Back Office Ops: Fund Lawyers 101
A few months ago, Eric Bahn went on a rant.
Eric is the co-founder of Hustle Fund. He's normally a chill, even-tempered dude. But the chaos and cost of the back-office ops scene was driving him mad. In fact, he said that back-office ops take up around 50% of his time. That's time NOT spent looking at deals, supporting the portfolio, or fundraising.
Eric's rant left me with a lot of questions. Those questions led to a 4-part series on the biggest elements of back-office operations within VC. So far we've covered:
- Fund administration
- Tax accountant
And today we close out with the final piece of the puzzle: fund lawyer. We'll cover:
- the two different types of lawyers you'll need
- what makes a good lawyer
- a big myth
I know, I know... this stuff can be tedious. Stay with me, or scroll for the TL;DR.
The two types of VC lawyers
Most VCs have two types of lawyers:
Type 1: Fund Formation Lawyer
This type of lawyer helps you out with all the nitty gritty details that go into launching a fund. They'll help you incorporate, set up all the paperwork, onboard your LPs, etc.
Type 2: Deal Lawyer
This type of lawyer is someone you'll work with frequently, so pay attention.
When you invest in an early-stage company, most likely that agreement is taking place on a SAFE. When the company raises a priced round, your SAFE will convert into shares.
This can be a tricky process. Thanks to things like dilution and annoying lead investors and down markets, early stage terms aren't always considered when the company finally raises a priced round. This is where your deal lawyer comes in. Your deal lawyer's job is to make sure your shares convert properly. You want to make sure that:
A) the contract you sign at your initial investment will set you up for success in the event of a priced round
B) the terms of that contract are carried out properly
C) you understand the terms in new any documents you sign
What makes a good lawyer?
A good lawyer has these qualities, regardless of whether they help you with fund formation or deal review:
1. A good lawyer is responsive. This is a common theme among all back office providers, so get that shocked look off your face.
2. A good lawyer is detail oriented. You want someone who will read every line of a contract, not assume it's all groovy.
3. A good lawyer will simplify things.
Let's talk about #3 for a second. Legal-speak can be overly complicated with far too many "therein"s and "indemnity"s and "severability"s.
A good lawyer will dumb down the complicated stuff so that you fully understand the most important aspects of a contract, and can quickly make a decision on what (if anything) should be edited.
A big myth about lawyers
There are a lot of big-name law firms out there, many of which specialize in working with VCs. It may be tempting to hire a brand-name firm. Maybe you assume that the bigger the brand name, the more protected you'll be.
This is not necessarily the case. The one thing you can count on from a brand-name law firm is a high hourly rate. Small boutique law firms may not be as well known, but they could be a great fit for your fund. And their fees may be much more reasonable.
Be sure to interview a wide variety of lawyers before going exclusive with one.
My eyes glazed over... can I get a TL;DR?
Yep! Deal lawyers are different from fund lawyers. Do your homework on each. Do your research to find the right firm. Don't be scared off by a smaller firm just because they're not well-known.