By Guisela Figueredo, Legal Operations Analyst
Inspired by the release of the third edition of the Fundraising Field Guide authored by our Managing Partner Carlos Espinal book (get your copy here) earlier this year, I wanted to share some of the most common misconceptions that I come across while guiding founders through their legal process at Seedcamp.
Myth 1 – Any lawyer should be able to provide advice. The cheaper, the better
Even though there’s tons of advice out there telling founders to get good legal help when fundraising, I still see cases in which this guidance is ignored to “save” money. Unfortunately, that usually leads to slow, painful issues for everyone involved, and invariably, founders end up regretting it. So, here is a reminder again: don’t cut corners when it comes to legal advice.
A good lawyer isn’t just an affordable friend-of-a-friend. I won’t delve deeply into this point, as Carlos eloquently elaborated on it in Chapter 13 of his book, which I strongly recommend reading. Instead, I just want to stress how important it is to hire a lawyer with industry experience. It won’t just make your life easier, it also shows respect to your stakeholders. Dealing with a lawyer who lacks the right experience can be a headache and very time-consuming for your investors’ team. Not only is this frustrating, but it also diverts their energy toward handling unusual requests from your lawyer, when they should be focused on building the best possible round and support network for you. An inexperienced lawyer might push you into unnecessary battles for irrelevant matters, straining your relationship with your investor and possibly losing the deal (more about this in the next myth). Finally, having smart, long-term legal advice makes you more appealing to potential investors.
Once you’ve found a good lawyer, aim to build a long-term relationship. Treat your legal partners with respect and share the success. Like angel investors, experienced lawyers can become invaluable assets within the village around you. They are more likely to be responsive when you have questions as you transition into the operational phase. Fundraising is just one stage of the journey and you’ll also need lawyers to manage your ongoing operations.
Finally, we’ll just add that “the cheapest lawyer” can ultimately be the most expensive choice. In the short term, an inexperienced lawyer may need extensive hours to grasp documents that an experienced lawyer would quickly navigate, increasing the costs. However, the immediate cost savings are trivial, the real risk lies in the potential for misguided advice, which could result in significant financial losses for you (and others) in the long run.
Myth 2 – Founders can delegate the entire legal process to lawyers
In short, stay diligent throughout the process. Getting a good legal counsel is a huge game changer, however, you need to complement that by staying on top of things. Start by researching the common legal structures and terms in your jurisdiction, and get a feel for their pros and cons. Before you talk to your lawyers or investors, it’s a good idea to have your own thoughts on which setup might work best for your company. Simply stating, ‘I want a SAFE because I’ve heard of it in YC,’ isn’t enough, especially if you haven’t even read it!
By conducting prior research, you’ll be able to engage in informed discussions, ask smart questions, and make better use of everyone’s time. Additionally, keep in mind that other stakeholders may have differing motivations, even if their intentions are good, so while it’s wise to listen to your community’s advice, it’s also essential for you to understand what’s going on at every step.
That said, don’t get overly fixated on the structure, approach this with an open mind. There’s no one size fits all and what truly matters is having a solid understanding of the terms, particularly the main ones, as they will significantly impact you and your company throughout its entire lifecycle. Especially, because in many cases follow-on investments will aim to minimise changes to your existing investment documents. Therefore, prioritise understanding key terms such as pre-emption rights, consent matters, and vesting, and consider explaining your specific situation to your investor if you feel that you have a compelling reason to deviate from the market standards.
It’s also important to understand how and why the standards in your jurisdiction have become the norm. There’s usually a good reason for these standards, so just asking for a different structure without thinking it through might not be the best move. It could make you come off as inexperienced.
In well-developed ecosystems you’ll usually be able to find some reliable sources (see some examples below) and engage in discussions with other founders.
| Convertibles | Equity | |
| UK | Seedsummit | BVCA |
| US | YC templates | NVCA |
| Germany | German Standards Settings Institute | German Standards Settings Institute |
| Europe | Seedsummit |
Finally, ensure you are included in communications and be ready to jump in when necessary. As Carlos wisely advises, “Don’t let your lawyer get annoying or overly aggressive with your investor… Be assertive, for sure, but don’t be divisive.” This is crucial because your lawyers represent you, and their interactions with your investors can either strengthen or damage your relationship with them. Few things are more uncomfortable for your investor’s legal team than discussing something with you and then receiving a different position from your legal team, especially if it’s delivered aggressively.
Myth 3 – Founders don’t need to understand their cap table
The biggest (and not uncommon) pitfall I see when helping founders with fundraising is their lack of interest in understanding their cap table. After all, what’s the point of building a successful company if you’re not keeping a close eye on your ownership stake?
It’s absolutely crucial for you to know and manage your cap table better than anyone else. You definitely don’t want to face unexpected dilution just because you overlooked this part. It’s totally fine to get help from your lawyer to set it up, but you really need to understand it inside and out, especially how each document you sign affects your ownership.
