A common entry point for us as a law firm to a new client relationship is the seed investment round.
Commonly a seed investment round is one of the first rounds of institutional capital invested into a venture capital-funded business. It marks a step-change for a company previously either bootstrapped (i.e. funded by the founders or from revenue), funded by friends and family, or which has raised a small pre-seed round from a VC, all of which is fuel for the exploratory phase of a startup’s life.
The seed round is different. An institutional investor is looking for the business to take on a new pace of development, capitalising on the validation of its initial start-up plans. Investors expect the company to make (and measure) progress and the investors will hold the founding team accountable for doing so.
The amount of capital invested is usually also a step up, and the governance structure of the company starts to take a new shape.
It’s an incredibly exciting moment for early-stage businesses and has the potential to create the platform for the much sort after hockey-stick growth.
Advisers can add value in multiple ways, and good lawyers in this space go far beyond the black letter application of the law. Here are a few things we think every law firm should be delivering for its series seed and series A clients:
- Good advisers should understand how governance structures play out in the real world. At Farha, we advise companies through multiple investment rounds, over years of growth and expansion. We have seen board disputes, founder fall-outs, investor fall-outs and multiple examples of good behaviour and bad behaviour by shareholders, board members, management teams (and even lawyers!). Founders should be looking for advice that goes beyond the law, and even beyond market practice. It is vital that your lawyers understand your business, know and understand your cap table, and properly grasp your ambitions when advising in this space.
- When negotiating seed stage documents, there should be a balance of power between creative license reserved to the founders for executing their vision, and protections for capital. Founders are key to these businesses, much more so than capital at the early point (and probably any time before there is a product in the market). You can replace the money, but many of the best ideas of these companies are still in the founders’ heads and they aren’t interchangeable with other people. Advisors need to help founder clients to strike the balance between freedom and control for the founders, appropriate protection for the investors, and accountability of one to another. (And by the way, good investors bring a lot more than just money to the deal).
- Seed Funding agreements always contain difficult terms for founders. First time founders are very likely to meet some new and uncomfortable concepts such as founder vesting, reserved matters, drag along, founder employment contracts and liquidation preferences. Experienced founders may well be carrying the scars of previous experiences with these terms. They need to be carefully and sensibly explained so that the owner-management team understand the practical impact of those terms on their businesses. The founders can then make informed decisions about how they intend to negotiate.
- Advisers should also provide a buffer between client and investor. Tensions can run high during an investment process, particularly on the founder related terms. The stakes are high (or at least feel that way), and for founders, the business side of things can be very personal. Advisers can give clients breathing space, present their clients’ position dispassionately and guide them to the right responses.
- As the above suggests, good corporate lawyers for early stage companies are not just legal advisors. They are friends, and champions of their clients We should champion our clients through good and bad times. Over the many deals and companies that we have worked with, we have become friends, investors, advisers and even occasional co-founders! Lawyers should be independent, dispassionate champions.
- The founder-investor relationship needs to outlast the deal for most of these businesses to have a chance of success. We are skilled in fostering those relationships, and we are passionate about building governance structures that perform well for founders and investors over the life of the companies we advise.
At Farha, we strive to practice this way for all of our clients. We are fierce in seeking the best outcomes for our clients, their investors, their families and beyond. It is part of who we are, how we see ourselves as a firm, and how we train our team to service our clients.