Getting Good Documents Early On: Money Well-Spent
As an active early-stage investor and a long-time Wall Street denizen, I appreciate the value of a well-done set of documents. And while I also appreciate the desire to keep non-operating costs low, especially in the early days of a start-up, I believe it is critically important not to short-change the legal formation and fund-raising framework for a young company. And I am saying this from the perspective of the entrepreneurs and early investors, who are inevitably the ones who get jammed when things don’t go as planned. Let me offer a few cautionary tales for those who may thing “Oh, we’ll figure out the legal stuff later. Let’s get the money in the door and build this thing. Nothing bad will happen.”
Well, what about your IP? And I’m not talking about patents here, I’m talking about most young companies earliest and most valuable source of IP - its people. When people leave, they take tremendous IP with them, and unless these employees have proprietary information and inventions agreements that clearly establish IP ownership for the company, and have fair and reasonable non-competition and non-solicitation clauses, their departure can do real and lasting damage to the company and its investors. Not that their mere leaving won’t hurt, but it will pale in comparison to the pain should they decide to start up a related business on someone else’s dime when they developed this IP at your company. This would suck. And yet it happens.
And what about something like, say, the ability of an investor to sell and/or transfer their shares without the consent of the company? And what if the person or entity to whom the shares are transfered elects to compete with the company in which they own shares? Again, not a pretty picture, and one that could have been avoided with a right of first refusal clause, pretty standard stuff in basic, well-constructed financing documents.
So my point isn’t that sometimes an entrepreneur gets the short end of the stick in document negotiations, but that they can be beaten with the stick if they don’t put decent documents in place right up front. So even if it costs $20k to get a quality set of docs from a well-respected law firm, it may well save many multiples of this down the road when it comes time to do another financing, do an offering, sell the company, etc., because quality investors won’t stand for weak, crappy papers. That dog just doesn’t hunt. Life is too short to be futzing around with litigation and stress related to poor early organization. Raise enough money to do it right - and get on with creating the business you’ve envisioned and disrupting an industry. Because that is what it’s all about.
