Aligning with entrepreneurs
Startup Attorney, IP Pioneer, Entrepreneur Advocate
Often law firms will only represent venture backed startups, aligning themselves with the VCs.
Alignment with VCs means that founders do not get the best advice or full picture of their options.
ELG sticks with the founding team through thick and thin and does not take voting rights.
Lesson: Startup IP with Jack Russo
Step #10 Alignment: Aligning with entrepreneurs
You have to know where there are biases here in the Valley. So for example, if you go to a big law firm and there are lots of them and they’re great and they do lots of great things, and they say, “We will represent you if you get venture capital." The subtext of that goes like this, "We like representing venture capital firms. You are a portfolio company in a venture capital firm that will bring us other business. You yourself probably will not bring us other business, but you might." The venture capital firm is like the foundry that is building different models of cars and you are just one of the cars. We want to represent the foundry.
Now when the foundry decides on the board of directors, we back what the foundry wants us to back because they, basically, are our client, so we are aligned with their thinking. If they say there needs to be a new round of financing and you ask as management or as the founders for our opinion the bias is probably going to be, "Yes, you probably need a new round of financing." If that means that your control is going to go below 50%, we are probably just going to tell you, "That’s the way the world works," and we are not going to give you the counter case.
When we say to you, “When tough times come, you can count on us,” we are saying the business can count on us, not necessarily the founding team. Now contrary-wise, what we like to say to startup folks to co-founders teams, "We are fully aligned with you as a team. The venture capital is just the financial resource. We are going to stick with you as a group through thick and thin. We are never going to take for our fees voting stock where could somehow fire off a contrary vote. We are going to give you our proxy for any of the shares that you give us for services, so we are completely neutralized on that. When things get tough, we are going to tell you that the effect of this is going to reduce your control on your 50% and before you do that, you may want to go to friends and family, banks, other forms of capital and the existing venture capital to see if you can get nonvoting sources, sources that don't dilute your control. Because once you lose that control, you may lose the entire division of the business.”
This is a very significant difference, because there is one where there the intellectual capital is what we are hitching our wagon too. Venture capital is probably what prevented us from continuing with certain clients, so it’s not uncommon. We’ll say, "Once you take venture capital financing, the odds are they'll ask us to leave as your lawyers because they know that we are aligned with you and you would perhaps keep us as your separate council."
Neoforma was the kernel of the idea that two co-founders Jeff Cleck and Wayne McVicker had. They went to a number of big firms as two individuals. The big firms all asked, “Do you have venture capital?" "No." "Do you have angel money?" "No." "Come back when you are further along." They smartly said, "Is there anyone that you think would talk to us about what we want to do because we really want to think about how we want to get this started?"
I was refereed by someone at either Wilson Sonsini or Fenwick and West to meet them. I didn't know them at all. They came in and said, “Oh you were highly referred I think by two or three other law firms,” and they said, "Look, we don't venture capital, we don't have angel money, but we have a great idea let us tell you in confidence what it is." I said," Fine." We were sitting at this table and my recollections actually helped them improve the idea substantially and it’s kind of a whole separate story.
They short answer is we started that business and I was the first outside person to commit to them. That we would do the legal services for either deferred or discounted written off fee and at one point when they showed me that they were very, very serious and ready to make it full time work, I actually cut the first check and I want to say it was $25,000 which was maybe $100,000 in today's dollars and I remember that investment and I may have made a few follow on investments.
When they went public it was worth something like $80 million at the top of the market so people in the firm were like, “Wow, that great! Can we all retire now?" I just laughed and said, "No, we are probably going to give most of the money away to charity." Which we did and we formed an interesting foundation called the Foundation for Creativity in Dispute Resolution which is a nonprofit that exists to help people learn how to resolve complex disputes.