Transparency in Legal Documents
I had to do something this week that I have never done before which is almost walk away from a verbal commitment I made towards giving money to a company. It has to do with legal documents and zero transparency.
I can't stress enough the importance of having a company being built on smart legal documents that create transparency for every investor in the company. Over time there will be more documents drawn up as more money comes into an organization but those first set of documents set a tone for everything going forward.
Investing in a company is risky but when the documents are anti-investors then there is nothing legally covering your risk. If you have intellectual property the documents need to be shared. When a company shares documents with me that are a mess it sends a lot of red flags. It makes me want to dig deeper to find if there are other deals that I don't know about that might crop up later from employment contracts to advisor shares. When you start to take money from the first round of investors particularly ones that have seen more documents than they care to, listen to their advice about cleaning up the legal part of the company before moving forward. It is for the good of everyone. Documents are not like a diner where everybody gets a different order.
I felt terrible thinking that I would have to walk away from a commitment but it was the company/entrepreneur that was putting me in a situation where I had no choice. I can't participate when I know that we will discover information after the closing that will put all the investors in a situation that did not need to take place.
People often characterize legal documents as a commodity (variation in quality doesn’t have much impact). Sometimes they are. Judgment, however, is not. Let’s forget about the legal implications of giving investors in the same round different deals and not disclosing that to all of them. Founders and investors ought to each view the negotiation of their deal as an “audition for a role in a partnership.” Through that lens, consider whether you want a partner with whom you need to count the silverware. I don’t. As an angel in roughly 40 companies, I’ve rarely walked from a deal over terms. I have, however, been turned off enough to consider whether this is a founder with whom I’d like to be in business based on the judgment that founder has demonstrated (or failed to demonstrate) as evidenced by positions s/he has taken. For instance, boasting to me about how you ‘fleeced’ another investor or that you took that upround term sheet because you ‘just wanted dumb money and they were willing to pay the most to get in’ shows me the kind of relationshop you want and the extent to which you value your partners. Not being transparent with them on the terms offered to other investors is a sure sign that you and I (and I suspect, you and Joanne) aren’t a good fit. Fair enough, but let’s not do a deal.As a matter of law, not disclosing these varying side deals…well, hopefully you have a good enough lawyer to explain that to you!
Thanks Ed. That is exactly what diligence is about. Good news is that I have an excellent lawyer.
Always always trust your intelligence and analyticsJudy
you are spot on.
love this post. I am glad you felt the power to walk away from the deal. Some would have crumbled.I have a similar experience. A shark blew up three companies that me and another investor had to put back together. It was shameful the way he played the entrepreneurs, me and the other investor. I too had a tremendous lawyer. She was great and is my go to atty today.There is so much to learn in this area. Transparency and honesty from both entrepreneurs and investors are paramount to getting business done.I also know about a company that faked revenue and an unwitting VC signed on the dotted line. Too many companies today are starting up, hoping to get funding and then planning to fail if they find the next good gig. Starting out by hoodwinking investors is no way to start.Conversely, Entrepreneurs should vet their investors just as much as we vet them.
I agree it is a two way street. Everyone should vet each other. You are essentially getting married especially if you get really involved.The good news is the entrepreneur knew everything I told her but making the move to make those changes is not always easy. She knew it and she is moving to the right changes.A lesson learned for everyone involved.
Our integrity, honesty, transparency and reliability are just as important – if not more – as having a bankable business. Your post drives home the point that good investors are investing in people, so who we are is really the most important thing we bring to the table (or the biggest detriment if we’re not a good bet).
Legal agreements actually are the “sweet nothings” of intimate personal relationships applied to artificially created legal persons. Just like their real-world counterparts they can be comforting or laughable or “turn-offs”.Sometimes people think of legal team as a “profit centre” and usually it all goes downhill from there. The best position in any deal is when both win and feel same – just like in any relationship.During a contract negotiation, lawyer represents a deal not a party. In litigation he represents a party yes, but not in a contract. Unfortunately many lawyers carry this adversarial attitude to contract negotiations and hurt both the contracting parties.
everyone should be happy when the deal is done. it is not personal, it is business.
A legal document that gives someone who has developedsomething the lawful right to create or offer that innovation for aparticular time interval.Transparency is operating in such a way that it is easy for others to see what actions are performed.Legal papers is a lawful term that is used for any officially implemented written document an formal papers that gives details of a lawfulcontract.
After read this article I have one question, some company is provide legal documents online, To create legal documents is risky or not…please replay
Know the lawyer who wrotr the docs
I don’t know any lawyer name but i know some website like: http://www.legalzoom.com, http://www.quicklawdocs.com/ they provide legal documents online