Skimping on Legal

Startups try to do a lot of things while spending no money.  “Sweat equity” is not a strange thing.  I am empathetic to founders that want to keep burn rates down.  Sometimes I see founders take very low salaries compared to the rest of their team in order to lower burn rates.  After all, they are working for equity.  The big payoff.

Fred Wilson has a great post up today about why founders shouldn’t use SAFEs or Convertible Debt notes for initial financing rounds.  I don’t have anything to add to it but it made me think of this point on legal costs.

A lot of founders use notes/SAFEs to save on legal costs.  It’s cheaper to do a debt instrument and scrounge a funding round together rather than pricing it.  Personally, I’d rather see founders set a realistic valuation and then “lead” the round themselves. Too often, founders see the initial negotiation between investors and them as a competitive negotiation.  That turns into win/lose.  It’s important for both sides to remember they are becoming partners, not adversaries.

As a matter of fact, as a seed round funder of companies, I know that when the next round happens I will be on the opposite side of the table and seeing things from the founder’s perspective.  I don’t want dilution either.  However, I will trade dilution at a higher price and with a new investing partner that can help get the company to the promised land.

Lawyers are the butts of lots of jokes.  We all bitch about the cost of paying attorneys in seed rounds and Series A rounds.  It seems like an outsize cost to pay given the amount of money raised.  Sometimes they can be the bane of your existence because it seems they always bring up problems.  They can ask questions that make your stomach flutter.  They can create uncertainty and then capitalize on it.

However, a great attorney in your corner from the outset is a great strategic asset.  Drafting good documents in a time efficient manner for a decent price is a great service.  You might find that the counsel for the venture firm would be a good fit for your company once the deal is over.  It’s not unheard of for founders to discover counsel at the closing and then ask them to represent them in future rounds.

I have seen deals that were laden with unintentional minefields due to poorly phrased or designed documents.  That includes notes and SAFEs.  I have seen deals where an attorney is “learning” on your company.  The legal bill can get atrocious.

You need to find an attorney that has done venture deals before and not just one or two.  Act like a pro.  You are building a scalable startup company that will create value for customers.  This isn’t time for amateur hour.  Not every firm is well versed in venture law.  Private equity law is not necessarily the same as venture law.  There are nuances and it is important to know them.

Your goal is to have 1-3 turns of the documents.  This is a seed deal and the terms aren’t complex.  Pre-negotiate as much as you can before talking to your attorney with the investor.  There are plenty of places to learn what you need to know about venture terms on the internet for free.  Some top venture firms even have term sheets you can download for free with explanations of the terms.

Photo of the day; my dog hunting squirrels with a ball in his mouth.  That’s the road out in front of our cabin.  It became passable on May 20th this year.  Today I have to hop in the lake and fix the dock.  Ice out on our lake was May 15th.  Back in Chicago Jun 1.