Understanding how fundraising terms can affect early-stage startups

Some phrases are deal breakers, says Fenwick partner Dawn Belt

You’ve got a great idea and a strong founding team. So now what? When VCs come knocking, it’s important to make sure you’re well positioned to make deals. Fenwick & West partner (and business lawyer) Dawn Belt joined us at TechCrunch Early Stage to break down some of the terms that trip up first-time entrepreneurs.

Belt has been involved in a number of key Silicon Valley moves, including EV company Proterra’s recent decision to go public via SPAC, as well as IPOs for Bill.com and Facebook. Here, she discusses key concepts like equity and the right of first refusal, and the role they play in the early stages of startup funding.

How financially savvy should founders be?

When it comes to navigating early-stage deals, how important is it to have someone on the founding team with a deep knowledge of these financial guidelines?

I actually don’t think that’s really necessary. I think that it’s nice to have, and it’s good to be able to do this, but that’s not the core competency of the company. That’s actually a function. It’s pretty easy for you to outsource to somebody like me at the time when you need it and get the advice then. It’s more important for you to be really focused on building a good business, and then being open minded and a good listener and learner. (Time stamp: 27:48)

Getting legal help early on

As with financing, there are plenty of question marks around when and how to access legal expertise. Does a company need to be far along and have significant resources in order to seek out legal guidance? Are there other methods beyond hiring a law firm for gaining access to this information?

I think one great thing is that there are so many good resources out there now to get started and just learn about these terms. Just Googling “what should I learn about in order to be on the legal side,” you’re gonna find a ton of things to work with. Our peer firms are used to working with startup companies and have ways to do that efficiently from a relatively early stage. That said, I also tell a lot of very early-stage companies, just go online and do LegalZoom or Clerky. You can set up a company very easily, very cheaply, and it will get it mostly right. And then you, you know, go on your way and start building. And when you’re ready to do a financing, come talk to us. That’s really the better kind of use of time and use of like, our level of resources. (Time stamp: 29:18)

A series of seeds

So, we’re obviously talking mostly early stage here. Heck, it’s right there in the event’s name. But how much do these guidelines change the further down the road you get? When it comes to this guidance, do things dramatically shift as you move from a seed round to a Series A, for example?

We should talk about what it means to be a seed round or an A round; those lines have been really blurred. When I first started practicing, there was really no such thing as a seed round beyond friends and family putting a little money in on a note. Now there are things like full-on price rounds, a big stack of NVCA documents, and it’s called a seed round, and they raised $10 million. The names are somewhat arbitrary.

You can have Series Giraffe Round and Elephant, or whatever you want to call them. It doesn’t really matter too much. But if you’re talking about a priced round in the Valley, and people are using the NVCA forms or some variant of them, there is sort of a market set of terms that, you know, people don’t deviate too much from. (Time stamp: 30:38)

Using your leverage

It’s true that we’re mostly speaking in broad legal definitions here. That’s unsurprising, really, for what’s ultimately a bit of a crash course on the topic. Ultimately, however, viewers were curious how concrete this sort of deal-making is, and what happens if you’re a startup negotiating with some leverage on your side.

Ultimately, it’s like all other negotiation. It’s about leverage. If you’ve got competing term sheets, that gives you a lot of leverage. And where do people spend that leverage? It tends to be on valuation. That’s both the headline valuation and the amount people will invest. The size of that option pool. These key economic terms tend to be a place where people spend energy negotiating, because that has a big impact. (Time stamp: 32:08)

You can read a full transcript of the interview here. 

Check out other sessions from Early Stage here.