From Biglaw to Founder Trenches: A Law Student’s Path into Venture Capital
“Ah, the lawyers — I bet you thought we’d never get to them. In deals, a great lawyer can be a huge help and a bad lawyer can be a disaster.”
This post is co-authored by Henri Hyvärinen, Anton Backman, and Aleksis Tapper, all three of whom study law at the University of Helsinki. Henri, Anton and Aleksis have all gained previous work experience from some of the leading law firms in Finland. At the same time, they have shared a common interest in entrepreneurship and contemplated about the future opportunities of founding their own law firm or going into venture capital. The trio has also actively sought out experts within the legal technology domain in order to further understand the implications of the recent developments in legal tech and what the consequences will be for young lawyers like themselves.
This is the second post in a series of individual blog posts by the team at Wave Ventures. This time, we will write from a different kind of perspective, with the aim of introducing the world of VC to people who want to understand a law student’s point of view on the dynamics of the venture capital industry.
Diversifying the VC Domain — New Ways of Getting into the Business
The age-old recipe for VC has largely been about former successful and revered entrepreneurs or high finance professionals pooling their wisdom and experience together in order to help smart and ambitious founders on their journey to success. However, new ways of getting into the business have been carved out as VCs look into extending their investment teams with new talent. Despite the young age of the industry, it can be said that desired additions to investment teams have largely been focused on young talents with backgrounds either in engineering or in finance. Recently, the VC firms have been increasingly diversifying their teams in hopes of outperforming their competitors over time. People with backgrounds in design, social sciences, law and liberal arts have entered the industry to work as investors side by side with their more traditional peers, providing insight that otherwise might have gone unnoticed.
In our case, our first exposure to the world of VC was through volunteering at Slush, one of the leading startup events in Europe. The experience made us inclined to seek alternatives to traditional law firm internships. After meeting with the other soon-to-be founding members of Wave Ventures, what we had on our hands was a like-minded group of interdisciplinary students who were determined to execute the concept of a student-run VC fund and to create a lasting movement around it. Even though the entire team of Wave Ventures now focuses primarily on making investments, there are and have been quite a few cases where a legal viewpoint has proven to be useful.
Lawyers as VCs — From Fundraising to Managing the Investments
Step 1: Fundraising
When it came to raising a VC fund, a legal background turned out to be advantageous. In order to get things up and running, we had to prepare quality marketing and pitching materials. In addition, we had to decide on the most suitable fund structure — i.e. whether the fund would be structured as a traditional limited partnership (where the fund’s lifetime is normally limited to 10+ years) or as a limited liability company (an evergreen fund with an indefinite lifetime). Finally, with the appropriate preparations we could enter a roadshow to solicit investors to our fund.
The pitching material or the Private Placement Memorandum is a document that lays out the objectives, risks, and terms regarding the investment. In our case the investors wanted to know most about the investment team and their background, the fund’s investment criteria as in where the raised capital would be invested (geographic focus), into what types of companies (domain or industry focus), and how much capital was to be allocated per investment (check size). The information provided at this stage reflected how the subsequent Limited Partnership Agreement was drafted and the formulations of the provisions therein. The said agreement provided a framework for the division of rights and obligations between the General Partner (us student managers) and the Limited Partners (our investors) of the fund.
Step 2: Investing
Network. Network. Network. Should you ask a traditional VC how their deals come in through the door, more often than not, the answer you would get is ‘’through our network’’. VC’s like to syndicate. At the early stages, it is mostly a means to diversify risks and to provide the founders with a solid foundation of complementary skills straight from the get-go. At the later stages, it reflects the substantial amount of capital raised by companies during their final years before a potential exit.
With a background in law, one’s first realization is often the lack of a relevant ‘’VC network’’ as most of the events organized in law school focus solely on topics aimed at future lawyers — a practice that in itself lacks diversity and discourages interdisciplinary movement and interaction. Yet having read the article How to work with lawyers at a startup, it dawned upon us that there is much potential to draw from the legal field — also in regard to how VCs find relevant companies to invest in.
Think of yourself as a potential founder. You have been brainstorming with your friends regarding a potentially viable business and you finally decide to get the wheels turning and try your wings as startup founders. Who is the first outside advisor you ought to contact, in order to form a company and to make sure that everything you have come up with belongs to the company, and not to the respective individual who came up with the idea? A lawyer.
That is, reputable lawyers established in the startup and venture capital space often see startups before anyone else. There are quite a few legal hurdles that should be handled accordingly before the founders would want to start pitching their company to potential angel investors and VCs.
