With four funding transactions in closing right now, I’m thinking a lot about legal documents these days. As I sift through stacks of documents and interact with numerous law firms, it struck me that one key party is missing from this stage of the process – the investors. And I think this is a missed opportunity to help teach and develop the entrepreneurs that they back.
It’s standard practice for investors to be heavily involved up to the issuance of a term sheet. After that, things get turned over to the lawyers to draft the agreements and do due diligence. For entrepreneurs though, this stage can be intimidating. First of all, you need to pretend that you have been diligent and organized and have every document you’ve ever signed neatly scanned and labeled and ready for the lawyers to see. That’s just a pain more than anything else.
The bigger issue is the legal docs. A standard financing is done with between 100 and 300 pages of documents. Can be sub 50 on the new series seed templates. Still, there are a lot of concepts and details. As an entrepreneur, you are left to go through them with your own lawyer, which is expensive. And if issues come up, your lawyer deals with their lawyer, which is even more expensive. Also, you need to remember neither lawyer is a party to these agreements. They are here to serve their clients, not make a deal. So, things can drag on, adding time and costs to the process.
I think a better approach would be for investors to stay involved at least through presentation of the first full set of drafts. Imagine if I as an investor sat down with you and walked you through what each of these points mean, why they are important to the fund and what they mean for the company. This approach has a lot of benefits:
- You get your first lesson in startup finance, making you a better leader of your (to be) funded startup.
- The deal gets done faster and cheaper because we limit the number of revisions by getting all issues discussed directly between the company and investors based on the first drafts.
So, maybe this doesn’t scale well. Maybe investors are too busy meeting new companies and helping existing ones. But to me, if I issue a term sheet, that company is part of the family. And so from that moment, I’m going to treat them as such. So, on all deals I do with our new fund (once it’s closed that is…), I will personally walk the entrepreneurs through the drafts and help them take that first step to becoming truly comfortable with financing documents. That can only help my investment.