Funding rounds involve a mountain of legal work - here’s how can lawyers collaborate with founders and ensure they’re fully prepared for the raise.
If your scaleup chooses to be equity-funded, your attention will be drawn at some point towards fundraising.
Hints arise of a funding round on the horizon, and the legal team prepares to get involved in the process from start to finish ... but there’s usually a problem: funding rounds are uncertain by nature. There’s no guarantee of investment at all, let alone for the amount the leadership team is negotiating.
Founders tend to keep funding rounds close to the chest until everything is agreed, and they’re ready to announce. But for lawyers, there’s often a ton of work to do to prepare the company for the legal due diligence exercise.
As a former lawyer, and now a founder, here are my key learnings on how legal can hit the ground running and effectively handle their first funding round with the business.
Legal priorities vs founder priorities
I’ve been both a founder and a lawyer, which made certain aspects of Juro’s first funding round easier for me. I had judgement of my own to offer on deals, and could complete some of the legal work myself and manage external counsel - but for the most part, lawyers and founders have separate priorities and need to find a way to address concerns from either side.
As a company approaches the funding round, the lawyer’s main priorities and concerns should be around getting internal documents ready for the legal due diligence exercise, looking at drafts and managing confidentiality obligations in the business.
“A common mistake lawyers make is seeking external counsel after parties have signed. Getting external counsel to assess terms post-signature is a nightmare”
With the latter, it’s important to consider: who needs to know? Is there a confidentiality agreement in place? Does the whole company know? Should the whole company know?
Make sure you proactively think about those risks. The CEO might also rely on the lawyer’s wise counsel and strategic advice regarding the process, so you’re also acting as a sounding board for the leadership team. Legal also have a responsibility to educate the business on what the process will entail - especially if the execs have never raised before.
The priorities of legal counsel may vary to those of the founders. Normally, founders are focused on closing the round on the best possible commercial terms and this takes priority over negotiating the legal risks. If there’s a misalignment on these priorities, it could lead to friction.
Legal should act as enablers, instead of blockers, so it’s incumbent on them to support the wider business objectives. But it’s equally important for lawyers to identify and be clear on the risks that the company may be taking on. There are few occasions where a scaleup needs ‘a grown-up in the room’ more urgently than a fundraise.
Make sure your CEO is aware of what they’re agreeing to - show them the consequences of the key risks so they can make informed decisions.
Finding the right external counsel
External counsel are pretty much essential for hugely consequential legal processes, like funding rounds. But a common mistake lawyers make is seeking external counsel after parties have signed the term sheet. Getting external counsel to assess the terms after you’ve signed up to them is a nightmare - ideally, you should involve external counsel at the earlier stages, or right before the parties sign. This means you need to be in the loop early as an internal legal counsel.
“External lawyers can increase the company’s cash burn considerably - any work you can accomplish in-house is a much better alternative to spending the money externally”
Finding the right people to help you in the funding round isn’t always easy. You can search through online marketplaces, accelerators, and even partners at law firms, but the best place to start is through your own network of contacts. I was introduced to Taylor Wessing and Wilson Sonsini Goodrich & Rosati through an investor, and they helped us through our Series A in January 2020.
When outsourcing, the most important thing is to look for stage-relevant experience - if you are raising a Series A, it’s unlikely that Magic Circle law firms have the right experience to streamline that transaction. If you’re raising a Series D, this may be more relevant for them.
In external counsel I also look for:
- Proactive lawyers: they expect to engage early in the process, helping to drive the transaction process, as well as advise on the risks
- Lawyers with a thorough understanding of your business, working closely with me to understand the company and the specific funding round as best as possible. Law firms have hundreds of clients, and they can’t possibly know your business better than you do - find those that understand you the best
- Highly focused advice; having external counsel who can act as a sounding board for both legal and leadership is valuable, but they need to focus on what’s important
There are obvious challenges in working with external counsel - the first being budget. External lawyers can increase the company’s cash burn considerably - any work you can accomplish in-house is a much better alternative to spending the money externally. As an in-house lawyer in the business, these decisions fall to you; assuming you have relevant experience, it’s a choice between working on all the legal matters yourself or spending money to outsource that work and free yourself up for other tasks. Use your judgement.
Where to start
The best way to mitigate these issues is to think several steps ahead. If you get involved early and have full sight of the process, and you’re working hand-in-glove with the CEO, then you can manage the funding round without getting snowed under by legal work.
At Juro, we created a data room as we went, so that when it came to funding, everything we needed was in one place. If you operate in this way now, with centralized document repositories, a lot of the work is already done when it’s time to prepare for due diligence.
“Venture funding is fuel in the tank, and the last thing you want is to be running on fumes while you wade through legal processes you could’ve completed months ago”
This is helpful over time, as the funding rounds get more complex and there’s greater expectation on legal to manage the right documentation. Where legal due diligence is concerned, hundreds or even thousands of documents will need to be reviewed by investors’ counsel. Most companies don’t have these documents ready to go as a data room, so your work arranging them early will pay off down the line.
It’s also important to ask the right questions around legal involvement in the fundraise: what’s my role in the process? As a legal leader, what are my main responsibilities? And most importantly, what do I need to do to support the business through it?
Start early - and keep your eyes wide open!
If I was working at a scaleup approaching my first funding round, I would start preparations for that raise as early as possible. It’s important to discuss the round with your CEO and get context beforehand - make sure you are part of the process, and not a passenger. Educate your colleagues and share your experience and insight with them.
Most importantly, focus on moving quickly - the business probably needs the money, so align with their goals and enable that growth. Venture funding is fuel in the tank, and the last thing you want is to be running on fumes while you wade through legal processes you could’ve completed months ago.
As you continue to progress, there’s a pressure to maintain that growth momentum. VCs invest to see the company scale faster, and for a lawyer that means more contracts, more legal issues, more HR issues and more litigation risk. You should expect an increased volume of absolutely everything - from headcount to legal work - so it’s important to have your eyes open to everything that’s happening.
An investor wants a board seat, for example - what does this mean for the business? It might mean the investor has a 33 per cent vote in most company decisions. Is your CEO genuinely aware of their legal decision-making power? Do they have a choice?
Legal admin in a funding round seems seductively boring but it’s not; a rogue provision could end the business if it eventuates and you got it wrong. Being on top of those risks is part of what it means to be a General Counsel. There are plenty of bear traps waiting for you out there, and lawyers can play a massive role in helping the business avoid them - as long as you start early.
This is a chapter from our 'Legal for scaleups' eBook, featuring legal leaders from some of the world's fastest growing companies. Download for free now.
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