Are they specialized in Startup Law? “Startup Lawyer” is an informal name for an “emerging companies” focused corporate and securities lawyer. This means lawyers who have all of the deep background knowledge of broad corporate and securities law, but have further sub-specialized in the application of that law to early-stage companies raising angel and venture capital. Generalist corporate lawyers who work in lots of industries may be very smart, but will not have the domain-specific understanding of norms and expectations within the startup ecosystem. Hiring those kinds of generalists can get expensive fast, because you’ll end up paying to “reinvent
While the legal documentation that VC-aspiring tech startups should use to form themselves has become relatively standardized (the forms that various law firms use generally say the same things), it is far from commoditized. By that we mean that it still is a highly specialized (niche) form of documentation that is very different from what is used by “small businesses.” A coffee shop or plumbing company is going to incorporate itself with dramatically different documentation than a tech startup. For that reason, the most popular “automated incorporation” companies are a poor fit for startups. LegalZoom, Rocket Lawyer, and ZenBusiness should
In structuring the terms of a financing, there are two broad categories that founders and startup lawyers should always be laser focused on: economics (dilution) and governance (voting power). Most founders intuitively understand the corporate governance oriented distinction between the common stock and the preferred stock. The common stock tends to be founders and employees, whereas the preferred stock tends to be investors. Thus paying attention in a term sheet, and in deal docs, to how much power is allocated between the common and preferred is very important. However, a more subtle but nevertheless extremely material distinction that founders should
Background reading: Why Startups Shouldn’t Use Post-Money SAFEs As we’ve written previously, the Post-Money SAFE template published by Y Combinator has dramatically worse economics for founders and common stockholders than it should, but it has been getting lots of promotion from the investor community because of how favorable it is to them. To help, we’ve published a very easy-to-understand redline of the Post-Money SAFE that “fixes” the most impactful economics problem in the Post-Money SAFE: the fact that any subsequently issued SAFEs or convertible notes dilute only the common stock and not investors. Many, many founders are getting tricked/duped into
The vast majority of material issues in structuring startup financings, at least as they relate to the involvement of lawyers, boil down to two key categories: economics and control. Economics The following are some useful posts for understanding the economic side of seed rounds, including convertibles (notes or SAFEs) v. equity, and the nuanced flavors of each category: Why Startups Should Avoid Post-Money SAFEsMyths and Lies about Seed Equity for Seed RoundsA Convertible Note Template for Startup Seed RoundsTemplate Library Control (and power dynamics in corporate governance more broadly) Pre-Series A Startup BoardsTrust, “Friendliness,” and Zero-Sum Startup GamesNegotiation is Relationship
While having distributed teams was “a thing” long before the pandemic, people’s increasingly familiarity and comfort with working “virtually” has accelerated the trend of startups hiring employees outside of their local cities. This is particularly true for startups headquartered in Tier-1 cities with higher costs, like New York; where the founders and senior execs may want to stay within the local ecosystem but the calculus for hiring the remainder of the team is very different. One source of “friction” in remote hiring is legal compliance. While most NYC startups are Delaware corps, Delaware law does not govern their relationships with
There are a few key reasons why founders need to be careful with how they structure their “friends and family” round; which is typically their first set of outside checks. First, an F&F round rarely has a sophisticated investor in it that can reasonably “price” the company via an equity round price or a valuation cap in a note or SAFE. The company is often so early that even attempting to set a valuation can end up being little more than a guess. Second, the round is often on the smaller side (under $1M) such that any equity structure is
Long-story short: there are two kinds of SAFE structures. The original safe had a pre-money method for calculating the SAFE’s conversion price, and it became a very popular seed instrument, particularly in silicon valley. However, a few years ago the SAFE’s publisher, Y Combinator, completely revamped the instrument into a post-money structure, which is significantly worse economically for founders, and structured to favor investors. If you close on a post-money SAFE, the founders (you) will absorb all dilution from any subsequent convertible securities (Safes or Notes) until a Series A. Your post-money SAFE holders will be completely protected from dilution
In every single tech ecosystem in the country, whether it’s New York, California, Texas, Washington, etc., the vast majority of startups intending to raise angel and venture capital incorporate as Delaware corporations. The reason for this is simple: Delaware is the “english language” of corporate law in America. Having to learn 50 different sets of laws can be incredibly inefficient and cumbersome for investors, lawyers, and other professionals intending to do business on a national level. For that reason, Delaware has emerged as the standard place to incorporate any serious tech company intending to operate beyond a specific city. All