deal done. Rule No.
2: You can go to the mat on only a very few things — and only once. Remember well the face of the contestant on Shark Tank when Mr. Wonderful says, “I’m out.
You’re dead to me.” Rule No. 3.
If your lawyer is a jerk, do not be afraid to fire him/her. Remember, every time the two eagles “turn the documents,” you might as well take $100 bills and burn them, and the founder is the one paying the legal fees of both sides. Good news though, the VC pays for the closing dinner.
I confess that with my first deal 28 years ago, I knew nothing. But I was lucky. I had a solid law firm and a lawyer who frequently told me to shut up.
The VC round closed, and four years later, we sold it for a lot of money to another company, whose lawyer argued about stuff that didn’t matter. This is the “laughing all the way to the bank” rule. The financing world right now is a wasteland.
If you are fortunate enough to find investors, VC or angels, keep your eyes on the prize, not the fine print. Picking an attorney is not the luck of the draw, swipe left, swipe right. It matters.
Same rule applies to mentors/advisers. I have done this dance more than a dozen times. Remember, if your company ends up as banjo picks, it won’t really matter who had the first pick over the carcass.
A final note. I recently attended a pitch fest, one of those “tell me about your company in three minutes” events. Rather than say less, the founders simply spoke faster in an effort to cram more information into the same size bag.
The net effect was less understanding of the company. I offer to the incubator/startup world a study from Wharton’s Jonah Berger, “The Power of Speaking Slower.” Bottom line, listener engagement increases with fewer syllables per second.
Rule No. 788: Just kill some of them. Senturia is a serial entrepreneur who invests in startups.
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