I’ve looked at start-ups from both sides now: initially as a lawyer for venture capitalists and other investors, and now as the CEO of my own legal-tech start-up.
According to the management maxim known as Miles’ Law, “where you stand depends on where you sit.” I.e., we naturally tend to see things from the perspective of the position we occupy, and have to work harder to see things from another perspective.
If you’re a start-up founder, it’s helpful to know how your version of reality diverges from the view of potential investors – and their lawyers. You can be more effective as a negotiator if you understand the other side’s goals and fears as well as your own.
Avoid Fatal Mistakes
When a start-up’s in its infancy, founders may be willing to say (or do) anything in order to get that first funding. There’s often a huge sense of urgency – if the funding doesn’t come through fast, people aren’t going to get paid – and you can only live on ramen for so long.
When cash is tight, founders often cut corners and do things on the cheap rather than doing them right. Founders can be over-eager to give away equity (rather than pay cash) in exchange for the services they need: expert advice, software development, legal services, etc.
Investors know that founders are often impatient and sloppy. Therefore, they’re going to look carefully for mistakes that make a start-up less attractive or even un-fundable.
Have founders failed to protect their intellectual property (and thus their competitive advantage)? Have founders already given away shares to 100 vendors and unsophisticated friends-and-family investors who’ll be a pain to deal with later?
Founders can avoid early-stage mistakes that bite them in the butt later by consulting with experienced entrepreneurs (as many as possible) who can tell them what’s really important and how they’ve gotten burned. Don’t be afraid to reach out and always ask at least two opinions before making a decision.
Minimize Risks as Well as Maximizing Benefits
Founders want to raise as much money as possible, as fast as possible, while giving away as little as possible.
Investors want to make as much money as possible by taking as little risk as possible.
When speaking to investors, founders often stress the “huge” opportunities – markets measured in the billions and growth trajectories that look like rocket launches. Investors have heard that all before, so they tend to be sceptical about pie-in-the-sky scenarios.
Founders are less likely to talk about how they plan to mitigate risk – for example, by:
- Properly protecting their IP
- Having a strong and experienced team
- Collecting hard evidence about how they’re serving an unmet need
Founders who talk about mitigating risk as well as pursuing opportunities can set themselves apart from the starry-eyed wannabes.
Don’t Get Burned by a Bad Contract
Founders may see contracts as necessary evils – incomprehensible paperwork that has to be completed before they can get on with business and start making money. They may look at lawyers as a “luxury” and be tempted to just “sign the damn thing" and worry about what it actually says later.
Investors know that founders are (again) impatient as well as cheap and may sign contracts without reading them. Thus, it’s a standard part of the due diligence process for an investor’s lawyers to read every contract a start-up has entered into prior to investing in the startup.
If due diligence reveals that the founders have signed bad (or even stupid) contracts, investors may conclude the following:
- The risks and obligations in those questionable contracts reduce the value of the company.
- Founders who’d sign such problematic contracts may lack the maturity and business acumen to run the company effectively.
It’s smart to try to save money, but it’s dumb to sign any contract you don’t understand.
As we discussed in this recent blog, there are many ways for start-ups to save money on legal services, including:
- Going to a start-up legal clinic at a local law school
- Finding a law firm you can pay in equity (but see caveat above)
- Deferring fees until you’re funded
- Reviewing contracts at lawgeex.com
Noory Bechor is the founder and CEO of LawGeex. The company’s contract review tool uses cutting-edge data analytics and machine learning technology to compare users’ contracts to thousands of others and point out what’s common, uncommon, and missing. The tool also translates legalese into plain English so that users can make smarter legal decisions.