Guarding Founders’ Interests: Exit Lawyers’ Perspectives
Step carefully, the world of legality is no playground. The choice of your legal representation sets the stage for your business conduct.
Let’s face it, legal stuff can seem like a maze of jargon and microscopic text. But believe me, in the grand scheme of things, they are an absolute necessity, especially when you’re gearing up for that monumental exit! So, the sooner you master your legal mechanics, the better off you’ll be.
Speaking from personal experience, having a formidable lawyer in the family, I’ve come to appreciate the profound significance of legal intricacies in both our professional and private realms.
First things first…
Before diving into the exciting details, let’s establish a few key characteristics of the startups I have in mind…
- First and foremost, these startups are established and playing by the rules — they’ve got an incorporated company in place. On a side note, if you are wondering when it’s the right time to enter the incorporation game, check out the wisdom of Yoichiro (“Yokum”) Taku, a star player at Wilson Sonsini Goodrich & Rosati. He’s got some stellar advice on that front!
- The startups are well-established in the market. They demonstrate a clear track record of their performance, maintain reliable revenue estimates, and have an up-to-date financial reporting mechanism in place.
- The startups might or might not have various venture capitalists (VCs) from different markets on their cap tables. Due to historical factors and human dynamics, U.S. VCs may have distinct characteristics compared to VCs from other regions. Therefore, your role as a founder is to ensure a crystal-clear alignment.
- You grasp why venture capital follows a power law model, where you’ll frequently navigate economic challenges instead of focusing solely on your quest for innovation. Embrace this dynamic, my friend. Check out David Clark’s insightful analysis, which includes data from 11,350 companies supported by 259 funds between 1986 and 2018.
Picture this:
Wilson Sonsini Goodrich & Rosati has been around since Silicon Valley was just a twinkle in someone’s eye, and their client list reads like a tech giant hall of fame — Apple, Google, DoorDash, LinkedIn, you name it!
These experts have seen it all, from those humble beginnings to the glitzy IPO podium. Their amassed knowledge and industry insights are truly invaluable.
We’ve been fortunate to attend masterclasses by Michael Labriola and Bradley Doline for some time, and just last Monday marked our final session with Michael. They both have that unique superpower of effortlessly diving into the nitty-gritty details while simultaneously seeing the bigger picture, and understanding the actions, consequences, and expectations of all parties involved. Plus, the humor and energy? Infectious! Who would have thought that the world of law could be such an engaging adventure?
⚖️ So, what’s the golden nugget we took away from our sessions?
1. Partner with experienced attorneys.
Even if you’ve got top-notch investors and their legal squads, nothing beats the experience of a solid law firm. Bradley Doline, a legal masterclass pro, also emphasized this crucial point in our earlier sessions.
They’re your swift ticket out of potential disasters.
They’ve encountered more startups and situations than you could ever imagine, and you’ll truly learn from them as you build your own company.
Moreover, they have unique access to people you would probably never get to know otherwise. So, they can make introductions. This is especially valuable for first-time founders.
While in any profession, you might need to double-check the advice you receive, as lawyers have different strengths in different areas. Therefore, in my opinion, it’s a good practice to have another lawyer on your side when things get critical. A fresh set of eyes who bring complementary perspectives to your lead lawyer’s expertise can be invaluable.
2. Different geographic locations mean different legal systems.
There’s no one-size-fits-all solution. What succeeds in Tanzania might not cut it in the US. Especially when a company has a presence in two different countries, it’s like orchestrating a legal duet with distinct rhythms, harmonizing business across borders.
3. As much as we’re here for innovation, it’s essential to recognize that the system is fundamentally driven by economics.
The critical question is, ‘Is this the founder who will lead us to a major exit?’ Not everyone envisions an IPO or acquisition, but both limited partners (LPs) and venture capitalists (VCs) share the common goal of achieving substantial returns on their investments.
So let’s honestly grasp what success truly means for each of us.
