Lawyers . . .

are individuals who have graduated from a law school and passed a bar examination in the state in which they practice. That said, know there are lawyers who understand corporate finance and venture capital financings, and those who do not.

A lawyer who knows corporate finance can be a real help to a start-up company’s financing efforts. One who does not cannot, and probably will be expensive and distracting. The easiest way to determine whether a lawyer understands financings is to interview him and ask him about his experience.

Venture capitalists routinely use lawyers to prepare and even negotiate their financing agreements. Nonetheless, some venture investors discourage entrepreneurs from employing counsel to represent them in negotiating financing terms and finalizing documents. Others encourage entrepreneurs to keep things simple and hire a lawyer only after the deal has been agreed to and to limit the lawyer’s function to that of reviewing the financing agreements prepared by the investor’s lawyers.

The theory these venture capitalists espouse is that while they need a lawyer to protect themselves from making bad deals and taking unnecessary risks, the entrepreneur needs none. But does it really make sense that a venture capitalist who has completed dozens of financings needs a lawyer while an entrepreneur who is new to the whole venture financing process needs none? Of course not.

The venture capitalist who advises the entrepreneur not to seek professional advice usually does so from personal motives. Certainly, the deal will go easier and better for the venture capitalist if the entrepreneur forgoes the advice of counsel and negotiates from a position of inexperience.

The negotiation and documentation of venture capital financing involves a number of issues of importance to the entrepreneur. Many of these issues are ones that are apparent only to a person experienced in corporate finance who understands the legal and practical implications of the way these issues are resolved. In general, it is wise to enlist the aid of counsel before the terms of the financing are fixed. If a letter of intent or investment memorandum precedes the formal financing agreements, it is probably best to secure counsel before the letter of intent is signed. See: Letters of Intent, Negotiation, Structure.