It is known. Venture Capital deals are a tough nut to crack. It might seem that VCs and lawyers speak a weird made-up language designed to make you feel funny, right? I mean, what is a “weighted average anti-dilution protection” anyway?
No matter how daunting it feels, retaining experienced legal counsel (without spending a fortune) that would help you navigate and structure your next VC round is paramount.
So, if you are about to choose your lawyer, we've got you. Here are the best tips we can offer, out of our experience, helping clients build their very own VC rounds.
Hire experienced counsel.
Remember venture deals are very specific types of private investments. Retaining an attorney with experience negotiating this type of very specific deal will help a lot. Experienced counsel will help you understand the most common clauses, to spot when an offer is “out of the standard” and even provide a fair estimate of the closing costs and legal fees. Also, some lawyers with experience doing these types of deals can give you special negotiation tactics, like when or where to push back and when pushing back isn’t that important. Experienced attorneys are, most of the times, well connected, and can even help you find the best investor.
Document your company early on.
Have the legal documents of your company well organized before bringing the lawyer. Generally, organizing your documents in the following classification is a good idea: Corporate documents, agreements with employees, contractors, and advisors, convertible debt agreements, intellectual property documents, permits, or licenses. If your documents are a mess, your lawyer will happily help you sort the out… for a fee. Keeping a regular tidy file for your legal documents reduces time, saves costs, and accelerates the closing of a financing.
Involve the legal team in advance but ask for specific, short, and concrete advice.
If possible, involve your lawyer early on in the process to help you figure out what the best corporate structure or type of deal is best according to the particular situation of your company. There are several factors (i.e corporate, tax, permits) to consider before choosing the right entity or the right structure of a particular deal. Be open with your lawyer about your goals, the type of investors you are looking for, what are you raising money for, etc. Having a 30-minute call with your lawyer, at the beginning of the process, helps your lawyer make mental notes about your case and provide specific guidance on how to structure your business.
IMPORTANT: ask concise questions, limit the scope and time that should be devoted to each one of them, be strategic. Avoid (if possible) open-ended questions.
Prepare your round.
Ask your lawyer for guidance about what is the best document to use for particular financing. Discuss the convenience of using convertible investment documents or go for a priced round (a good rule of thumb: convertible notes are great for small investments to keep the closing costs low but, for considerable investments, it's better to go for a priced round).
If you choose to go for a priced round, get acquainted with the term sheet beforehand. This will allow you to have tailor-made questions. Ask your lawyer for help on choosing the adequate clauses for you and laser-focused on the standard of each of them (e.g nobody closes a 1X Participating liquidation preference anymore, those are evil!).
Term sheets usually are divided into Economic terms and Control terms (a.k.a Governance terms). Economic terms control ownership of the company and any automatic adjustments to the cap table as well as rights for the investors to receive their money before the entrepreneur in the case of a liquidation event. Common economic terms are Price (Valuation + Option Pool), Liquidation Preference, Anti-Dilution, Conversion. Governance terms refer to the powers to control the company, like, members or observers of the board, information rights, drag along, tag along, etc. (Quick tip: don't neglect pay-to-play clauses, those are usually great for the entrepreneur).
Closing the round.
In closing, keep it standard. The more simple your deal is, the lesser the legal fees and closing costs. And remember, you are closing the deal, not your lawyer. You should have the last say.