A Founder's Dilemma - Who is Watching Out For Me?

This week, I had coffee with a friend who is an up and coming founder about his series seed raise for his new start-up. My firm is not representing his company, him, nor any of his prospective investors, but I found our discussion nonetheless interesting hearing him lament about his experience raising venture capital for the first time. What struck me the most was his passing comment about how despite being the sole founder/shareholder of the company with effective control of the board post-raise, he is feeling discomfort over his sense that none of the numerous lawyers working on the round, including his company's outside deal counsel, are really watching out for nor represent his personal interest as founder. His rhetorical question struck a chord - "Who is watching out for me?"

This may not be a big deal for a seed raise or in this particular circumstance where he is the sole founder and shareholder, so there are no obvious conflicts with other founding shareholders. But his discomfort as a first-time founder is not surprising. It's his first time having financing negotiations and he's learning on the fly, which naturally leads to concerns about whether or not the post-raise structure, his share dilution, the preferred share class structures being established, common shareholder rights, the board governance structure, and other considerations are really protective of him and his long-term goals. It's a very valid concern.

Ideally, these strategic and, candidly, educational discussions would have occurred with his deal counsel BEFORE approaching investors, but we don't live in an ideal world. So what should a founder do if they find themselves questioning whether their interests are fairly represented mid-raise? Ask questions. Side-bar with your deal counsel, that's why you are paying them. Talk to other founders in your orbit who have experience raising capital. In short, educate yourself as much as possible, as soon as possible. Maybe even retain your own counsel to ride shot-gun with you.

Any deal counsel worth their salt will happily educate a new founder or any newbie to venture capital financings before jumping into the negotiations, let alone the deal documents, that only makes their jobs easier with their client as the round progresses. A really good deal counsel will also identify any issues that the founder(s) should review independently with their own personal attorney (or even tax advisors), especially where co-founders are involved or there exists nuanced issues with stock restrictions, grants, etc... . It's certainly in my opinion entirely appropriate for deal counsel to identify and explain to a founder legal issues present in the transaction documents that may impact their specific rights, but avoid advising on what the founder should or should not do to address - at least beyond hypothetical discussions.

The reality is unless the founder has their own legal representation protecting their individual, financial interests by reviewing the relevant deal documents or ancillary agreements (or even having discussions pre-term sheet) that impact them specifically, they are largely on their own - which is super scary for someone who has not “been at the table" before. Deal or even company counsel doesn't represent the founder's interests in a lot of situations and this especially true post-seed when the cap table now includes other shareholders. Remember - company or deal counsel represents the company (ALL shareholder interests), not the founder(s), preferred investors, or even the CEO. This is an important, ethical, and a necessary delineation for reasons I can get into another time since it raises some practical challenges for even experienced in-house counsel. This is not to at all suggest anything intentionally malicious, nefarious, or unethical is afoot that but to simply call attention to an often overlooked consideration when raising capital - founders need someone watching their back too.