Lawyers Posts

Go read Elad Gil’s You Should Read Every Word of Every Legal Doc.

Some docs are too long and boilerplate to read, so this is how I read financing docs:

  1. Read and understand everything in the term sheet. But when it comes to the closing docs, ask your lawyer to explain all the terms that he has seen written, or could have been written, more favorably to the startup. The closing docs are too long and boilerplate to read.
  2. Get a good lawyer because you probably don’t have one. You really won’t know what a good lawyer is until you’ve fired a few. I regularly run into lawyers at big firms who give bad advice alongside good advice. Don’t assume your lawyer is good just because he works at a big Silicon Valley law firm.
  3. You probably can’t tell the difference between good legal advice and bad legal advice. So you will need a great advisor like Elad.

You should subscribe to Elad’s blog. It is consistently great.

Scott Edward Walker’s sponsor post, Top 10 reasons why entrepreneurs hate lawyers, created a lot of awesome discussion about startup lawyers. See the comments to that post and the comments to Bram Cohen’s follow-up, “Lawyers can’t tell you you can’t do something”.

Scott’s post also generated a lot of positive comments from lawyers who blog, tweet, and comment. So let’s start a list of “social” startup lawyers: lawyers who blog, tweet, Facebook, etc.

Here’s a first draft, in alphabetical order, including a link to the comments they left on Bram and Scott’s posts. I’ve included info on how I know each one.

Matt Bartus (comment). Matt Mullenweg (Automattic’s founder) works with him and introduced us. Matt Bartus is sponsoring Venture Hacks in a few weeks.

George Grellas (comment). George has lots of good advice on his website and he’s active on Hacker News.

Rob Hyndman (Toronto) (comment). Rob has left a lot of comments on Venture Hacks if I remember correctly.

Antone Johnson (comment). I really liked his comment and Twitter bio.

Nathan Roach (IP focus) (comment). Former programmer — always a bonus.

Yokum Taku (comment). Yokum’s blog is one of the best startup law resources on the web.

Scott Edward Walker. The sponsor who started this all.

(Apologies if you left a comment and you’re not on this list — please add yourself in the comments here.)

Update: Giff Constable has his own list of Great startup lawyers.

Update 2: See the comments for more recommendations, including my legal friend Andre Gharakhanian.

Update 3: Mark Suster and True Ventures also have their own lists.

I’ve never met any of the lawyers on this list in person — except Yokum, who I’ve met once. That’s the way it usually goes with startup lawyers. You meet them once and then phone/email them for the next few years.

Obviously, a startup lawyer doesn’t need to be social to be good. Venture Hacks works with Jorge del Calvo and Tom Thomas. Neither one is social and they both rock.

Please add your favorite startup-focused lawyers in the comments. They can be social or not — but tell us why you like them, e.g. have you worked with them? And if you’re a startup lawyer, feel free to add yourself — especially if you’re social.

Yesterday, we published Top 10 reasons why entrepreneurs hate lawyers, a sponsor post by Scott Edward Walker. Scott’s a lawyer.

First, I thought other lawyers would hate it. I was totally wrong — we got a bunch of nice comments from lawyers like well-known Silicon Valley folks Yokum Taku, Josh King, and Matt Bartus.

Second, Bram Cohen, the inventor of BitTorrent, left an awesome comment that I’m reproducing here with added emphasis:

“Thanks for the link to my tweet, Scott.

“You cover the problems very well. My particular gripe in that tweet had to do with the practice of billing up several hours to answer a question asked in email, when all that was really wanted was the answer *if* the lawyer knew it off the top of their head. Next time I start a small company I’m going to have a policy that any hours billed need to be approved in advance, after estimates of how many they will be are given.

“You’re very right about the over-lawyering, and the NVCA docs in particular. There’s no reason in principle why one couldn’t take an NVCA document verbatim and simply fill in the blanks and do a round of funding without needing a lawyer at all. The contracts which people go into when they buy a candy bar are equivalently complex, but they’re implicit and contained in the uniform commercial code, and always going with the boilerplate works for everybody.

“Associates doing work is a real problem. I’ve found that insisting that all work be done by partners results in better work for less money in the end, even though the nominal hourly rate is much higher, because an associate will bill for several hours researching a subject which the partner already knows off the top of their head.

“Not only is the biggest problem with lawyers them being deal-killers, but being general activity killers. Too many inexperienced entrepeneurs get into ‘The lawyers say we can’t do X” disease. Lawyers can’t tell you you can’t do something. They can warn you about risks, and in extreme cases tell you that something is such a bad idea you’ll need to get someone other than them to do it (although I’ve never personally been told that) but the judgment call of whether the risk is worth it is the entrepreneur’s. Since lawyers are trained in risks and don’t generally even think about the business, they always advocate being overly conservative, sometimes to ridiculous excess.

