Understanding Legal Considerations in Vc Deals

"The VC got liquidity. The founder got blindsided." A VC sold some of their preferred shares in a fund secondary transaction—standard portfolio management, right? But the buyer turned out to be a wolf in sheep’s clothing: another fund with close ties to a direct competitor of the startup. Because the information rights were tied to the shares, not the holder, the buyer inherited access to board materials, financials, customer pipeline, and more. His competitor was now inside the house, using investor rights to tear it apart from the inside. This isn’t hypothetical. I've seen this pattern: - A VC sells secondary shares without vetting the buyer. They just need liquidity to raise their next fund. - Buyer inherits information rights and uses them to empower a competing company - Founders lose strategic advantage, and culture deteriorates from the betrayal - The original VC walks away with liquidity—unaware or unconcerned. How to avoid this: Founders: - In most venture deals, information rights are granted only to specific named investors or are non-transferable unless explicitly allowed. Make sure that is the case with your docs. - Ask for notification of all secondary transactions - Push for non-transferability of information rights without board consent - Consider revoking or limiting investor rights for non-participating shareholders VCs: - Be thoughtful about who you’re selling to—your secondary sale has consequences - Work with founders to avoid unintentional cap table landmines Companies: - Use transfer restrictions in your IRA and Voting Agreements - Require company or board approval for information rights transfers - Monitor your cap table like your competitive moat depends on it—because it does VC liquidity shouldn't come at the cost of a founder's company. Secondary sales aren't just a transaction—they're a gateway. Guard it wisely. #venturecapital #startups #secondaries #founders #governance #captable #growth

𝐍𝐞𝐠𝐨𝐭𝐢𝐚𝐭𝐢𝐧𝐠 𝐲𝐨𝐮𝐫 𝐕𝐂 𝐓𝐞𝐫𝐦 𝐒𝐡𝐞𝐞𝐭 Raising venture capital is not just about landing the money—it’s about understanding the terms that can shape your company’s future. This guide dives into the critical deal terms every founder must grasp before signing a VC term sheet. From liquidation preferences to protective provisions, what you don’t know can hurt you. Key Takeaways: 1️⃣ Not all money is equal – Understand liquidation preferences, anti-dilution, and participating vs. non-participating preferred. These terms determine who gets what in an exit—and how much. 2️⃣ Control is negotiated early – Board composition, voting rights, and protective provisions shape who holds real power post-funding. Don’t give it away blindly. 3️⃣ Anti-dilution ≠ protection for you – Founders often get wiped in a down round. Know the difference between full ratchet and weighted average provisions—and fight for the latter. 4️⃣ Drag-along clauses are a double-edged sword – They can help get a deal done—but may force you to sell under terms you don’t love. Push for a minimum price threshold. 5️⃣ It’s not just about the raise—it’s about the exit – Redemption rights, registration rights, and co-sale provisions give VCs optionality. Founders should negotiate limits and timelines to avoid future pain. Bottom line? Term sheets are more than just paperwork—they’re the blueprint for how your company (and your stake) evolves. 📌 Don’t just celebrate the yes. Understand the terms of the yes. Credit: Guide to Negotiating a Venture Capital Round by Alexander J. Davie & Casey W. Riggs PS. check out 🔔 for a winning pitch deck the template created by Silicon Valley legend, Peter Thiel https://lnkd.in/eQFrsUnE

𝗞𝗲𝘆 𝗙𝘂𝗻𝗱 𝗙𝗼𝗿𝗺𝗮𝘁𝗶𝗼𝗻 𝗧𝗼𝗽𝗶𝗰𝘀 𝗼𝗻 𝗩𝗖 𝗟𝗮𝘄 𝗣𝗼𝗱𝗰𝗮𝘀𝘁 𝘄𝗶𝘁𝗵 𝗚𝘂𝗲𝘀𝘁 𝗕𝗲𝗻𝗲𝗱𝗶𝗰𝘁 𝗞𝘄𝗼𝗻 Here's a summary of Gary Ross's podcast featuring Benedict Kwon, Nixon Peabody fund counsel, with some additional commentary from me. 𝟱 𝗞𝗲𝘆 𝗧𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀: 𝟭. 𝗪𝗵𝗮𝘁 𝘁𝗵𝗲 𝗔𝗯𝘀𝗲𝗻𝗰𝗲 𝗼𝗳 𝗦𝗘𝗖 𝗣𝗿𝗶𝘃𝗮𝘁𝗲 𝗙𝘂𝗻𝗱 𝗔𝗱𝘃𝗶𝘀𝗲𝗿 𝗥𝘂𝗹𝗲𝘀 𝗠𝗲𝗮𝗻𝘀 • The Fifth Circuit struck down the SEC's Private Fund Adviser (PFA) rules. • Fund managers should still stay cautious; the SEC may still use these rules as guidelines under anti-fraud provisions of the Advisers Act. 𝟮. 𝗦𝗶𝗱𝗲 𝗟𝗲𝘁𝘁𝗲𝗿 𝗗𝗶𝘀𝗰𝗹𝗼𝘀𝘂𝗿𝗲𝘀 • Granting preferential terms through side letters can create conflicts of interest—it's an SEC enforcement hot button item. • Fund managers have fiduciary duties to disclose all material information; proactive disclosure can prevent regulatory issues and breach of fiduciary duty claims. 𝟯. 𝗘𝗾𝘂𝗮𝗹𝗶𝘇𝗮𝘁𝗶𝗼𝗻 𝗣𝗮𝘆𝗺𝗲𝗻𝘁𝘀 & 𝗟𝗮𝘁𝗲 𝗔𝗱𝗺𝗶𝘀𝘀𝗶𝗼𝗻 𝗙𝗲𝗲𝘀 • To motivate limited partners (LPs), managers might offer incentives like QSBS benefits and co-investment opportunities to early investors. • Implementing equalization payments and late fees (often Prime Rate plus a margin, e.g., 8.5%–12%) ensures fairness to earlier LPs. Fund managers can retain the ability to waive late fees, but can never receive them to avoid conflicts of interest. 𝟰. 𝗛𝗮𝗻𝗱𝗹𝗶𝗻𝗴 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗖𝗮𝗹𝗹𝘀 • Strict enforcement of default penalties for investors missing capital calls can harm relationships and future fundraising. But this is often what the top tier VC firms do without hesitation. • Managers should seek solutions that uphold duties to non-defaulting investors while maintaining positive relationships, such as LP transfers, extensions, or forced redemptions. 𝟱. 𝗔𝗱𝗱𝗶𝘁𝗶𝗼𝗻𝗮𝗹 𝗙𝗲𝗲 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲𝘀 • VC fund managers may have an opportunity to receive extra fees from portfolio companies (e.g., advisory fees, or transaction fees). • Full disclosure of these fees is essential; venture capital funds typically should avoid charging them to prevent negative signal. 𝗜𝗻 𝗦𝘂𝗺𝗺𝗮𝗿𝘆 The regulatory environment demands heightened transparency & proactive communication. Following best practices helps fund managers avoid regulators and foster stronger relationships with their LPs. Link to podcast in comments.