Startups seek outside funding to provide the resources they need to accelerate growth. Meanwhile, investors seek promising companies that can deliver them long-term returns. 

Before entering negotiations, each side can benefit from a venture capital lawyer who can help represent them throughout the negotiation process, protect their interests, and manage risk.

Without legal guidance, startup founders risk giving away too much control of their company in exchange for financing. 

Likewise, investors assume great financial risk. Before they commit to capital, they need to have confidence that the company is properly organized, owns its intellectual property, and isn't hiding legal issues that could jeopardize the investment.

For both startups and investors, entering negotiations without a startup attorney with expertise in venture capital can expose both parties to significant legal and financial risk.

The role of an attorney in venture capital extends beyond simply drafting agreements. It's about balancing the legal, financial, and strategic risk that their clients face now and in the future.

Why Venture Capital Law is Complex

On the surface, venture capital may seem straightforward: founders exchange equity in their companies for capital needed to expand operations and scale. 

But below the surface, every venture capital negotiation is really about creating a balanced, long-term legal and financial relationship between founders and investors who sometimes have competing interests and priorities.

Founders want to raise capital to fund growth, while maintaining as much upside and control of their company as possible. Investors want to maximize their returns, while protecting against potential risks. Companies must comply with a variety of regulatory requirements at both the state and federal levels before a transaction can be completed. 

Still, founders often try to use templated venture capital documents from online sources to structure these deals. It may seem like a good way to save money when funding is tight, but those documents can't possibly account for the many variables that exist in a venture capital deal. 

The decisions made in a single round of funding can have far-reaching consequences that affect how the company is run, its ability to raise future funding, and eventual exit opportunities and returns. 

For both investors and startups, experienced VC attorneys don't just draft transaction documents. They serve as strategic advisors to their clients, helping them evaluate the legal risks and negotiate deal terms that can position them for long-term success.

How a Venture Capital Attorney for Startups Can Help

For founders, the role of an attorney in venture capital starts before negotiations ever take place.

Preparing the Company for Investment

Whether it's an LLC or C-Corp, startups need the right legal structure. A venture capital attorney for startups will help their client weigh their options and get the right formation locked in place. They'll also help put the groundwork in place for a smooth transaction including cleaning up the company's cap table, ensuring founder agreements are in place, reviewing stock issuances and employee equity plans, and ensuring that the company has ownership rights to its intellectual property.

Negotiating the Term Sheet

First-time founders often assume investor term sheets are non-negotiable. While there are often standard provisions, sometimes investors try to include provisions that give them rights unfavorable to the founders. A venture capital lawyer helps founders analyze provisions like board composition, voting rights, liquidation preferences, and anti-dilution protections to ensure that they are standard and fair for both parties. They push back when necessary, and help prevent founders from agreeing to unfavorable terms that can affect the company for years.

Protecting Founder Control

Without an attorney to look out for their interests, inexperienced founders risk giving away too much control of their company in exchange for financing. An attorney can help structure a deal that balances founder control by limiting investor board seats, veto and approval rights, and other provisions that can reduce the amount of control founders have. 

Preparing for Due Diligence

Investors will want to go through a startup's recordkeeping with a fine-tooth comb before funding closes. A VC attorney for startups can organize the company's records, employment and contractor agreements, IP ownership, licensing, cap table and customer contracts well before VC talks begin. Poor preparation can delay or even kill a deal, while startups that are prepared for due diligence tend to close faster.

Closing Financing

When negotiating is done, an attorney helps the company cross the finish line. They prepare, review, and coordinate execution of the transaction documents needed to complete the deal including the stock purchase, investor rights, and voting agreements, as well as other ancillary agreements. They coordinate shareholder approvals, board approvals, disclosure schedules, and any other documents needed to finalize the deal.

Corporate Governance After Closing

When startups lack a full-time legal team, a venture capital lawyer can serve as a long-term strategic advisor long after closing a funding round. Many VC lawyers continue providing founders with guidance around board governance, shareholder matters, fiduciary obligations, future equity issuances, and ongoing corporate compliance.

How a Venture Capital Lawyer Helps Investors

While an attorney is essential to helping founders balance fundraising needs with keeping company control, attorneys representing investors help them understand what they're buying and minimize risk.

Conducting Investor Due Diligence

From the investor side, due diligence is about doing the homework on a company to make sure the investment is sound. A venture capital lawyer will do much of the investigative legwork into the startup, looking at things like whether the company actually owns its IP and technology, whether founder equity is properly vested, and whether there are any pending lawsuits or tax issues that increase the risk of the investment. 

Negotiating Investor Protections

Investors don't write checks to a startup without reasonable safeguards in place. The role of an attorney in venture capital for investors is negotiating those safeguards in the form of provisions like liquidation preferences, anti-dilution protections, and board representation. However, the goal of investors isn't necessarily to control the company, but to protect their investment as much as possible by gaining a say in major corporate decisions.

Ensuring Regulatory Compliance

Venture capital investments have important regulatory compliance requirements. VC attorneys representing investors and startups help ensure that the deal negotiated complies with state and federal securities laws, and any applicable industry-specific regulations. This area is critical for both sides, as a single mistake can create significant legal exposure and jeopardize a deal. 

Future Financing Strategy

No matter which side they represent, venture capital lawyers must always think beyond the current round of funding. If investors try to take too much control of a company in an early round, that may make future fundraising rounds more difficult. Experienced VC attorneys think down the road, helping structure future fundraising, acquisitions, and exit opportunities in mind. 

The Risk of Moving Forward Without a Venture Capital Attorney

Working with a VC attorney provides numerous benefits for both startups and investors, but what are the potential risks of negotiating without legal help? 

For startups, the biggest risk is signing a venture capital agreement that gives too much control to investors. Without an attorney to represent their interests, startups risk signing unfavorable term sheets that can result in a loss of board control, excessive dilution of founder shares, and IP ownership problems. They might also fail to be prepared for due diligence, which can delay the process and even jeopardize a deal. There's also the potential for securities law compliance issues. 

For investors, negotiating without an attorney to represent them can result in inadequate due diligence that fails to uncover hidden liabilities. They risk ownership disputes, weak investor protections, and invalid stock issuances. Compliance issues are more likely without a lawyer to structure the deal. It can also be more difficult for investors to exit, and leaves the potential for internal conflict between founders and investors that can lead to expensive litigation. 

When both sides work with experienced lawyers with startup legal expertise, venture capital deals have a better chance of aligning the interests of both parties. 

Venture capital lawyers help their clients negotiate agreements that protect their interests, and resolve disputes with realistic compromises. They encourage founders to prepare for due diligence, and help investors identify hidden risks before signing documents. 

No matter which side they represent, the best venture capital attorneys serve as strategic advisors throughout the negotiation, and through the entire lifecycle of a company. 

SVTech: Silicon Valley VC Attorney for Investors and Startups

Whether you're launching your first startup or evaluating a new investment opportunity, an experienced venture capital lawyer provides guidance that helps negotiate stronger agreements, reduce risk and conflict, and position investors and founders for long-term success. 

At SVTech, we have extensive experience providing guidance and representation to both founders and investors. With over 25 years operating in Silicon Valley, we deeply understand the dynamics of venture capital law from the vantage point of both sides. We help our clients through every stage of the venture capital process, from company formation and financing to governance, growth, and exit strategies.

Our goal is to help founders sign favorable agreements that position the company for future fundraising and exit opportunities, while providing investors with the protections they need to feel confident about their investment.

Before you enter into negotiations, contact SVTech to speak with our team. We can represent your interests and help create an agreement that positions each party for success.