All this sounds much more negative on lawyers than I generally feel. I view lawyers as performing a necessary function, but their costs can easily skyrocket and need to be contained, and their advice needs to be taken with a very large grain of salt. I don’t have the deep distrust for them that I have of, say, sysadmins and HR directors, who who are entrusted with running the core systems for a company and can easily get away with all kinds of stuff if they’re of dubious ethics.”

Bram, if you’re reading this, can you share more lawyer hacks and maybe tell us about your experiences with sysadmins and HR directors?

Thanks to Walker Corporate Law Group, a boutique law firm specializing in the representation of entrepreneurs, for supporting Venture Hacks this month. This post is by Scott Edward Walker, the firm’s founder and CEO. If you like it, check out Scott’s blog and tweets @ScottEdWalker. He’s also writing a new series on VentureBeat: Ask the attorney. – Nivi

Last week I offered 5 New Year’s resolutions for closing deals in 2010. This week, I thought I’d have a little fun and address the issue of entrepreneurs’ frustration with lawyers. A recent tweet from Bram Cohen, the inventor of BitTorrent, captures this frustration well: “Lawyers are like phone companies. Their bread and butter is in tricking you into racking up minutes.”

There’s a time in just about every entrepreneur’s career when he or she has wanted, in the words of Shakespeare, to “kill all the lawyers”. In the spirit of David Letterman, here are my Top 10 reasons entrepreneurs hate lawyers (I should point out that “hate” is too strong a word to describe the feelings of most entrepreneurs, but it makes for a catchier title than “dislike” or “complain about”). Click here for a brief video version of this post.

#10 – “Because they don’t communicate clearly or concisely”

Lawyers love speaking legalese and hearing themselves talk. I learned this first-hand as a corporate associate for nearly eight years at two large New York City firms. The tax lawyers, the employee benefits lawyers, the antitrust lawyers and the rest all spoke their own language. As a corporate associate in charge of quarterbacking transactions, I dealt with the various legal specialists and had to learn their mumbo jumbo. At times, I was as frustrated as the clients.

In the book Garner on Language and Writing, Former U.S. Solicitor General Theodore Olsen wrote,Legalese is jargon. All professions have it. All professions use it as a substitute for thinking, and they all use it in a way that makes them appear to be superior. Actually, they appear to be buffoons for using it. The legal profession may be the worst of all professions in using jargon. It’s not necessary to communicate that way. You’re really not communicating, and you’re not really thinking.”

#9 – “Because they don’t keep me informed”

Lawyers often keep their clients in the dark. The real estate lawyer I hired to handle the sale of a property came highly recommended and seemed like a good guy. But I never knew what was happening throughout the process. I showed up to the scheduled closing only to learn it was postponed because of some wrinkles, including the buyer’s financing.

Tom Kane, a legal consultant, notes: “[A] failure to communicate often (as in constantly, frequently, persistently, regularly…) is not only foolish from a professional standpoint (as in discipline by the bar, keeping professional insurance premiums reasonable, and so forth), BUT it is just dumb marketing. One could even say it is marketing malpractice.”

#8 – “Because they are constantly over-lawyering”

Corporate lawyers often have a one-size-fits-all approach to deals. I recently represented a software company in a relatively small business sale (about $10 million). The buyer was represented by a large law firm that sent an acquisition agreement with three pages of environmental representations. When I explained that none of the environmental reps (or indemnities) was applicable to the target because it was a software company with one office lease, the corporate counsel got on a soapbox about his client “not assuming any environmental risks.” He even patched in the firm’s environmental lawyer to support his argument.

As John Derrick, a California appeals specialist, points out in his book Boo to Billable Hours, “Just as the cost-plus contractor has no financial incentive to keep the price down once hired for the job, so the lawyer who charges by the hour has little incentive — at least in the short term — to keep down the hours billed. To the contrary, the lawyer’s incentive is to bill as much as possible. The result can be unnecessary lawyering.”

#7 – “Because they have poor listening skills”

While lawyers love hearing themselves talk, they are often not very good at listening. Entrepreneurs want their lawyers to listen carefully to their concerns and address them appropriately; and they don’t want to be interrupted. I feel the same way, particularly when I am negotiating a transaction and trying to close a deal. I have sat in too many conference rooms negotiating with other lawyers as they played with their Blackberries and answered calls on their cell phones. This is not only rude, but it’s also bad lawyering.

From the Wabet Blog: “While great corporate lawyers have several different attributes, one stands apart from the rest: being an exceptional listener. First of all, it’s essential that the corporate lawyer is always ready and able to listen to the client’s description of [his or her] goals and needs. This sounds trite, but involves a set of skills that is more than simply hearing the words spoken or reading the words on the written page. The exceptional corporate lawyer looks beyond the words to delve into the facts, circumstances and other aspects that define the situation… Some of the skill is derived from training, but to a large extent the exceptional corporate lawyer applies his or her experience and the wisdom derived from that experience.”

