So. What happens after you issue a term sheet? The Legals begin.
In a deal, the major agreements that require legal input are the Shareholders Agreement, Subscription Agreement, Debenture (if you’re doing convertible debt), and the Restricted Rights Agreement (sometimes called a Founders Agreement).
Lawyers are expensive. In some markets, fees are split between the VC and the Company, in some markets, the Company or the VC foots the entire bill. Either way, no one wants to see a fifth of their investment get eaten up in legal fees (it happens more than you think).
Its important to make sure what ever legal counsel you chose understands that your relationship only works if they don’t nickel and dime you for every call, email, or question you have. Especially when starting out, you’re going to need a lot more help understanding legals than you probably want to pay for.
So, how do you get free advice from a lawyer? I actually got this tip from my father who used to be one. Basically, he told me to interview lawyers before deciding on one, and make sure that you spend the first twenty minutes of the interview talking about anything but work, the deal, or what you actually want. Then you can start working your way into the conversation you intend to have, and make an informed decision based on their advice. And always make sure you pay for the coffee.
If you build a good relationship with a lawyer, they’ll usually get involved at the term sheet stage, free of charge. They will also be way less antagonistic toward the other side’s counsel because they know you, what you’re looking for, and how you build your relationships. This is extremely beneficial for two reasons, one because it expedites the negotiation process and two, because it keeps costs reasonable, while making sure they still to an amazing job. This is because you’re now in the repeat client business. They want you to keep working with them, so they wont fleece you on legal fees, nor will they spend any less time on your transaction.