One of the most painful things for a corporate lawyer in the fundraising space is this - getting in too late into the client's business to make a difference.
There is a terribly sad paradox that affects fundraising, it goes like this - the founders who come too early think they can't afford you. And by the time they think they do, its too late!
When we started out as a firm representing startups in investment deals, our clients were a mix of small companies and small investors, most of whom were doing their first or second deal. As lawyers used to representing on much larger transactions, the lack of capacities and paying power stared us in the face. There were a few however who believed in having quality counsel despite the limitations. Who overcame their entrepreneurial instincts to stretch every penny and put consulting among the "bottom of heap" expenses. Even though sometimes the legal fees exceeded 2% of the investment size, we had founders and companies who came to have their investment agreements vetted by us.
This was a good choice. Many companies that raised investments from Indian angel networks and small investors in 2012-13 were subject to terms that were not only draconian but also made their companies unattractive to future investors.
Founders took on liabilities that are unusual for their businesses and dilution levels that are unhealthy given the nature of the business. We sought to mitigate this the best we can. Among the companies that raised money from angel and other small institutional investors during that time, few went on to raise capital or grow, many of them are shutting down as we speak now, years later. There are after all, only so many things even the best legal counsel can negotiate when the fault lines run so deep.
Cut to 2015-16, we have grown as a firm and the deals that often come to us are larger deals that can afford our now usually much larger legal fees. While some of these are still early in their business cycles and the fundraising represents a seed investment or a Series A investment, many are deals that come to us from companies that were previously unrepresented or represented by other less than competent counsel.
Often in such cases, we realize we are too late in the game to change how the founders and company negotiate their rights.
Having taken terrible terms previously, out of misguided attempts to save transaction costs (sometimes at the insistence of irresponsible investors) or plain desperation, callousness, ignorance, laziness - the founders and company have accepted terms that make it difficult for even the most skilled negotiator to salvage the terms and bring it on par with market practice (if not better) in future investment rounds. There is of course the occasional "hot" startup that you can manage to turn things around for, but by and large the legacy of your terms sticks with you. It is difficult to convince an investor that you won't accept a term that you have accepted before because you were on meth (or you didn't have a lawyer). That's that.
This is what makes the paradox strike you in the face.
Your clients need you the most when they can't pay your rates, and least when they can.
We have had clients we have represented in the first three or four rounds (Seed, Series A, Series B, Series C, Series D etc) and they have had little use for our services subsequently except putting documentation in place. While we do make money on large deals that keep our practice running, we know we aren't contributing excessively to the shareholder dynamics, wealth and power of our founder/company clients.
On small deals, such as the very first of them, our ability to impact deal terms in the long run is high - we are able to set the tone for what is acceptable and what isn't.
Our experience has shown us that your deal negotiation approach as a founder sticks. Investors take a cue from previous rounds, and soundly negotiated deals create a binding effect on future deals. There are few well negotiated Series A deals that haven't resulted in well negotiated Series E deals, in fact - we had very little to do in subsequent deals in these cases because we weren't reinventing the wheel on the previous ones.
All this is good. Except it brings the legal professional in me to the classic commercial dilemma - what do you do when the people who require your services the most can't afford it and the ones who can pay you the most don't need it as much?
To resolve this dilemma, like all startup investment lawyers do - we cross-subsidise across deals and business life cycles. We undertake deals that pay less but where we have a greater impact and then charge-out their larger deals well to make up. This has worked well in most cases because the entrepreneurs and investors we work with are a wise and kind lot. Even those that haven't raised subsequent rounds (too many of them!) probably would have engaged us if they had. Those who have engaged us have always engaged us. After all, in the long run the relationship we build with clients we have grown up with tends to be bigger than a deal or two.
That doesn't take away from how important you first fundraising deal is. Hire a great lawyer, a lawyer you will keep for a long time. Saving a few pennies on your first deal may not turn out to be as wise as you thought.