#6 – “Because inexperienced lawyers are doing most of the work”

This is the dirty little secret at most law firms, particularly large ones. It even has a name: “leverage”. Law firms try to create the highest possible ratio of associates to partners. The higher the ratio, the more money the partners make. For most entrepreneurs, this generally means paying for the training of young associates.

I discuss this issue in my blog post Behind the Big Law-Firm Curtain: The Good, The Bad, The Ugly, “The reality is that the smaller the client — the smaller the transaction — the further down the ladder the work gets pushed at the big law firms. That’s the way these firms work. The entrepreneur may meet the senior partner at the first meeting for his $15 million acquisition or $3 million financing, but that partner then goes back to his office, calls the assigning partner and gets some young associate to start cranking out the work.”

#5 – “Because they spend too much time on insignificant issues”

Lawyers are notorious for failing to prioritize issues. This is especially true in small transactions. Since I moved to Los Angeles from New York City in 2005, I have handled predominately middle-market M&A transactions, financings and restructurings, a departure from the billion-dollar deals I handled in New York. I expected lawyers on these transactions to produce documents relatively quickly and focus on the key issues of a deal, particularly in venture capital transactions that benefit from standardized documents from the National Venture Capital Association. Instead, I found much of what I found in New York: lawyers spending needless time fighting over insignificant issues.

Foundry Group co-founder and managing director Jason Mendelson recently asked, “Why can’t lawyers know when to leave well enough alone and not feel like every piece of paper needs a mark up? Especially given how expensive lawyers are these days, why on earth would the culture of ‘must mark up documents to show value’ persist? (Answer: lawyers make more money). Especially in the world of venture financing, this is very frustrating.”

#4 – “Because they don’t genuinely care about me or my matter”

Too few lawyers are passionate about the practice of law. Before launching my own firm, I worked alongside many big-firm lawyers who didn’t seem to enjoy what they were doing. This translates to indifference toward clients.

This quote from Zappos CEO Tony Hsieh in a recent New York Times interview struck a chord with me: “I just didn’t look forward to going to the office. The passion and excitement were no longer there. That’s kind of a weird feeling for me because this was a company I co-founded, and if I was feeling that way, how must the other employees feel? That’s actually why we ended up selling the company.”

That’s how I felt at the law firms where I worked. There were a number of passionate superstars at each of my previous firms. But many others were burned out and just going through the motions. “Just another fuck’n deal,” one of my former colleagues once complained to me. That’s why I launched my own firm: to create a team of passionate, hard-working corporate lawyers who love what they do and love helping entrepreneurs.

#3 – “Because their fees are through the roof”

As I discuss in the introductory video on the home page of our website, the traditional law firm business model is broken. Legal fees have sky-rocketed over the past decade, with lawyers at some national firms billing more than $1,000 per hour and lawyers at smaller, so-called “regional” firms, billing more than $600 per hour (see “Law Firm Fees Defy Gravity, Annual Survey Shows”). The number one thing driving these outrageous rates: overhead. Traditional law firms simply pass huge overhead costs onto their clients — expensive office space with lavish artwork and dramatic views; large support staffs complete with librarians, and receptionists; and, of course, high-paid associates.

As a result of the recession and this broken business model, large law firms have recently shed associates in large numbers. LawShucks reports, “2009 will go down as the worst year ever for law-firm layoffs. More people were laid off by more firms than had been reported for all previous years combined.” But as Dan Slater argues in his recent New York Times DealBook post, Another View: In Praise of Law Firm Layoffs, “These layoffs — which in many cases have been paired with salary freezes or cuts and significant reductions in law school recruiting –­ are the best thing to happen to the legal industry in years. Call it a blessing amid recession. Start with the benefit to cost-conscious corporate counsel, who for too long have been bilked by a law firm compensation model that leads lawyers to prioritize their ‘hourly quotas,’ which determine year-end bonuses, over quality service.”

#2 – “Because they are unresponsive”

We’re all busy, but that’s not a viable excuse for failing to promptly return a client’s phone call or email. Clients may have differing definitions of “promptly,” but one business day is a good starting point. I experienced unresponsive lawyers as a client in personal matters, and I experience it as a corporate lawyer trying to close deals on behalf of my clients. Entrepreneurs crave immediacy (and so do I).

A recent deal I was on ran days late, requiring an all-hands conference call to finalize a few key issues in the acquisition agreement. I distributed an updated version the same day with instructions to the lawyer on the other side to call me for an update before he left for the weekend. The weekend passed. I heard back from the lawyer on Monday afternoon, over email — and he had sent a new blacklined version with all new issues raised.

