Let’s talk about working with a startup lawyer.
I’ve heard many stories of inexperienced or predatory investors ruining companies by putting non-standard terms in the term sheet. These startups could raise much-needed capital because the prior investors put in bad terms and refused to give them up. I’ll give you a few examples.
Occasionally a corporate investor will try to include a Right of First Refusal, a ROFR, on sale. This unnecessarily limits the exit options of the startup and with venture investors being in the exit business, any reduced optionality is a bad thing.
In another case, I heard of an angel group that had an overreaching right to approve or deny future investments, and actually prevented a startup from raising much-needed capital.
In both cases these were materially different clauses from a typical Right of First Refusal, which usually has to do with common stock sales.
Another case I heard recently was an investor asking for a discount on the next round of financing, which is ridiculous.
The expectation is that every investor puts money in on the same terms in the same round. The next round gets negotiated separately.
There are more insidious terms to avoid, too many subtleties to list here. The single best piece of advice I can offer you is to hire a law firm with experience writing startup term sheets. This is NOT your cousin that just got his JD nor is it your aunt who has practiced real estate law for 30 years. Neither are qualified to represent you in a financing round.
Find a good startup law firm. It doesn’t have to be a big national name like Cooley or Wilson Sonsini. The startup practice at Michael Best in the Midwest is stellar, as are many local law firms. Ask around to the startups in your community for a good startup law firm, and avoid these major pitfalls that will sink your company if you don’t.
Listen to the whole episode here:
Startup of the Year Podcast – #0053 – How Startup Founders Should Pitch a TechCrunch Reporter with Natasha Mascarenhas
On this episode of the Startup of the Year Podcast, we hear an interview from our 2020 Summit, when our Director of Strategic Operations, John Guidos, talked with Natasha Mascarenhas, a reporter at TechCrunch. Natasha covers seed and early stage founders, as well as the networks they take to get their first check. She also focuses on education amid COVID-19. Before TechCrunch, she was at the Boston Globe, the San Francisco Chronicle, and Crunchbase News.