Legal Tech & Contract Review

HT Colin Levy

“Legal tech and AI won’t replace attorneys, but attorneys who leverage these tools will replace attorneys that don’t.

Lawyers should view AI and legal tech as a tool that will help support their work and allow them to focus on higher-value tasks, and not as something that will replace them. Legal tech will facilitate growth and productivity in organizations by increasing accuracy and driving efficiencies.

In contract review, there is a need for a triumvirate of people, process, and technology to solve contract challenges. AI is not able to solve these challenges alone.  For example, AI contract review software can review an organization’s real estate leases for force majeure clauses or pandemic exemptions, but there may be other relevant yet obscure language buried inside of the contract that requires a human’s capacity to extrapolate and interpret.” –Daniel Broderick [Emphasis Added]

Application Level Encryption for practice management systems

HT Effortless Legal.

“When data needs to be stored in an online billing or practice management system, “application layer” or “app level” encryption offers the highest level of security.

With application layer encryption, data is encrypted at all times, including when it is at rest and in transit. When an online billing or practice management system uses the application layer encryption method, encryption and decryption occur within an application itself, and all data is encrypted both when it is stored and when it is being used.” [Emphasis added].

Who is the client?

HT Silicon Hills Lawyer.

“[C]ompany counsel’s role is to make it clear to the founder that he’s looking out for the company, which certainly includes the founder, but also includes other stockholders. If the founder wants to negotiate heavily for an employment agreement that is biased in her favor, knowing that entrenching herself isn’t the best option for the company, she may want to hire her own lawyer (apart from company counsel). Many times in these scenarios (I’ve experienced) founders are fine not hiring their own personal lawyers, because on some level they too are interested in what’s good for the company as a whole.  There’s a certain dysfunctionality that tends to sink companies when founders have detached their personal motivations from the well-being of the company generally. But it depends heavily on the circumstances, including the composition of the cap table and the Board, the stage of the company, and the personal dynamics between the founder, investors, and even the lawyer(s).”

Common Stock vs. Preferred Stock

HT Silicon Hills Lawyer

“Common Stock is the default equity security of a corporation. It’s what founders, employees, advisors, and other service providers get.

Preferred Stock (Series A, Series B, etc.) is “preferred” because it has extra privileges / rights layered on top of it relative to the Common Stock, including a liquidation preference, rights to block certain things, etc. Preferred Stockholders are almost always investors.

Why don’t investors (usually) buy Common Stock? Short answer: why be common when you can be “preferred”?

Longer answer: they want the downside protection that a liquidation preference provides (they get their money back before anyone else), and they want various contractual privileges that separate them from the “common” holders; like the right to elect certain directors. Also, another argument often made is that by having investors buy Preferred Stock, the “strike price” of options (which buy common stock) used as service compensation can be lower (when a valuation occurs). The logic is that common stock at the time is less valuable due to its lower rights and status on the liquidation waterfall.”

DIY Founder Convertible Notes

HT Silicon Hills Lawyer.

“Clerky has the ability to issue convertible notes cheaply. For founder notes, you don’t need the term sheet. While these aren’t rocket science, it’s still best to hire a lawyer if you want to completely avoid mistakes. But if it’s just one founder, or a small group of founders with no legal budget, they could probably handle this on a DIY basis if they read carefully.”

Are you really saving?

HT Silicon Hills Lawyer.

“Negotiation takes time. Because of their experience, VCs often know how to negotiate deals themselves, without much need for lawyer involvement; certainly term sheets and Board issues. But first-time entrepreneurs and startup employees (common stockholders) are in the opposite situation. They rely heavily on outside advisors to walk them through terms and negotiate, and that requires a budget.

As we’ve said above, aggressive VCs hate negotiation. They know what they want, and they’re accustomed to being able to pressure founders into getting it. Any extra time negotiating (supported by counsel) means shrinking the power inequality between the VC and the entrepreneurs, so a great way to shrink that time is to shrink the budget. To the common stockholders, the extra time may be totally worth it, given how high-stakes and permanent the terms being negotiated are. But by saying something like “this deal shouldn’t cost more than $X” in legal fees, the investor has found an indirect way to get the lawyer to shut up in negotiating against… whom? The investor himself.

Flat fees are also a great tool for VCs to get your lawyers to rush their work. Under a flat fee model, the less your lawyer negotiates/advises you, the more of the fee they pocket while being able to do work for someone else. Less work means more ROI. Watch incentives.” [Emphasis added]

Manage your headcount

HT Silicon Hills Lawyer.

“Every salaried employee on your payroll raises the revenue threshold needed for your company to be default alive. Ensure that every member of your roster is essential, and that there aren’t redundancies that could be addressed by asking someone to be more of a generalist. And don’t let an institutional investor pressure you into hiring a high-salaried professional executive unless you have a clear strategy for how you are going to afford them, because, yes, that is another way that they can add fundraising pressure[…]watch your payroll closely. “

Where are you getting your information?

HT Silicon Hills Lawyer.

“Think about all the most well-followed blogs, podcasts, etc. that founders go to for advice on funding. How many of them are not published by investors? What about the most followed twitter profiles? VCs are repeat players. They have the time and resources to build strong networks and distribution platforms for disseminating their preferences in ecosystems, maintaining heavy influence over the microphones and amplifying narratives that suit their interests. You really think they’re all doing it to save founders money? First-time entrepreneurs and early employees, who are heads-down building their companies (not blogging and tweeting about startup fundraising and governance) aren’t coordinated or influential enough to counterbalance the dynamic[…]

This is why the info you hear offline (and privately) in ecosystems is often starkly different from what you hear online.

Then when a first-time entrepreneur – a “one shot” player without much ecosystem leverage – is advised to question the standard, a VC can use the whole investor-dominated ecosystem backdrop to exert pressure[…]Founders want to see themselves as bold risk-takers, and there’s often a level of insecurity in interacting with seasoned investors, who might be former (and successful) entrepreneurs themselves. By saying something like “This is nit-picking. Why are you wasting time?” the investor is subtly saying “I thought you were a real entrepreneur. A real entrepreneur would close this deal.”

Unicorns and the Common Stock

HT Silicon Hills Lawyer

“[T]he SV community has a far more binary outlook on business success than “normals” do. There is very little time for, or interest in, companies that would legitimately call a $50MM or $100MM exit a true success.

This is most clearly highlighted in the “unicorn” boom we all saw over the past few years, where founders raised very large rounds, with terms very onerous to the underlying common stock, hoping they could eventually justify billion dollar valuations to skeptical acquirers or public market investors. The result of the binary philosophy is, in fact, truly binary outcomes for founders. The handful who truly succeed at justifying their valuation in an exit achieve “buy a yacht” level wealth. And those who in a different world may have built a business that made them “merely rich,” walk away with virtually nothing; their stock under water. 

A good portion of the newer generation of entrepreneurs has, in my opinion, wised up to this reality[…]They’re thinking much harder about what kind of business they want to build, and what kinds of people and resources they want to use in building those businesses.” (2017)

What is a CEO?

HT Silicon Hills Lawyer

“[T]he core jobs of a CEO, particularly at early stage, are quite uniform: (i) recruit employees, (ii) recruit investors and strategic partners, & (iii) manage and lead everyone to execute effectively on the strategy. From the moment you first interact with investors, they are asking themselves whether a founder CEO can do those things.

Fact: everything about your interactions with lead investors, from the tone and confidence of your communications, to body language and eye contact, and how you respond to push-back and calculated aggression, will influence their perception of whether you are “CEO material.” “