#1 – “Because they are deal-killers”

Lawyers are often viewed as deal-killers because of their failure to set a positive tone and their annoying habit of raising all sorts of reasons why a particular deal won’t close or why a particular idea won’t work. One of the better lawyers I worked with at a firm often said: “Good lawyers are able to identify significant potential legal problems; great lawyers provide solutions to those problems.”

As James Freund, a professor and retired partner at Skadden Arps in New York, points out, “In a transactional practice, nothing comes easy. There are invariably two opposing points of view on significant issues, and the parties will even clash… over a circumstance that may never come to pass. Every disputed issue has to be resolved in order for the deal to take place. And the business lawyers bear the primary responsibility for getting it done. Viewed in its broader context, this activity falls under the rubric of problem solving. Unless you’re a problem solver, you’re unlikely to be an effective business lawyer. And the problems that stand in your way aren’t limited to transactional matters… they can involve dealings with regulatory agencies, tax planning, strategizing about how to protect intellectual property, and on and on.”


While much of this list includes criticisms of my industry, I hope it helps initiate dialogue among entrepreneurs and the lawyers who represent them, to improve the value of the services we offer. And, please remember, I put this list together in the spirit of having a little fun. What experiences have you had with lawyers? Feel free to share in the comments section.

If you like this post, check out Scott’s blog and tweets @ScottEdWalker. He’s also writing a new series on VentureBeat: Ask the attorney. If you want an intro to Scott, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

Thanks to Walker Corporate Law Group, a boutique law firm specializing in the representation of entrepreneurs, for supporting Venture Hacks this month. This post is by Scott Edward Walker, the firm’s founder and CEO. If you like it, check out Scott’s blog and tweets @ScottEdWalker. – Nivi

It’s a new year — which means it’s time to make resolutions. Rather than write about my resolutions, I decided to put on my lawyer hat and advise entrepreneurs on what I think their New Year’s resolutions should be. During my 15-year career as a corporate lawyer (including nearly eight years at two major law firms in New York City), I have seen entrepreneurs make certain fundamental mistakes over and over again. So what better way to welcome in the new decade than to recommend the following resolutions to entrepreneurs…

Resolution 1: “I will create a competitive environment when I’m doing deals”

There is nothing that will give an entrepreneur more leverage in a negotiation than a competitive environment (or the perception of one). Every investment banker worth his salt understands this simple proposition. Not only does competition validate a firm’s interest, but also it appeals to the human nature of the individuals involved. Competitors can be played off each other and, as a result, the entrepreneur will be able to strike the best possible deal.

I learned this important lesson as a young corporate associate in New York City. As I discuss in my video post, Lessons Learned in the Trenches of Two Big NYC Law Firms, I recall having two M&A transactions on my plate: one was a divestiture — i.e., the sale of a division of a multinational corporation being auctioned by an investment bank; and the other was the sale of a private company to a competitor (with no i-bankers involved). In both deals, my firm was representing the sellers but, as we worked our way through the negotiation process of each deal, we ended-up with two completely different acquisition agreements with respect to the material terms.

In the auctioned deal, because the i-banker was able to play the prospective buyers off each other and create a competitive environment, the final agreement was extremely seller friendly and included broad materiality qualifications, a huge basket/deductible and a cap on seller’s liability of 10% of the purchase price. In the private-company transaction, however, there was only one prospective buyer — and the buyer’s principals knew that the seller was anxious to sell and thus were playing hardball. The deal terms ended-up being extremely buyer-friendly and included a large portion of the purchase price being escrowed and a cap on the seller’s liability equal to 100% of the purchase price.

The lesson learned is that you must create a competitive environment (or the perception of one) in order to have strong negotiating leverage. There is, however, one important caveat that entrepreneurs should keep in mind: this game must be played carefully and is better handled by someone with experience. The last thing an entrepreneur wants is to end up with is no deal at all.

Resolution 2: “I will leave my heart at home”

You have to think with your head, not with your heart — particularly when you’re doing deals. The best deal guys are masters at taking their emotions out of transactions and being extremely disciplined. They will just walk from a deal if they get out of their comfort zone (e.g., with respect to the price, risk profile, etc.), regardless of how much time and money they have spent.

On the other hand, most entrepreneurs become emotionally wedded to a particular transaction and are unable to maintain their objectivity as they move further along the deal process. They get all excited as soon as someone waves some money at them and allow themselves to get drawn into the money guy’s web. It is critical that entrepreneurs understand this dynamic. Entrepreneurs will generally be negotiating with guys on the other side of the table who are far more deal savvy than they are – venture capitalists, private equity guys, etc. – guys who are masters at playing on their emotions.

