While many startup lawyers maintain good professional relationships with venture capitalists (VCs), those who sell their services based on promises of special access to VCs and introductions should be approached with caution.
Having a trusted legal counsel is crucial for navigating the complex landscape of VC funding. Startup lawyers can offer valuable insights and advice to entrepreneurs, help them negotiate complex deal structures, ensure favorable terms and protect their interests. However, potential conflicts of interest can arise when startup lawyers become beholden to VCs. In this article, we explore why entrepreneurs should be wary of seeking VC introductions from their startup lawyers, and how conflicts of interest can compromise the legal advice provided to startups.
The Role of Experienced Startup Lawyers
Experienced startup lawyers possess a wealth of knowledge and expertise in dealing with the intricacies of startup-VC relationships. They have seen numerous deals and understand the dynamics involved in negotiating with seasoned investors. These lawyers play a crucial role in leveling the playing field for first-time entrepreneurs who often face and experience inequality when negotiating against more experienced investors.
With their deep understanding of deal structures, legal requirements and industry norms, startup lawyers can provide valuable insights and advice to entrepreneurs. They help entrepreneurs navigate complex negotiations, ensure favorable terms and protect their interests. By leveraging their expertise and negotiation skills, these lawyers empower entrepreneurs to engage in discussions with confidence and make informed decisions.
However, VCs benefit from the experience inequality that exists between first-time entrepreneurs and seasoned investors. The unequal balance of power allows them to secure more favorable terms and potentially gain more control over the startup.
When startup lawyers effectively level the playing field and advocate for the entrepreneurs’ interests, it challenges the advantage enjoyed by VCs. By negotiating fair terms and ensuring the entrepreneurs’ rights are protected, these lawyers may disrupt the traditional power dynamics in favor of the startup. As a result, VCs may prefer to preserve the inequality and discourage startups from seeking the expertise of experienced lawyers who can tip the balance.
Captive Counsel
In the startup ecosystem, VCs wield significant influence and control over startup lawyers and law firms. As repeat players in the industry, VCs have the ability to generate substantial business for these lawyers and firms. As a result, a power dynamic exists where VCs can pressure startups to hire lawyers who are loyal to their interests, often at the expense of the startup’s best interests.
When lawyers are heavily influenced by their relationships with these investors (and the resulting revenue they can bring to the firm) they are “captive counsel”. This dependency compromises their ability to provide unbiased and objective advice to the startups they represent. The interests of captive counsel become intertwined with those of the VCs, and they may prioritize preserving these relationships over advocating for the best interests of the startup and its common stockholders.
The conflict of interest stemming from captive counsel can have long-term implications for founders and employees. The skewed priorities of captive lawyers may result in unfavorable terms for the startup, leading to significant financial consequences and an imbalance of power within the company.
VCs may employ various tactics to influence startups into hiring lawyers who are aligned with their interests. In turn, captive counsel may use their closeness to VCs as a selling point, trading on their “special access” to these investors to attract potential startup clients.
Suspicion Toward Lawyers with Special Access
When lawyers claim to have special access to VCs and use it as a selling point, it raises concerns about potential conflicts of interest. Startups may question whether these lawyers are truly prioritizing the startup’s best interests or if their loyalty lies with the VCs who provide them with access. This suspicion arises due to the inherent conflict that arises when lawyers have strong ties to specific investors.
This potential for biased should make the startup founder suspicious. Founders may wonder if captive counsel will provide them with objective and unbiased advice. Startups need lawyers who will prioritize their interests without being swayed by external factors.
Quality startup attorneys don’t need to use their special access as a selling point for their firm; those that do may be captive counsel.
