Nivi · June 12th, 2008
I learned a lot from a recent twitter by Andrew Chen:
“Other people teach you the rules of the game. Venture Hacks teaches you how to play it.”
First, I learned that lawyers are referees, not coaches.
Second, I learned that advisors are the coaches of the startup game.
Lawyers teach you the rules of the game. But they usually can’t teach you how to play it.
Lawyers say whether you can do something, within the confines of the law and your existing contracts. Lawyers will also write the contracts and do the filings. But they usually can’t tell you what to do—that’s what coaches do.
Here’s a classic startup mistake that illuminates the difference between a coach and a referee:
You’re negotiating an investment and you’ve agreed to a board with 2 investors, 2 common, and 1 independent.
You’re almost ready to sign the term sheet when your prospective investors say, “Sorry, we forgot, one of the common board seats needs to be the CEO.”
You’re thinking, “I’m the CEO and I was going to elect myself to the board anyway, so that’s fine.” Your lawyer agrees and says, “That’s standard.”
This is a mistake. If you hire a new CEO and he’s aligned with the investors, the investors will gain control of the board. Instead, you should create a new board seat for a new CEO.
A lawyer knows that you’re not breaking any laws or contracts if you give a common board seat to a new CEO. He also knows how to write the contract. But an advisor knows the possible outcomes of that decision.
Third, startups without advisors often assume their lawyers have good business advice. That’s a mistake. You need a coach, not a referee, to teach you how to play the game. And most referees aren’t good coaches (but some are).
Fourth, not every coach is a Phil Jackson. Not every coach has won 9 NBA titles as a coach. The effectiveness of coaches in the NBA varies widely. Why would the effectiveness of advisors be any different? Is your advisor a Phil Jackson?
Fifth, there’s more than one way to play the game. Phil Jackson doesn’t have a monopoly on coaching. And neither do we. Go find a coach who can teach you how to play the game. There’s only one Phil Jackson in the NBA because basketball is a zero-sum game. Fortunately, there’s more than one great startup advisor in the world—life is not a zero-sum game.
This is probably an under-appreciated point for new entrepreneurs, so I understand completely why you’re making it for your audience at Venture Hacks.
I want to point out, however, that more sophisticated (and wealthy) consumers of legal services often do receive valuable non-legal information and advice from their outside counsel. Specifically, experienced outside counsel may have a better sense of what “the market” for various qualitative terms in an agreement. Whereas even experienced entrepreneurs (or venture capitalists) may have negotiated dozens of deals, experienced outside counsel have assisted with negotiating hundreds or thousands. That source of information about the market is definitely part of what you’re paying for with the most popular and expensive outside lawyers.
Thanks for the thoughtful comment Michael. I agree that lawyers have information about market terms.
I’m not sure you need very high end lawyers to get it, just lawyers who do a lot of deals that are similar to yours.
I also find that many entrepreneurs just chase the vanilla terms that their lawyers suggest. That’s a mistake we try to get entrepreneurs to avoid.
I completely agree that price and value are not always correlated (if that’s what you mean by “high end” lawyers not being necessary).
And creativity is not a virtue in law school, so everybody should keep that in mind (not just entrepreneurs) in consuming legal services.
Any decent lawyer in this space would’ve spotted that CEO/board seat issue.
Nice article – timely reminder to all entrepreneurs that professionals, be they lawyers, accountants or others, are there to tell you what is doable, permissible and occasionally possible – but rarely will they necessarily tell you what is in your best interest or how to go about it. This is where a board of advisors or a mentor makes a lot of sense.
SKMurphy » Common Questions about Advisory Boards // Jul 17, 2008 at 12:00 am
[…] Lawyers are referees, not coaches […]
Acquisitions: Pulling Back The Covers – Part 2 | 500 Startups Blog // Oct 10, 2010 at 11:44 am
[…] I mentioned above the importance of assembling your team to help with negotiations. This basically boils down to lawyers and advisors. I first want to explain that lawyers and advisors are very different – you need to make sure you have both. To put it simply, lawyers are focused on minimizing risk. They will pore over the details of an agreement and make sure you aren’t exposing yourself to things that could come back to hurt you. They want to protect you. What lawyers generally won’t do is present you with creative ways to reach a better outcome. As an entrepreneur, you are not only interested in minimizing your risk, but also in maximizing the upside of the deal. This is where having experienced advisors is key. Hopefully your advisors have done a few deals in the past and have a few tricks up their sleeve that that can be used during negotiations. To give an example, one of our advisors was a very experienced tax accountant and figured out a way to structure the deal that helped us minimize the tax we would owe to the government. Venture Hacks explains this well in their article Lawyers are referees, not coaches. […]