This is why it is so important for entrepreneurs to establish a game plan (i.e., dealbreakers) before the negotiating process begins and to have the discipline to stick to the plan and be willing to walk, if necessary. If an entrepreneur is seeking venture capital financing, he should sit down with his transaction team before reaching out to the VC’s to establish his dealbreakers with respect to key terms, such as valuation, the liquidation preference, board composition, etc. The same approach should be followed if he’s interested in selling his company: What’s the lowest purchase price you’ll accept? What’s the highest cap on liability you’ll agree to? Will you agree to escrow part of the purchase price? If so, how much and for how long? Once you establish the dealbreakers early on, you can take your heart out of the equation and think with your head.

Resolution 3: “I will work my balls off”

This is the advice a senior partner gave me when I was a young corporate associate at a major New York City law firm: “If you want to be a great lawyer, you have to work your balls off and make practicing the law the number one priority in your life.” He explained that this means everything else in your life has to be pushed aside, and you need to “work, work, work.” And when you’re not working, he added, you need to be reading treatises and articles discussing the deals you’re working on to get a deeper understanding of the significant issues. When I explained to him that, after three months, I had been working nearly every weekend and that my girlfriend was ready to leave me, he told me that I need to get a new girlfriend.

I received similar advice from Harry Hopman, my old tennis coach (and the winningest coach in Davis Cup history), when I was playing tennis in the minor leagues after college. He preached to me that: “It all comes down to one word — desire. How badly do you want it? How much are you willing to sacrifice?” And he was right. When I was traveling and playing tournaments in Europe and South America, I noticed that the best tennis players were generally the hardest working; the qualifiers were the ones going out drinking every night, not the top seeds. Sure there were exceptions — like John McEnroe — but the exceptions were rare.

I have seen this same pattern during my legal career: the most successful clients tend to be the hardest working. The private equity guys and hedge fund guys I represented in New York City were animals; working around the clock and cranking out deal after deal. I attribute a lot of their success to just plain hard work. In 2005, I moved out here to California to help entrepreneurs, and it’s been a mixed bag in terms of the work habits that I’ve seen. Some of my clients are intense and put in the long hours; others, however, are just dreamers — and they are the ones who struggle. In short, there are no shortcuts to success.

Resolution 4: “I will not let my investors screw me”

Here’s the advice I give all my clients to avoid getting screwed by their investors: do your due diligence prior to accepting any money. The number one mistake I have seen entrepreneurs make in any deal is the failure to investigate the guys on the other side of the table. Remember, you will, in effect, be married to your investors for a number of years. Accordingly, entrepreneurs must do what any bride or groom does prior to tying the knot — date for a while and, of course, meet the family.

What does this mean in practical terms? It means surfing the web and learning everything you can about the particular firm making the investment and, more importantly, the particular individuals with whom you are dealing (and who, presumably, will be sitting on your board for a number of years); it means breaking bread and having a couple of beers with the potential investors; and it means getting references and talking to other entrepreneurs and founders who have done deals with them. Issues to address include: How have they treated their other portfolio companies? Are they good guys or jerks? Can they be counted-on and trusted? Do they share your vision for the venture? Will they add significant value (e.g., through contacts, domain expertise, etc.)?

There is an outstanding video discussion on between Brandon Watson, a smart entrepreneur (currently at Microsoft), and Andrew Warner, the founder of Mixergy, as to what could happen if you don’t adequately diligence your investors. Brandon is extremely candid and discusses how he got “bullied” by his board. Moreover, he expressly notes in the comments to that post that, “the diligence factor was that I knew them, but had never taken money from them. It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.”

Resolution 5: “I will retain a strong, experienced lawyer to watch my back”

This is obviously a bit self-serving, but every entrepreneur needs a strong, experienced lawyer to watch his back. There is just too much at stake for entrepreneurs to be (1) using sites like LegalZoom, (2) pulling forms off the web and trying to play lawyer, or (3) retaining the cheapest lawyer to save money. And as the Madoff affair and other recent high-profile cases demonstrate, there are a lot of unscrupulous characters out there trying to take advantage of unsophisticated entrepreneurs.

There are also more subtle potential problems entrepreneurs need to be protected from, including the inherent conflict of interest that certain service providers have. For example, entrepreneurs need to be careful with investment bankers, who generally only get paid if a particular deal closes. Indeed, a middle-market i-banker’s entire year can be made or broken based on whether or not he can close one or two deals.

Unfortunately, I experienced this issue first-hand shortly after moving to California when I got pulled onto an M&A deal in which an i-banker stuck his finger in my chest and warned, “We’re going to get this deal done despite you fucking lawyers.” He then later complained to the managing partner (who had the client relationship) that I was blowing up the deal because I had retained special environmental counsel from my old NYC law firm and we were pushing too hard on the environmental indemnity. Good work by the i-banker (and cheers to my former managing partner) for getting the deal closed by watering down the environmental indemnity: less than six months later our client’s company was indicted for environmental problems that it inherited as part of the acquisition.

