“Opposing” counsel?: Stop fighting with your investees
How Navajo Power & Candide Group got a deal done at half the cost, with twice the love
From prenups to amicable divorces, legal processes that govern all sorts of relationships have gotten streamlined as people learn that it can be far less costly, in terms of both time and dollars, to use one lawyer to set an agreement rather than traditional “opposing” counsels.
This year we asked — why not apply this to an investment relationship? So when we at Candide Group set off to lead an investment into Navajo Power, we asked our friends at Blue Dot Advocates if they would be willing to be our “collaborative counsel,” acting as a mediator to structure and paper our deal as lead investors.
Spoiler alert: it worked phenomenally. We spent about half the money, took about a half the time, and all still like each other. Read on for the full story — and our lessons from it for others who are interested in jumping on the collaborative train.
Why “opposing” counsels if we all love each other in the first place?
Here’s the sad truth many investors and entrepreneurs encounter. We start off like a love affair — the metaphors abound in the field, from founder dating to romancing investors. Right before an investor decides to make an investment is often the most nerve-wracking time for both sides — investors, at least those with a conscience, don’t want to be leading on the entrepreneur, who is keenly aware that the investor might walk away at any time as they get to know the company and team. (Like, will you still love me once you find out I don’t just snore when I have a cold…)
We’ve learned each others’ good and bad traits, and decided we’re willing to mutually take the risk. The investment proposal comes, and is gleefully accepted — we’re getting hitched! Elation, engagement pictures and perhaps press releases, the whole nine yards. Trust and love is at an all-time high. Until… and we’ve heard this before: “Baby, how about a prenup?”
Disappointment, fear and pandemonium enters the formally harmonious relationship. Ok, that’s a bit dramatic — and in the case of investor-company marriage, every single relationship has a prenup, often in the form of NVAC docs that govern the relationship over time. It’s standard enough to not need to have too much debate, unless there’s some really specific features that the investor or entrepreneur wants to add.
And yet, the traditional process is to have opposing counsel sitting on every call, culling over every redline and back and forth of the documents, to the point where, from Candide Group’s perspective, we found at times that lengthy legal processes were getting in the way of the good work the companies wanted to do in the world, and in general, are just not fun for anyone. Negotiating legal, and all the back and forth it implied, wound up being a chore and a relational downer, that ultimately would build trust, but never be particularly fun in the process. If this feeling resonates with you — we feel your pain, and think we have a solution.
How a collaborative counsel works
This process was initially proposed by Bruce Campbell of Blue Dot Advocates. With a collaborative counsel, both sides sign a legal agreement saying that they have committed to counsel serving as mediator, and thus give up some traditional rights such as attorney-client privilege. The investor and entrepreneur first have a detailed conversation to outline what they think they want.
The lawyer then takes that initial set of agreements and stress tests it, like a good marriage counselor — have you thought about the consequences of x? What would happen in the case of y? You’re saying z, but how do we make it actually legally enforceable? Once each contingency has been worked through, then we go to docs and set an agreement. Final alignment is done by consensus.
Why this tool is extra-awesome for impact investors
Impact investments, at least, when implemented under a non-extractive framework, are designed to ensure that the primary beneficiaries of transactions are affected communities. That can mean sometimes needing to have quite meaningful deviation from standard NVAC terms. Deviation from standard terms can increase substantially legal costs, especially if a lawyer on one of the “sides” is unfamiliar or uncomfortable with impact-related innovations in deal terms. On the other hand, we found that in the collaborative process with Blue Dot we were able to efficiently incorporate the following community accountability measures:
- Allow a company to return capital without forcing an exit, as mission-driven founders often aren’t trying to grow and flip, they want to grow and root in community.
- Allow a company to grow at a reasonable pace, rather than demanding 10x growth.
- Preserve ownership by a particular community, rather than having the majority of proceeds flow out of that community.
- Ensure that the company can make mission-driven decisions, even when impacting the short-term financial bottom line.
- Ensure that companies, if choosing to sell, can set their own mission-related conditions for doing so.
In the case of Navajo Power, a majority Native-American owned entity, all of us around the table wanted to make a number of mission-aligned adjustments in order to maximize the potential for impact. Again, it was incredibly useful that the lead investor and the company could work with a single law firm to design and document the following mission-alignment provisions, some which are completely new to the field:
- Profit Reinvestment into New Projects — The company is seeking to develop a self-propelling model to develop more and more clean energy projects with tribal communities, and as such, we codified that a minimum of 80% of profits have to be reinvested in new projects or into communities rather than distributed to owners.