Once a deal comes through our door, the next step is to assess the merits of the case. This is often times done by evaluating the team, the idea and the target market, often in the form of a pitch deck, and given that the things laid out in it solicit our interest, subsequent meetings follow before any investment decision is made — a comprehensive practice for which the analytical skills gained in law school and the fundamental principles of corporate law strengthened during law firm internships provide a great foundation.
Lawyers are often called risk-averse and for a great reason — the profession focuses largely on identifying current and potential risks regarding the client’s operations. Focusing on risks is not necessarily a bad thing as long as the investment team is not made up of lawyers entirely. VCs take calculated risks all the time, and most of the time the answer to a founder pitching his or her company is a no. That is, when an investment is made, it has gone through multiple rounds of questioning — something that comes as second nature for people with a background in law.
Additionally, a great deal of the companies obtaining investments from VCs are highly innovative and continuously challenging the current legal environment either intentionally or unwittingly. Companies like Uber and Airbnb are set out to disrupt entire industries in a manner that often requires the relevant legislation to be shaken up as well. In these cases, a great ‘’legal engineer’’ , who is capable of constructing a relevant legislative framework of all the different acts and rules that govern the startup’s business and of forming a strategy that enables the intended business to blossom in one way or another, can create a lot of value for the company.
Making the investments
Prior to an investment, as is a normal practice in any M&A deal, we conduct a relatively brief due diligence — and legal knowledge comes in handy again. The briefness is due to the fact that there seldom are that many things to dig deeper into than the team, idea, and market at an early stage company.
The process, from a legal perspective, usually starts by us asking the founders to provide us with all the relevant agreements and other material put into place at the company prior to our involvement. These include at a minimum, a shareholders’ agreement and an agreement regarding the assignment of intellectual property rights to the company, as the company not owning its IP is often a deal breaker for VCs.
Consider yourself in the shoes of a startup founder once again. When you start developing a technology, bringing on board co-founders, and discussing equity distribution, it is recommended at this point to contact an attorney and start drafting a shareholders’ agreement governing the relations between the shareholders of the newly established company.
The capitalization table or cap table is also of utmost importance for any future investor. From the cap table, we are able to examine the ownership structure of the company. At the earliest stages, one of the main interests of an investor is to make sure that the founders have enough equity left in the venture, so that their interests in maximizing the success of the company are aligned with the investor’s intentions.
Once the company has passed our due diligence, we issue them a term sheet. The term sheet is a brief document laying out the specifics of our investment with clauses regarding the economics of the investment and what kind of control and protection rights that investment entails for us as an investor.
Step 3: Managing the investment
Making it about the founders. After the investment is made, the company officially becomes a part of Wave’s portfolio and our role shifts to helping and providing the team with everything we practically can, be it legal drafting, student recruiting, intros to follow-on financiers or extracting synergies between portfolio companies, and thus enabling the founders to focus on the things that are most critical for their company. The fact is that the ideal VC can add huge value to their portfolio companies beyond a mere capital infusion. As we see it, the real added value comes from a mixture of personal time, access to network and cash.
We have found it mutually rewarding to work closely with our portfolio companies and to keep ourselves up to date with their progress. Besides participating being extremely exciting, it also provides us a unique learning experience that can be utilized for the good of other portfolio companies as well. Moreover, as a student-run VC fund, we try to lower the threshold between FFF and the first investment from an outside investor.
Finally, we see the whole playing field of venture capital as a means to provide the most prominent minds with the tools of the trade, including the right people, to kick in the next gear in the company’s journey. Diving head-first into the trenches with our founders entangles us with the challenges and successes of their everyday lives, simultaneously exposing us to the steepest learning curve imaginable when it comes to managing a portfolio of companies. With an investment team composed of talented and hungry individuals from different backgrounds and with each one having their own distinctive story to tell, we aim to bring something of our own to the table — being students in the world of venture capital.
Interested in law or VC or the beautiful mix they make? We love meeting new people and discussing topics of varying seriousness. Do not hesitate to contact us at first name [at] wave.ventures.
P.S. Henri, being an avid runner, decided to enroll himself to Helsinki City Marathon organized in August, so should you want to meet up in a more high-paced environment it is possible also. Anton is most likely to be found admiring the in-house acoustics at Kaiku and Aleksis somewhere in the middle of the hustle and bustle of Silicon Valley. ;)
P.P.S A book that we dearly recommend that you familiarize yourself with before embarking on a startup journey: ‘’Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist’’ by Brad Feld and Jason Mendelson.