The bottom line is that a strong, experienced corporate lawyer will sober the entrepreneur and lay out all of the significant legal risks in a particular transaction; he will then push hard to negotiate reasonable protections. If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections become a kind of insurance policy to the entrepreneur.

If you like this post, check out Scott’s blog and tweets @ScottEdWalker. If you want an intro to Scott, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. And if you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Thanks. – Nivi

In Part 1, I discussed a few of the term sheet clauses that entrepreneurs should absolutely avoid; the wrong tradeoffs which later expose them to really “losing” their company. There are rational explanations for all of these, but, as we know, hell is paved with good intentions. Here are some more pathways to hell…

“Thank You and Good Luck” for options: Limited exercise period

I am going to get some of my colleagues mad at me here. I see many stock options plans where, when employees leave the company, they have a short time window (usually 3 months) to exercise the options they have vested. This means they have to pay the strike price that the options were issued at and acquire the shares (strike price could be $3 for shares valued at $4 at the last round).

That forces startup employees to fork out cash and often crystallizes tax liabilities. It feels harsh to me. I think options should be exercisable over long periods of time, so people who have contributed to the wealth creation process can exercise when the value is realized (i.e. the company is sold) and it becomes a cash-less exercise for them.

Things I cannot get too excited about

Multiple liquidation preferences: This means investors get a multiple of their money back before you see anything. I don’t like these conceptually, they feel very un-venture to me, but they are only part of the deal. If you push super hard for a $100M valuation but have to accept multiple liquidation preferences as a trade-off, it’s your call. If the company goes public (at which point preferred shares convert into ordinary shares and the liquidation preferences disappear), you win. If the liquidation preferences are negotiated away in a subsequent round of financing, you win. Personally, I have a strong preference for simple terms at the right price from the outset.

Cumulative dividends: Sometimes an 8% dividend is slapped on, and it accrues over time when it isn’t paid. Again, this is not appropriate for most venture deals, but it may be part of an acceptable trade-off.

The trap of complexity

More than anything else, I find the real danger is complexity. When you need 3 full days of modeling to come to grips with a cap table, or when no-one can agree anymore on how clauses should be applied, you are in trouble. You will spend more time discussing internally how clauses should be applied than focusing on that critical acquisition you should be closing. I have seen cases where you needed robust macros to model outcomes. How about adding an exit-value-dependent management carve-out to a participating liquidation preference reverting linearly above 3X return on top of a French legal requirement that the first 10% gets distributed to all shareholders equally ? I have modeled this and it’s simply not worth it.

Value is not created by arcane legal language but by nailing business execution and growth. Keep it simple and keep yourself focused on the right elements.

Get good advice (duh!)

I was at Seedcamp on the VC panel with Fred Wilson and a few others recently and there was a lot of talk about terms and how not to get screwed (evil evil VCs…). I will repeat the advice I gave then: you want to protect yourself adequately, get a good lawyer. You will not out-compete us on terms negotiation. I use Tina Baker at Brown Rudnick in the UK and Karen Noel / Olivier Edwards at Morgan Lewis in Paris; they are great, go talk to them.

Having said that, it is completely your responsibility to understand what you are signing, and it is up to you to push back. Read the documents, ask questions about everything you do not understand. Ask your lawyer: where does this document create risk for me, both on my income stream and my ownership. How does this go wrong and how do I protect against it? This is advice you are seeking, not an outsourcing service.

And remember, there is no such thing as standard terms. May the force be with you.

If you like this post, check out Fred’s blog and his tweets @fdestin. If you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

andrew.jpgI 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.

Here are the latest great comments from our readers—please keep ’em coming!

rob_serious.pngRob Lord, founder of Songbird (Sequoia Capital), has some ideas for VC Wear t-shirts:

“Mo’ money, mo’ board seats.
409a a-okay!
“Some of my best friends are EIRs.
Venture debt is a non-starter.”

829918_a630614298.jpgJonathan Boutelle, founder of SlideShare, suggests using SlideShare to share decks privately:

“One safe way to share a PowerPoint deck with potential investors: upload it to SlideShare as private. Share it only with the investor. After 48 hours (or whenever they’ve had time to check out the presentation) simply remove it from slideshare.

“You could also share via a “secret” URL: but that URL could potentially be forwarded to other parties so it’s not a good way to share files with people you don’t trust (which seems to be the challenge we’re speaking of here). Still, you could take the file down after 48 hours, and this approach wouldn’t require the other party to have a login on slideshare. So it might be the more practical option.”

headshot_nabeel_hyatt.jpg Nabeel Hyatt, founder of Conduit Labs (Charles River Ventures), says you shouldn’t send your deck to investors:

“Not worth it. Not because your deck has some amazing information, it probably is pretty high level and isn’t as unique as you wish it was, but because it kills the point of the presentation. What if Steve Jobs posted his Keynote presentation the day before Macworld and then gave his presentation the next day — how much harder would it be for him to get any sense of drama, intrigue, and frankly keep people awake?

