Good lawyer’s vs Bad lawyer’s
“I’m trusting in the Lord and a good lawyer” — Oliver North
What do Robinhood’s IPO in July 2021, Telkomsel’s USD$300mm investment in Gojek in May and Casai’s USD$48mm Series A capital raise in October 2020 have in common?
In addition to the fact that they all raised capital, have founders and VC fund investment, all the transactions had the participation of law firms that supported them in structuring, negotiating, and closing the deals.
Lawyers are those advisors who are in the shadows of the transactions, although they have a preponderant role and a high influence in the decisions and results. Perhaps many people or first-time entrepreneurs deny the importance of having a good lawyer by their side. However, the best investment they can make is to have the best lawyer possible.
How many transactions have failed to close because of bad advice or poor expertise of lawyers? How many legal documents such as the Shareholders Agreement have inconsistencies due to lack of clarity of the lawyers? How many non-essential rights or out-of-market terms have been accepted by lawyers with limited experience?
What differentiates good lawyers from bad lawyers?
- Experience: As the saying goes, the devil knows better than the devil. Experience is the accumulation of knowledge and experiences acquired over the years and that increases the capacity of discernment of the advisor for a better decision making at the time of carrying out a transaction.
At the time of selecting a lawyer, his experience in transactions like the one to be carried out should be validated. The advisor should be familiar with the terms and practices of the market in accordance with the jurisdiction where the transaction will take place, whether local or international. The prestige of the law firm does not mean that it has experience in the practice needed. For example, maybe the law firm such as White & Case is very experienced in corporate law and even Private Equity, but that does not mean it knows about VC. Otherwise, you will be paying a law firm to learn.
- Objectivity: Sometimes the lawyer accompanying the process can be very arrogant, which could interfere in providing good professional advice. Perhaps the lawyer could be motivated to win an argument with the entrepreneur, does not know the company well and therefore the advice given will be biased.
Therefore, it is important not to hire friends or relatives, but to select the best possible advisor who will always give his or her objective opinion, even if it is something you do not want to hear.
- Customer service: Many people think that the most expensive is the best. However, this statement is not always true. Sometimes expensive means overpriced and not necessarily better client service. For example, among the most relevant law firms in the United States are Cravath Swaine & Moore, Watchell Lipton Rosen & Katz, Skadden Arps Slate Meagher & Flom; however, they are not the firms with the best VC practices compared to Gunderson Dettmer, DLA Piper, Greenberg Traurig, among others.
Usually, the largest law firms in any geography will be focused on serving large corporations, as they will be able to afford the high hourly rates charged by lawyers up to. As the VC industry has grown, it has been building strong law firms that focus on this asset class with appropriate compensation packages, as well as personalized attention from partners to startups.
Lawyers are like doctors, they must be available 24/7 in order to attend to the needs of their clients, especially during the closing of a transaction. In addition to the partner’s attention, an adequate support team is required to be able to cover the project load.
- Added value: The VC ecosystem is particular and requires specific expertise. The selected lawyer should meet the basic elements such as knowledge and experience. He/she should also have a holistic mind by understanding the entrepreneur’s motivations and the expected outcome of the transaction. For example, sometimes the entrepreneur grants an MFN to investors with the approval of his lawyers, losing sight of the fact that this right could complicate subsequent capitalization transactions with other investors.
The law firm should be aware of the costs it is charging, whether per hour or the fixed amount determined for the entire transaction and provide legal advice in a transparent manner. When the cost is fixed, they may put pressure on the entrepreneur or fund to close a transaction even when the terms are not fully agreed upon.
When an entrepreneur or investor has no experience in legal matters, it is very easy for him to be overwhelmed by the marketing of law firms and to select his friend or an inadequate advisor. Therefore, anyone who is going to sign a contract needs to keep the following in mind:
- Learn to read legal documents. Do not leave the reading of the documents only to the lawyers, sometimes they might make omissions or value judgments different from the ones you have about your business, especially if you are initiating the business relationship with them.
- Actively participate in the negotiation of the terms of the contract. Generally, the terms to be negotiated are legal or business terms; regardless of the scope, lead the negotiation and take responsibility for the decisions. The advisor leaves at the end of the transaction and you are left with the legal burden of the contract.
- Do not get carried away by the reputation of the law firm, always validate their knowledge, experience and track record in the practice you need; e.g. VC, Private Equity, corporate, intellectual property, criminal, etc.
- The law firm partner who will serve you is more important than the name of the firm itself. Develop and cultivate relationships with lawyers, they could be in a firm today and start their own firm tomorrow.
There is no doubt that lawyers are a necessary evil. They will not only be there to accompany you in the legal process of the transaction, but they can be very good traveling companions, since they can share knowledge and experiences, they have lived in the multiple transactions they participate in, they can also bring other investors closer and support you in the development of the startup and/or fund. The best thing an entrepreneur can do is to approach good lawyers, listen to their advice even if it hurts and cultivate a long-term relationship.
“I have a loyalty that runs in my bloodstream, when I lock into someone or something, you can’t get me away from it because I commit that thoroughly. That’s in friendship, that’s a deal, that’s a commitment. Don’t give me paper — I can get the same lawyer who drew it up to break it. But if you shake my hand, that’s for life” — Jerry Lewis
Note: please refer to the original publication at EL CEO: De buenos y malos abogados (elceo.com)
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Ricardo Latournerie. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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