Background Reading:
There are two general types of work that a corporate lawyer (startup lawyers are corporate lawyers) provides: strategy and execution. Very experienced, senior executives who’ve been in the game for a very long time tend to use their lawyers much more for execution than strategy. They know how to navigate the environment themselves, and how to negotiate, and just want good lawyers to paper things properly.
First-time entrepreneurs, however, are not seasoned executives. They’re often entering an environment of total opacity, where lots of the people they’re dealing with (investors, partners, etc.) have 10-20x more experience and connections than they do, and very misaligned incentives. In this context, entrepreneurs lean on their startup’s lawyers – who have very broad visibility into the market, and broad experience on a variety of deals – not just for execution, but for deep strategic guidance: how and what to negotiate, how to navigate the ecosystem, what to push back on, how to protect themselves, etc.
Unfortunately, because startup lawyers play such a pivotal role in helping entrepreneurs negotiate with and protect themselves from bad actor investors, those investors often make it a point to gain significant leverage over the lawyers in their local ecosystems: by sending deals in their direction, working with them on deals, etc. This is a huge problem.
If you are an entrepreneur working with a lawyer to negotiate a term sheet, how on earth can you trust the objectivity / impartiality of that lawyer’s advice when the people who sent you the term sheet have employed him on 20 other deals, and will do so in the future? Fact: you can’t. The conflicts of interest are simply too high. For that reason, one of the core questions any startup founder needs to ask a prospective lawyer is: what investors do you work for? Do not hire lawyers with deep ties to people you expect to raise money from.
Well-negotiated and fair deals result when both sides are represented by experienced, independent counsel. No matter what anyone else in the ecosystem tells you about how a certain set of lawyers will help you close on money, if you don’t take their independence from the money seriously, you will regret it in the long run.
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