Sometimes, you’ll even need to run some simulations before working with your lawyers. For example, while negotiating term sheets, you might think that agreeing to a higher valuation cap for your convertible deal is always a win. But that’s not always true! If you set a high post-money valuation cap in your convertible note and then can’t reach that when it’s time for the equity round, your dilution could end up being worse than you thought. You can avoid this pitfall if you have a clear grasp of your cap table and how each financing event can impact your ownership.
Myth 4 – My lawyers should be involved in every communication and interaction I have with investors
Certain communications run more smoothly when conducted exclusively between principals (founder and investment team), particularly those related to business terms. This is why it’s crucial for you to understand the terms, since you’ll need to engage in meaningful discussions with your investors and reach agreements on key points. While it’s advisable to consult with your lawyers offline, involving legal teams in these conversations can sometimes cause them to focus on points that aren’t that important for you, potentially delaying the process or straining relationships.
Founder-investor communications are also crucial when most terms are agreed upon, but lawyers have reached an impasse on specific points. In such moments, having a direct conversation with your investors often leads to the best outcome.
As Tom McGinn, General Counsel of Northzone and friend of Seedcamp, added in Carlos’ book “All-party meetings, where everyone is involved, are generally a huge waste of time. If their client is on the call, many lawyers end up posturing and fighting points their client shouldn’t really care about. Generally, the most efficient way to run the process is (i) to have a clear commercial agreement between the principals, (ii) let the lawyers draft the documents to reflect that agreement, and (iii) for any commercial point that arises during the drafting to be discussed between the principals.”
If you don’t fully understand something, ask questions. It’s difficult to hold constructive discussions and agree on creative solutions if your only argument is, “my lawyers say that’s the standard.”
Let your investors know why this is important to you, and be open to hearing what matters to them too. It’s all about finding a balance that works for both sides. This way, you can brainstorm solutions that benefit everyone. Once you have an agreement, just pass it along to your lawyers so they can get it all formalised in the paperwork.
Myth 5 – The Term Sheet is not that important since it’s non-binding
As Carlos mentioned “Always be mindful that the most important thing you have at your disposal is your word. If you make promises, keep them.” Hence, it’s important to be clear about what you agreed upon in a term sheet. Even though the majority of terms in the term sheet may be stated as not being legally binding, refusing to honour the terms afterward could undermine trust and damage your reputation.
If you don’t understand something in the term sheet, ask questions! There’s nothing wrong with that. The funds and the lawyers deal with term sheets daily, but you don’t, so it’s perfectly understandable if you have questions, you won’t come across as naive! If you phrase it as “help me understand” rather than being confrontational, you won’t be perceived as difficult to work with either. If you’re still unsure after your investor explains it, don’t hesitate to ask for more time to think about it and get back with an answer. You don’t need to have all the answers immediately.
Furthermore, if you’ve followed the previous advice by conducting prior research on the terms then you’ll know what’s important for you. Therefore, we strongly recommend that you initiate discussions and reach agreement on all the business terms that are essential for you, even if the investor hasn’t delved into specifics in the term sheet on those particular points. For instance, if the term sheet merely mentions “subject to customary standards” regarding a specific term, but you desire a more specific agreement, don’t hesitate to request it. Having such discussions becomes more challenging after signing the term sheet, especially since “customary standards” may not always be entirely objective.
Myth 6 – Funds are easier to deal with than angels
There’s a common belief that going with just institutional investors (like VCs) is easier than bringing angel investors into the mix. Mainly because there’s a perception that angels create more admin work. But that’s not always the case.
For one, funds have a fiduciary duty, meaning their legal team has to thoroughly review all the investment documents, which can take a few days. In contrast, angel investors usually do much quicker, simpler reviews. Furthermore, because of this duty, funds often need changes to the documents to comply with regulations and their Limited Partnership Agreement. This can mean juggling different requests from multiple funds and their legal teams, especially if you’re dealing with investors from different countries where the rules vary.
Angels, on the other hand, tend to request fewer changes (if any), except for some tax-related ones like S/EIS in the UK, but even funds might need those too.
And finally, when it comes to getting things signed, electronic signatures make it pretty straightforward. As long as your cap table isn’t overcrowded, collecting signatures from angels isn’t really any more of a hassle than collecting them from a few funds.
It’s worth noting that angels can be serial investors, at times even more experienced than certain funds, so they know better than blocking your closing. Therefore, after securing a strong lead investor, the objective should be to construct a well-rounded investor base, incorporating helpful angels who can significantly enhance the community you are building around your company.
To close, would love to share a few practical tips:
– Get on top of legal fees, agree on a cap.
– Learn to use and manage redlines.
– Share redlined versions with your investors, this will save them time.
– Proactively share closing binder, bank details and share certificates or shareholders’ registry (if applicable). Avoid making people have to run after you!
– Keep your promises.
– Experienced investors know their legal stuff inside out, so there’s no reason founders shouldn’t be just as savvy.
– Diving into the terms early on can pay off big time down the road.
The legal complexities only get tougher from here!