“You should send them *something* to entice their interest, but whatever it is, expect it to be widely circulated, and think of it as just a teaser to get the meeting. You should be the main event, not your PDF.”

ted_rheingold.jpg Ted Rheingold, founder of Dogster (Michael Parekh), has some ideas for protecting your deck:

“Don’t forget to convert it to PDF or another read-only format to avoid any funny stuff once it has left your hands.

“And make sure the date is the day or month you sent it, as it then stands as a point-in-time snapshot which is likely out-of-date by the next quarter (in case the slides end up floating around inboxes month later)

“I like the idea of posting the recipients name on each page so it’s clear who leaked it if they do want to pass along.

“I also thinking striping out any slides you think reveal too much is a good compromise. (Ask a trusted person to be the judge of what is too revealing, company founders tend to over value their own IP)”

wsgrwebpicthumbnail.jpgYokum Taku, a partner at Wilson Sonsini, disagrees with us on capping legal fees:

“The statement “Most caps include the fees for both sides” is not accurate. Term sheets typically only say that the company will pay reasonable legal fees of investors’ counsel, capped at $X. (I also disagree with $10K – $20K as a reasonable cap to propose with straight face for investor counsel.) Of course, you can try to discuss a fee cap with company counsel, but almost all competent counsel will not agree to a cap. However, most experienced counsel can provide estimates based on actual data from previous similar transactions. Companies often have neglected corporate cleanup that needs to be fixed in connection with a financing (similar to not going to the dentist for years and paying the price later). In addition, there are always things that occur in financings that are difficult to predict (such as arguments among founders). Finally, capping company counsel fees is a disincentive to provide services after the cap is exceeded.”

dsc_0001.JPG Farbood Nivi, founder of Grockit (Benchmark Capital), thinks raising a good chunk of money is not a bad thing:

“There is an argument that says too much money can cause one to take the foot off the gas.

“I can’t say it’s a false statement. I can say it doesn’t make sense to me or apply in Grockit’s situation. Raising the Series A we did, as opposed to a few hundred K seed round, has given us an engine with a lot more horsepower. That knowledge, if anything, should keep your foot feeling like lead. That said, keep in mind, a more powerful car requires more adept steering, braking and maintenance.

“Money well spent buys time (far more precious than money), quality (translate: scalability and user satisfaction), people (translate: your company), access, resources. Do you need any of these?

“Money is to a business what oxygen is to a human…

“All founders are desperate. The question is what for.

“I would rather be able to pursue my desperate need to create the ass-kickinest app I can over my desperate need to generate revenue for it.

“Money allows you to reduce revenue based desperation and replace it with product building desperation.”

Like we says, keep the comments coming—we’ll highlight the best ones in the next ‘comment’ post.

Summary: When lawyers defer their legal fees, they expect equity for the risk of not getting paid. If their risk is low or they’re not deferring fees, you can say no. In any case, offer them the right to invest $25K-$50K in your financing instead of giving them free equity.

A reader asks:

“I wonder if I could pester you briefly for lawyer advice. We are talking to a law firm and I’ve got their standard letter of engagement which asks for the right to purchase 1% of common stock at the same price as founders. Their other terms seem reasonable but this term seems pretty tough. What do you think?”

This is a common ‘ask’ by lawyers.

It’s also an example of a negotiation axiom: you get what you ask for. Particularly when one side is relatively clueless about industry norms, the other side’s strategy is to ask and expect their clueless opponent to say yes.


Lawyers want equity for deferring their legal fees.

If your lawyers are not deferring their legal fees, you should just say no. You’re already paying them for their services, right?

If your lawyers are deferring their legal fees, they can ask for whatever they like: equity, backrubs, your car, whatever. They want compensation for the risk of never getting paid. That’s fair.

But if your financing is imminent or nearly certain, the risk of not getting paid is low and you can still say no. Or give them the minimum equity you would give an advisor: roughly .1% vesting monthly over 1-2 years with no cliff.

Equity doesn’t incent lawyers to work on your case.

Most law firms spread the equity to (1) just the partners or (2) across the entire firm. In either case, the partner on your case receives nearly zero equity and the associate who does all the work receives even less.

Unless you hire a one-man law firm, equity doesn’t incent lawyers to work on your case.

Let your lawyers invest instead of giving them free equity.

In any case, if your lawyers ask for a piece of the business, you can offer them the right to invest $25K-$50K in your financing instead—don’t give them the equity for free. They get equity, you get money.