- Mission Delta — Investors into this deal loaned capital at below market rates for the risk being taken. But rather than the company receiving this benefit, we established a “mission delta”, the difference between what would likely be market interest rate and that which the investor lent at, and the company is bound to provide this share of would be profits to communities in the form of financing for off-grid solar systems or other community benefit projects. The company is helping to set up Navajo Power Home, a worker, customer, and community owned cooperative for Off Grid Solar and storage.
- Native Ownership — Within a year of closing, the company was bound to be majority Native owned and has already achieved this milestone. This is important for control of decision making and trust building with tribes and partner communities.
- Turquoise Share — We established a “Turquoise Share”, which is 10% of the company. In the event of profit distribution or the sale of the company, this ownership stake will yield proportional monies for community benefits. This was another way to honor the risk being taken by the impact investors in the deal, yet have the benefit of the concessionary rates go to financing community infrastructure rather than the company.
- Pay Scale — The company has placed a cap on executive compensation at 5X the lowest paid employee.
Prerequisites and Potential Pitfalls
Every process deviation inserts new variables and challenges. We thought the below were worth mentioning; albeit easy enough to mitigate against with thoughtful planning and dialog.
You need to know what you want: Imagine commissioning a painting. If you walk into the art studio with a photo of your mother at the piano, and say, “paint me her portrait, and just make the piano zebra-striped,” you’re far more likely to get what you want vs if you show up and say, “I want to give my mom a gift of a portrait, she looks like me but older.”
If you want a Rembrandt rather than a Monet, make sure you walk into the process with enough of an understanding and basic alignment. If you’re still fighting over the valuation and not sure what key terms you really need to protect your investment, perhaps you do really want your own counsel to protect your interests. Or if the investor is pretty new to you, and you are relatively green as an entrepreneur, you may want your own counsel to make sure no overly onerous clauses are inserted into the process.
We tried to predict any “unknown unknowns” through our preparatory conversations, but sure enough, Blue Dot Advocates still identified some — -for instance, how seniority would work in any number of work-out scenarios. This added time and cost to Blue Dot, and is something we would want to better budget for in the future. However — net-net, having one counsel rather than two still significantly reduced costs.
Trust and information symmetry is key: In the case of Navajo Power, the two founders, Dan Rosen and Brett Isaac, were known by Candide Group for many years. Dan was co-founder and CEO of Mosaic, a company in Candide Group’s portfolio already. Brett had been part of the landscape of solar on the Navajo Nation for years and overlapped with the Candide Group team in various forums. Both sides felt confident that they were equally devoted to the company’s mission, and not trying to take advantage of the collaborative process to simply get a better deal. Both sides had executed deals before and knew what they did and didn’t like (let’s say in the case of Candide Group, this was our 70th marriage). But entrepreneurs don’t always get years to get to know their investors, and vice-versa — a collaborative process may not be great for a newer relationship when trust is still being built.
Urgency asymmetry is normal: Typically, a management team is solely focused on the company, and extremely eager for their capital round to close in order to move forward in the work. For instance when legal questions came up, Navajo Power would often respond within a couple of hours.
An investor may also be eager, but tending to multiple deals at the same time — and hence might respond within a day or two rather than immediately. And counsel, with multiple clients, simply takes as long as they take. This can be frustrating, especially for first-time entrepreneurs who may not know how much investors have on their plates (they may be off solving another company’s emergency; at some point they may benefit from how the investor thoughtfully prioritizes their time!)
Dan, as an experienced entrepreneur used to busy investors, often did a lot of the prep work to make it easy for Morgan to step in and give feedback, or would take their phone conversations on the fly and put them into email to catch up the full group. This thoughtful shepherding of process helped keep things moving at an acceptable pace for the company, without setting unrealistic expectations on the investor. However, with competing priorities as well, not every entrepreneur may be prepared to play such a role. Setting out timelines and mutual expectations from the start can be a great way to avoid (or at least minimize) any frustration.
Be realistic about time and cost: Just as non-adversarial processes in other areas of the law (e.g. mediation) reduce costs and time, so should collaborative deal making. More efficient, however, does not necessarily mean “cheap,” especially if the transaction incorporates structural elements that are designed from scratch. The key, we think, to avoiding any surprises is open communication about the projected costs and a shared understanding that there could be legal complexities that add to the cost of a standard term sheet.