The Entrepreneur Hires a Lawyer

Term sheet in hand, it's time to find an attorney to get through venture capital negotiations.
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I am in the middle of negotiating an agreement for investment in a new venture. My roller-coaster adventure started with developing a business plan that would whet the appetite of investors, then moved to meetings with money boys from Philadelphia to New York.

Each investor meeting felt like the Universal Studios ride Tower of Terror where the floor drops three stories then shoots up two then drops then shoots up again. My stomach would be in my mouth after every meeting. I experienced highs where I felt I was going to be rich beyond my wildest dreams and lows where I thought the money once again had slipped my grasp. You see, I have been the Don Quixote of entrepreneurs swinging at venture capital windmills.

Finally, one day one of the guys in expensive suits called and said he was ready to present my partner and me with a term sheet. A term sheet basically outlines the terms of the deal. Usually a term sheet is a starting point, but if you have never raised money before and have no track record, the term sheet is basically a Don Corleone-esque offer you can't refuse if you want to have a chance at making a big score.

Actually, you do have choices. You can turn down anyone without having your legs broken. That said, if you get a term sheet that doesn't make you want to slit your wrists, you will receive a formal document the size of small-town phone book outlining, in our case, 54 different elements, such as, but not limited to, terms of the agreement, amount of money invested, the number of board seats, the type of corporation, dispute resolution and the drag-along notice, which means that if the investor wakes up one morning and asks the mirror in the bathroom, "Mirror mirror on the wall, what business should I get rid of?," it could be your business.

I have been writing business plans and advising others on offers they have received from investors, but when it comes to reviewing my own agreement, I follow the attorney dictum that "a lawyer defending himself has a fool for a client." So now it is time to shop for an attorney. Here are the criteria I use for selection:

Experienced at venture deals:

I once had a client who was negotiating over $3 million for 55% of his company. I told my client that I would be glad to introduce him to three attorneys with experience in providing advice and counsel on venture deals. He politely thanked me and said he would use his lawyer.

I met the attorney and asked him how many venture capital deals he did each year. The lawyer told me the last investment deal he did was 20 years ago. I proceeded to quiz him about how he would handle certain sections of the agreement, and every answer was wrong. The lawyer should have told my client that he wasn't experienced in this area and that selling stock to outside professional investors is different from selling a hardware store to a new buyer or getting friends and family to put money into a new business.

Business person with law degree:

I like attorneys who think like business people. They understand the big picture. They try to figure out how to help you get what you are after. They are strategic thinkers and advisors, not mechanics who just know how to draw up documents.

Dealmakers, not breakers:

They are two types of corporate attorneys. One type tries to figure out every way to protect their client, which on the surface is what you expect. The other type of attorney looks to protect your interest, but also advises you on what is fair and reasonable. I prefer the second type who tries to figure out how to make a deal happen rather than putting up roadblocks. I want someone who comes up with creative solutions.

As hard as this is to believe, I had a well-respected "dealmaking" attorney ask the venture capital fund we were trying to raise money from if he could work both sides of the deal because the fund's attorney was overwhelmed with work. Neither the fund nor my team had a problem, because we knew the lawyer was a very fair and experienced guy. Within two hours he worked out a deal that both sides were comfortable with.

After reviewing my criteria, I made a list of attorneys, and then it came down to how much I can afford or am willing to pay for this shark in Armani. I called three attorneys. Two came from large national firms, and one was a former partner at large national firm who moved to a large regional so he could work with entrepreneurial companies at prices they could afford to pay.

I sent each attorney our term sheet and agreement and asked for an estimate to review the documents and provide advice on what is fair and equitable. The estimate from the big boys was enough that I could take a family of four on a great two-week European vacation, while the regional gun was around $5,000. For non-Wall Street types, $5,000 will sound like a lot, but to get an experienced professional it's a very fair price. So that is who we went with. More on the ongoing negotiations as we move forward.

Kramer is the author of five business books on topics related to venture capital, management and consulting. He is a faculty member at the Wharton School of Business at the University of Pennsylvania and the veteran of over 20 startups and four turnarounds.