This unfortunately incents your lawyers to drive down the share price of your financing, but this conflict of interest is small relative to their existing conflicts of interest:

Most law firms do a lot more business with VCs than they’re likely to do with you. VCs hire law firms. VCs refer new clients to law firms. Lawyers make money by executing transactions and your investors simply provide more transactions than you do.

So don’t sweat this minor conflict of interest.

Image Source: My Cousin Vinny

“C’mon—you have $500M and I am raising $1.5M and you want me to take the first $25K to pay your legal expenses for doing the deal? That’s like your dad giving you your allowance and then asking you to buy him a hot dog. When we were raising money for Flixster I thought that must be a trick—like if I agreed to that term they would pull the term sheet at the last second and say I failed the secret fiscal responsibility test.”

Joe Greenstein, Founder of Flixster

Summary: Venture capitalists don’t want to pay their legal fees for financings. Don’t fight this term—that’s a “big move on a little issue.” Instead, cap your contribution to the investor’s legal bill. And watch the legal bills in small financings: don’t spend a large portion of the investment on lawyers or give up a lot of equity for the privilege of paying your investor’s legal bill.

Venture capitalists don’t want to pay their legal fees for financings. We explain why in the appendix below.

So startups often pay their investor’s legal fee. An investor gives you money, you use some of the money to pay his lawyer, and the investor buys a little bit of your company with his legal bill!


Pay your investor’s legal bill.

Although paying your investor’s legal fee may fall outside the bounds of common sense, don’t try to remove this term. It’s an industry norm.

Norms are made to be broken, but this one isn’t worth it. You will do a lot of work to win this argument and you will gain very little. “Make big moves on your little issues and little moves on your big issues,” writes G. Richard Shell in Bargaining for Advantage. This is a little issue.

Also consider your investor’s perspective. In every other financing, their investee paid the fund’s legal fee. Are you really going to ask your investor to go to his partnership and say, “Hey, this deal is going to cost us $50K in cash money.”

Cap your contribution to the investor’s legal bill.

When you pay your investor’s legal bill, you’re paying their lawyers to negotiate against you. You’re paying their lawyers to make your deal worse.

You may have to pay your investor’s legal bill but you certainly don’t need to keep paying their lawyers until they run out of things to say. Put a cap on your contribution.

Without a cap, their lawyers will just keep arguing and collecting fees. With a cap, they’ll stop arguing once they hit the limit.

Propose a cap between $10K-$20K and let them make the case for a higher limit. Some investments require more legal work and some require less: in one rare case, we saw a top-tier investor do a large Series A financings ($10M) with no external counsel at all.

Many caps include the fees for both sides, i.e. the company shall pay no more than $X for the sum of the investor’s and company’s legal fees. It makes more sense to cap only your investor’s legal fee… but hey! this is venture capital, not math camp.

Watch the legal bills in small financings.

Don’t spend $20K on lawyers if you’re raising $50K. Not only are you spending a lot of the investment on lawyers, but you’re giving up a significant chunk of equity for the privilege of paying your investor’s legal bill. Investors recognize this issue and usually pay their own legal bills in debt financings.

If the investor’s expected legal bill is a large percentage of the investment, you could increase the investment to cover the bill and increase your pre-money to cancel out the dilution from the extra money. This makes sense but it’s also a “big move on a little issue.”

Instead, calculate your effective pre-money and do an apples-to-apples comparison to your alternatives. For example, if you raise $50K on a $50K pre-money and spend $10K of the investment on your investor’s legal fee, your effective pre-money is only $40K since your investor bought half the company and you got $40K. In general,

effective pre-money = pre-money × (investment – investor’s legal) ÷ investment

This is similar to calculating your effective pre-money in the option pool shuffle.

Appendix: Why investors don’t want to pay their legal bills.

Many people think investors don’t want to pay their legal bills because the money would come out of the investors’ own pockets. The argument goes like this: VCs pay their salaries from the fund’s management fee and if they had to spend the management fee on legal bills, they would have to reduce their salaries.

But investors already pay various expenses such as ongoing legal fees or accounting fees without touching their management fee.

And there are good reasons why investors and their limited partners may not want to pay legal fees out of the management fee: (1) legal fees are a variable expense so it’s hard to include them in a budget that justifies the management fee to limited partners, and (2) limited partners don’t want investors to feel like they’re taking money out of their own pockets to do legal diligence.

(Of course, all these issues are irrelevant for investors who are investing their own money.)

We don’t know how or why this became the norm, but there are several advantages and few disadvantages for the investor whose investee pays the legal bills. Paying the investor’s legal bill:

  • Incents you to not argue too much or quibble over basic things that investors will never remove.
  • Lets the investor buy a little piece of the company with his legal bill.
  • Avoids discussion about how to split the bill among multiple investors.
  • May slightly reduce the hurdle for the investor’s carry, depending on the investor’s agreement with his limited partners.

Image Source: University of Virginia.