"Use Care When You Seek Out Legal Help"
By Susan Schreter, Writer about startup planning and small-business financing for the Seattle P-I
Here's a story that will make you feel good only because your approach to startup management is the right one: You gather information from multiple sources before making any big business decisions.
A few years ago, a team of entrepreneurs with an entertainment-oriented product hired a general small-business lawyer to advise them on how to raise money. The lawyer indicated that the team needed a private placement memorandum before they could present their business to potential investors around town. The lawyer required $20,000 in upfront fees to prepare this lengthy legal document.
As this rookie team soon learned, this document was not required to start pitching local angel organizations. All they needed at this early stage of the solicitation process was a business plan, which they had, and a willingness to listen to feedback to help fine-tune their business strategies. The team also learned more about how to price their deal and the advantages of raising money from accredited, high-net-worth investors.
The good news is, the guys did ultimately raise money. The bad news was, the original document wasn't used in the final transaction. The CEO referred to this misstep as regrettable but a good learning experience.
What is the real cost of too many learning experiences? Entrepreneurs lose time, they lose money, and they probably suffer greater equity dilution because of extra funding requirements to absorb mistakes.
Private-equity funding is a specialized field of securities law. Not every corporate lawyer will be current on the state and federal rules associated with stock issuances, employee stock option plans, corporate governance and the nuances of negotiating deal terms with investors.
In my experience, funding sources are pleased when entrepreneurs select firms that have well-respected securities counsel on hand. From their perspective, they want entrepreneurs to be well informed, not just in fundraising issues, but have access to skilled guidance on intellectual property, human resources, contracts and more.
Working with larger firms has its advantages and disadvantages. Some entrepreneurs feel lost in large firms. Another sore point is cost. It is possible for entrepreneurs to negotiate lower rates, and a few firms around town may accept some common stock in lieu of cash payments to help particularly promising entrepreneurs achieve their startup goals.
When selecting important vendors, I believe it is worthwhile for company founders to interview at least three candidates. Entrepreneurs should feel comfortable with their lawyers, not intimidated. Look for attorneys who are smart, creative, collaborative, exacting, informative and reflective. A good sense of humor is welcome, too.
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