Throughout the startup lifecycle, there are many legal hoops for founders to jump through. Whether you’re navigating commercial agreements or venture financing term sheets and financing documents, having an effective legal foundation and team in place is a necessity.
In the current economic climate, where many analysts predict the deployment of venture capital will remain constrained, VC term sheets can prove especially daunting for early-stage founders looking to ensure a good deal.
“Especially in a changing market like now, it’s important to have counsel and advisors on the legal side that really know the market, and can tell you when an investor is asking for something that’s off market,” says Dane Patterson, a partner at Goodwin Law. “We’re seeing things based on economic and deal trends that are coming back into vogue with certain investors.”
Patterson is a partner at Goodwin, a full service law firm with offices in San Francisco and Silicon Valley. He works primarily with technology companies and their investors through the entire startup lifecycle from formation through multiple venture financing rounds and ultimately to successful exits, whether M&A or IPO. At fnSummit 2022, Patterson will be on hand to meet with attendees during 1-on-1 office hours.
The theme for this year’s Founders Network fall conference is growth. Here are Patterson’s tips for ensuring you establish a strong legal foundation for growing your company throughout the startup lifecycle.
VC Funding Complications
While VC funding is often a necessity for high-growth startups, it can lead to complications for early-stage founders unfamiliar with complicated term sheets. Whether it’s board seats, liquidation preferences, anti-dilution provisions, transfer restrictions, or pro-rata rights, each clause can come with its own set of potential legal pitfalls.
“The companies I work with are typically planning to be venture-backed, high-growth startups raising VC funding to grow really quickly,” Patterson says. “The venture capital model can be great, but it complicates things quickly. From a legal perspective, you have complicated legal documents. You have rights and restrictions your investors put in place. Having an experienced outside advisor to navigate these issues is a non-negotiable.”
In addition to the various rights that VC investors will negotiate, taking on venture capital often requires startups to add one or two new seats on the Board of Directors. As this happens, particularly across multiple rounds of financing, it’s critically important to think through a number of points.
“As you grow, VC investors are most likely going to take board seats in your financing rounds,” Patterson says. “So you need to think through the board dynamics. Are you maintaining control on the board? If you’re not, are you adding independent directors to balance out the control of the investor directors? And who controls how those independent directors are elected and removed?”
Protecting Your IP
Founders often face significant risk and liability involving their intellectual property throughout the startup lifecycle. Failing to adequately ensure that the company owns the necessary IP can lead to significant complications down the road, particularly in future financing rounds and/or in an M&A exit transaction.
“For the types of startups we work with, IP is extremely important,” Patterson says. “So making sure IP is owned by the company and is documented correctly when you hire people, including the founders, is going to be really important. Especially before you raise venture financing, make sure your IP ownership is all buttoned up.”
fnSummit 2022 encapsulates the Founders Network experience, giving startup founders the opportunity to learn from other tech founders in the startup ecosystem, build deep relationships with investors, and uncover solutions to the challenges they’re facing. The annual event provides the perfect setting for off the record discussion, reflection, and networking.
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