I know that this controversial title will probably get me into trouble in some quarters but I believe that it is a conversation worth having. I have had the privilege of working with different start-up founders across funding rounds as well as VCs interacting with startups in the seed stage (s). What I have learned is that when it comes to structuring an investment agreement the different professionals involved – including lawyers act for the interest of those who pay them.
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Unfortunately, in a good number of funding/investment arrangements, founders, especially first-time founders are discouraged from getting their own independent lawyers or financial experts to look at the deal. They are told that it is faster and more efficient to use the lawyers recommended by the VC firm. I believe that this is a bad idea and this is why.
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VC-preferred lawyers are not Independent
Imagine this, you have been hired by one person to prepare an agreement between them and another person, whose interest will you protect more? Yes, it may seem efficient and easier to use the lawyers suggested by the VC firm, heck you may even save on legal fees but you will not receive fully independent advice. This is because most of the time, the VC is the big fish and the lawyer will not reveal anything to you about the deal that will step on the VC’s toes. This is because the VC offers them a pipeline of deals that you may not be able to, which means that they will structure the agreement in a way that favors the VC.
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No personalization
I once worked on an investment agreement where the investment was through the purchase of a convertible note in a Kenyan start-up. This founder was wiser and more experienced and retained an independent lawyer. When I looked through some of the agreements such as the Term Sheet and the Employee Proprietary and Inventions Agreement, I quickly realized that they are simply a copy-paste of an online template. I was shocked because the law firm in charge of the transaction is a global law firm with multiple offices in places like London & New York (which I will not name because of confidentiality), yet they had copy-pasted American templates for a Kenyan start-up. A lot of the provisions of the agreements were unfavorable to the Founder and we had to review them on his behalf.
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In conclusion, although it may seem easier and more efficient to use the law firm suggested by the VC/Angel Investor, it can lead to you not receiving independent legal advice and can leave your interests unprotected. Hiring an independent lawyer secures your interest and ensures you receive honest advice. Even if you are a first-time founder, you have the power to choose an independent lawyer for your startup. Use it.
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The writer is a lawyer who specializes in offering legal services to people in technology. You can reach him through info@masibolaw.co.ke
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