Fund Raising & Agreements
A couple of weeks back a much awaited document hit our mailbox — the Shareholder Agreement. Some background — we first met our investors way back in September 2017 at a time when we weren’t actively looking to fund-raise. Over several discussions we refined our thoughts together and then in April we had the signed termsheet. We did our little celebratory dance and went back to building the business.
We knew a formal agreement needed to be signed to actually formalize the investment and get the money, but thought of it more as some necessary paperwork. Now one thing that I am learning is that there is no ‘minor paperwork’. Every time you take something for granted you realise it needs your time, inputs and perhaps some expert opinion.
SSHA opened this Pandora’s box for us at strings.ai. Here are some observations on the process, the agreement and how to deal with it (its not meant to be legal advice, and I am sure you know better than to take legal advice from anyone who isn’t charging you an arm and a leg):

- Size matters: an 84 page document is not something I would read unless it was a friend’s book draft (or maybe life-changing parenting advice — topic for possibly another blog post). So my initial reaction to the attachment was to slot it for an uninterrupted slot in my calendar (aka procrastinate). Now those who know me know that I am pretty bad at procastinating (and I do not say this with any pride). So every time I encountered it while switching windows, I would get distracted from the mission at hand and start scrolling through the SSHA. Many scrolls later I realized that I was still in the ‘Definitions’ section. Advise: do the hardest thing first — find the right sections to read
- Definitions: Now if you think you were done with those in high school when you had to define Power, Force and other such weighty stuff, you were wrong. Lawyers have taken this to a completely different level, they can define obvious things like “Agreement Execution Date” (the date on which this agreement is executed, duh!) or obscure things like “Cause”. Advise: while definitions are important, you mostly let your lawyers deal with it. And if the lawyer is really good, they will find even more terms that need to be defined
- Big Picture: While it can feel great for self-importance (and maybe self-improvement aka learning) to delve into every point in the agreement, it is important to remember the why (Simon Sinek style). Is it for intellectual masturbation, for choosing between various investor offers or to close the deal quickly without pledging your arms and legs? Advise: empathy can be a super power here — can you think like the Company, the Founders and the Investors all at once and then see how they can all win.
- You can win: I am no fan of Shiv Khera, simply because I am yet to read any of his great works, but very often this process can begin to look like a “us versus them” where only one entity can ‘win’. The great thing about lawyers is that they are also problem solvers and creative ones at that. Advise: nothing is black and white — find the greys that work for everyone aka carveouts.
- Commercials versus legalese: we struggled with this a bit — every time the lawyer said “you focus on the commercials”, I was left wondering — aren’t all those covered in the term sheet? So your lawyer is good at looking out for you and identifying things that could be big risk factors or are non-standard. However, they wont help you decide how many board members should you have. Advise: A rough rule of thumb that evolved was anything that involved numbers fell under commercials — this could be time periods, %ages and ofcourse $$s.
- Indemnify: I don’t want to dwell on the specifics of the SSHA here, but one thing that everyone needs to look at in every agreement is the indemnities. Broadly this means “what happens when things go topsy turvy” — while typically this should be applicable in very extreme circumstances of lying and cheating sometimes this could also become relevant if the law changes (or the interpretation of law changes). Indemnities essentially mean that the investors should not suffer a loss in those circumstances and could hold not just the business but also the founders liable. Advise: Don’t take this lightly, get your magnifying glass and read the fineprint here.
- Changing lightbulbs: I am sure you have heard the “how many engineers does it take to change a light bulb” series of jokes. If there was a similar one for lawyers I am sure the answer would be “impossible”. It took me some real life examples to learn that you can’t leave 2 lawyers to negotiate an agreement. I remember reading my first agreement as an I-Banking analyst and thinking “so now I will take all these comments from the client’s lawyer and send it to our lawyer and it will be a ping-pong match, can’t i just get the 2 lawyers to speak to each other and sort it out”. Advise: agreement negotiations are more than the legalese, they are about informed trade-offs. Advise: Only the business people can make the trade-off decisions, your lawyers will help ensure that they are informed trade-offs.
Since I have hit the magic #7, I am going to sign off and get back to being distracted by the SSHA instead.
