Good lawyers should not put your VC deal at risk

Entrepreneurs and lawyers. Peanut butter and jelly.

Right before our founder figures out product-market fit, total addressable market, financial pricing, customer acquisition, and does anybody really want to buy this idea, it becomes apparent to her that she is going to need some legal eagle advice. And it is at this point that most founders are clueless.

Unless you went to law school, studied corporate finance and patents, etc., it is unlikely that you have ever had much interaction with an attorney. You don’t need one to buy a house or a car or get a business license, but if you start a company that can attract venture financing, with dreams of being large and sustainable, then that you need to find the proper one.

In San Diego, they are plentiful, but like any garden, it has both weeds and flowers. It is important to pick the right tool for the right job — real estate, corporate finance, patent, stock options, licensing deal structure — and of course, at some point perhaps, litigation.

The key to the legal garden is not only to get advice, but to know when to take it and when to reject it. Founders manage the team, the technology, and they also need to manage their attorneys. It is a dance, and you must learn the steps.

I have a client, he gets a solid term sheet, sends it to his attorney and since the attorney needs to prove that he knows his stuff, it comes back with some generic comments, but also a clear focus on getting an adjustment to the “drag-along rights.” Even though my founder needs this deal, and the venture investor is large and famous, still my guy wants to show that he is no roll-over, so he sends back the “red-line” lawyer comment highlighting this issue — an effort to demonstrate that he also knows his stuff.

He is also demonstrating that he is a rank novice. I explain to him that while the lawyer has in fact raised an interesting point that has about a 3.8 percent chance of actually coming into play, at the same time, by bringing up a minor issue, you have lost the momentum of the deal. Who cares about drag along at this point? Sign the damn term sheet, the valuation is extremely favorable. My client agrees, throws the lawyer under the bus, folds on the deal point, and the deal gets signed that afternoon.

The story here is nuanced. The lawyer was good, and his point was correct, if not particularly critical at this juncture, but the founder didn’t know whether it was worth fighting for or not. He lobbed it in, but when all he got back from the VC was crickets, he rightly got afraid. He had let the lawyer, whose job is to point out all the potential pitfalls, take charge of the deal, and put the deal at risk.

Shakespeare said, “Let’s kill all the lawyers” — but only the ones on the other side. I love lawyers (if they are my lawyers), and I have retained, used and even on occasion paid many of them. The key issue is for the founder to learn enough about the legal art and language of the deal, so that he can properly balance when to argue and when to ignore. Your legal team is very important. The best attorneys are not only your legal eagle, but also your consigliere. They give advice that goes beyond just telling you the legalities.

Learning when to use, how to use, and finally also when to ignore your legal team is part of being a real entrepreneur. Your attorney can explain the shoelaces, and they can discuss the subtle differences between boots versus loafers, but they can’t stand in your shoes.

Finally, as a last resort, do not be afraid to wander down the hall to the litigation department. That is a fascinating house of horrors and you will need to study the issues carefully to avoid the Freddy Krueger v. Godzilla lurking behind the desks of both sides, but sometimes, the right answer, the only answer that will bring satisfaction and justice is to sue the bastards.

Rule No. 688: On the other hand, maybe Shakespeare was right.

Neil Senturia is a serial entrepreneur who invests in early stage technology companies. You can hear his weekly podcast on innovation and entrepreneurship at www.imthereforyoubaby.com. Please email ideas to Neil at neil@blackbirdv.com.