Here is some good straight legal talk from one of Silicon Valley’s top corporate securities lawyers. This is taken directly from my book….and no that’s not John’s photo above…that’s below. John is a talented guy and was actually the youngest mayor in Cupertino, California’s history before becoming one of the Valley’s most active lawyers. No lawyer contributed more that made it into the final cut of my book. I like this bit, because John shows you what you need from a legal perspective to get going.
John Bautista, partner at Orrick, explains his pricing structure for startup formation:
I’ve moved to fixed pricing for startups (and fee deferrals) for formation and initial financing. This is what I do for companies:
1. Formation: $2,500—which includes company formation, founders’ stock issuances (including founders’ FF Preferred stock), option plan, offer letters for early employees and advisor, and consulting agreements.
2. Bridge financing: $5,000 to $7,500—for a convertible note financing on standard terms, which I will help the company negotiate and provide coaching around.
3. Angel equity financing: $10,000 to $15,000—there is more work here than a bridge financing, with representations and warranties, board composition provisions, stock restriction agreements between the founders and the investors, management rights agreement with investors, and legal opinion provided by Orrick. The fees will be at the higher end of this range if the angels are represented by legal counsel and depending on the number of investors to coordinate closing.
4. Venture financing: 1.5 times investors’ counsel fees. The first thing a company should do is keep the cap on investors’ counsel fees to a minimum. The more the due diligence and comments on documents from investors’ counsel the more work we will need to do as company counsel to respond. As company counsel, we will draft documents, prepare due diligence, finalize documents, coordinate the closing process with investors, make securities filings, and manage post-closing matters.
I will defer up to $15,000 of fees until the company has raised capital. I work with companies to determine what the capital raise will be that triggers payment of fees to help them with their cash use. As you will see from the above schedule, $15,000 will go a long way for companies. My view is that greater fee deferrals are usually a red herring; it could mean that the law firm is not working efficiently.
Legal Factors to Consider When Choosing an Angel Investor
John Bautista went on to talk about what legal factors you should consider in choosing an angel investor:
I was recently asked what “legal considerations” go into choosing an angel investor. These considerations are in addition to determining who is a good strategic fit for you and who will help open doors for your business. On the legal side, you should consider the following:
1. Lead investor credibility. Choose an angel who has the credibility to set terms and have others follow with the impetus to renegotiate. For example, if an angel like Ron Conway sets terms with you, it is very unlikely anyone else will try to negotiate different terms.
2. Convertible debt. Choose an angel who will do convertible debt instead of equity. Convertible debt is faster, cheaper, and provides you with more flexibility for your first venture round. And a convertible debt round can be done for about $5,000 in legal fees.
3. Valuation insensitive. Choose an angel who is fair on valuation. Some angels are looking for big ownership stakes without much investment. At most, you would sell 15 percent of the company in an angel round, and you will want angels who are willing to pay these effectively higher valuations.
4. Founder friendly. Choose an angel who is founder friendly who will not insist on a board seat, who will not request voting rights or blocking rights on your next financing, and who will not micromanage you.
5. Flexible terms. Choose an angel who will sign up for standard legal documents, like Orrick’s forms, and who won’t require extensive reps and warranties from you. This will minimize the likelihood that the angel will use a lawyer to review documents, thus keeping your transaction fees to a minimum.
Follow me on Twitter @RomansVentures and our firm @RubiconVC. Check out my book on Amazon: THE ENTREPRENEURIAL BIBLE TO VENTURE CAPITAL: Inside Secrets from the Leaders in the Startup Game