By doing so, we can creatively chart our course toward that shared vision. However, it’s crucial to exercise caution when prioritizing margin-driven decisions. Take, for instance, the wisdom from Amazon’s 1997 Shareholder Letter, which emphasized maximizing customer value over short-term margin percentages.
From 1997 Amazon Shareholder Letter:
“Our pricing strategy does not attempt to maximize margin percentages, but instead seeks to drive maximum value for customers and thereby create a much larger bottom line — in the long term. For example, we’re targeting gross margins on our jewelry sales to be substantially lower than industry norms because we believe over time — customers figure these things out — this approach will produce more value for shareholders.
Furthermore, remember that the state of the economy shouldn’t deter aspiring entrepreneurs. History has demonstrated that resilient founders can thrive regardless of the prevailing economic conditions, as evidenced by the success stories of companies like Google and Microsoft.
4. Founders, seek out those who genuinely believe in your vision — those who won’t prioritize short-term gains over the company’s long-term success.
Vision necessitates long-term thinking, which stems from a sense of true ownership. As mentioned in one of the Amazon Shareholder Letters, owners differ from tenants,
“many investors are effectively short-term tenants.”
Have you ever observed the differences in behavior between homeowners and tenants? No one looks out for your interests as diligently as you do. Therefore, it’s crucial to find ways to avoid bringing short-sighted investors on board, as their focus on the short term could prove costly in the long run.
How can you determine if someone truly believes in your vision? One of the most effective ways, in my experience, is to examine whether that person has taken concrete actions to support their convictions. Are they walking the talk? Look for clues that reveal their true commitment.
5. Evaluate everything in context.
Humans are humans. People will often prioritize their own interests over yours. Pause, understand their incentives, and move on to the next best scenario. Be the trailblazer and bring people together for your vision.
Sometimes, individuals may find it necessary to pursue an exit due to their own limited partner (LP) dynamics or a loss of belief in the cause. This decision is not a personal one. In other instances, financial institutions may naturally lean towards prioritizing a sale over an IPO because of the higher commission associated with a sale. As an investor or founder, it is your responsibility to mitigate conflicts of interest.
When it comes to exit strategies, the initial public offering (IPO) stands out as the most demanding path. It demands a substantial amount of information and meticulous preparation, including the need for forward-looking statements. There’s no safety net in this process. The most favorable scenario for an IPO is when the company boasts a strong track record of revenue growth. Factors like revenue predictability and accurate revenue forecasting play pivotal roles.
When it comes to selling your business, you’ll encounter a unique set of challenges, and these challenges often depend on the specific conditions set by potential buyers. It’s crucial to keep in mind that most buyers are not solely interested in the monetary valuation of your company. They have a myriad of strategic factors to consider.
Prospective acquirers are looking for alignment in terms of strategy, products, competitive advantages, and various other aspects. So, as you explore the possibility of selling your business, remember that it’s not just about the numbers; it’s about finding the right fit with a buyer who shares your vision and can help take your company to the next level.
Well, you can also argue, ‘Can you buy innovation?’ That’s a topic for another article.
6. Don’t ever downplay your finances.
Know your numbers from the get-go. In the end, finances are the continuation of a business and it is surprisingly easy to run out of cash. The only common language you have here is numbers. Founders often find it tricky, so be the unique investor who doesn’t just ask for financials but says the magic words:
‘Can I assist with your finances? Show me your approach.’
As you plan for a significant exit or growth, keep long-term thinkers (like homeowners) in mind. Assemble a robust team of critical thinkers and innovators who are enthusiastic supporters of your company.”
Special Thanks
For me, the session’s standout moment was when Michael dropped this simple yet impactful line:
‘More of you guys (Inlcuded VC Fellows) out there means more success. This ingenuity, energy, such smart people…
This is world-changing. Keep doing what you are doing!’
Thank you so much for every single minute you dedicated to our masterclasses and for training fearless future investors. Your support means the world!
And as always, thanks a million to my fabulous 2023 Cohort and role models, Anu Panesar and Nikita Thakrar. Without you, none of this learning and fun would ever be possible.
Here’s to being an owner!
Cheers from Germany! 🇩🇪
