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Venture Legal: a Conflict of Interest and a Complicated Mess

TheFunded.com Advice

Posted by Anonymous on 2007-12-23

Tags: Preparation Lawyers

PUBLIC:

With the average venture closing costing more than $50,000 and with the bills being paid for all parties by the investors, there appears to be a conflict of interest. AND, there is. A number of my entrepreneur friends have commented how they feel under-represented when it comes to the many issues relating to a closing. A common complaint is that their lawyers cave on important yet small issues that come back to haunt them months or years later. So, what is actually going on"

First, it's important to keep in mind that any competent venture lawyer makes a lot more from venture capitalists than from any one company, especially in the early stages. If a venture lawyer really fought for your interests, they would risk being blackballed by VCs from doing other venture deals. Imagine a VC saying that will not work with your lawyer. What would you do" Fire them, of course. Hmmm. Second, there is always a rush to get the deal done these days after a cumbersome diligence process, which forces the company to compromise. Lastly, every point that you fight as a company costs you double, since the bill for everyone comes out of the fundraising proceeds. It's like losing a full time employee, a marketing campaign, and nicer offices to make the terms reasonable. Ouch!

The best you can do as an entrepreneur is to come to the table prepared with your eyes open, and this takes a decent amount of tedious research BEFORE you get your first terms. Terms that appear harmless on paper, like a mandatory cumulative dividend, can eat away at your returns as a founder and make your life much more complicated as you do later rounds. You need to know what the terms mean in good times and in bad, and you need to be prepared to lead the fight directly during the term sheet negotiation. Don't rely on your advisors, as that is a craps shoot.

Fortunately, there are resources to help. The best overview that I have found is a tediously long document by the law firm of Fenwick and West, outlining all of the terms, sample outcomes, historical data, and even sample term sheets. Here is a link to the 70-add page document:

Basics_of_Early_Stage_Legal_Issues_-_Guide_for_Entrepreneurs

For a quick primer, you can take a look at an article from VenutreHacks below:

http://www.venturehacks.com/articles/...

It is far too common for entrepreneurs, whether they are seasoned or inexperienced, to get nailed by some unexpected term. It's the unbridled optimism that nails the seasoned guys, thinking that they can beat the 3x clearing for participation, for example. I certainly have been nailed. Does any other Members have some resources or opinions to share"

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