Since it’s Sunday and I’ve got time to kill, here are some shower thoughts on my day job (in-house counsel at a small crypto VC fund).

There are 2 relationships at the core of a VC deal that the VC lawyer must pay attention to:

#1 the relationship between VC fund’s partner/associate who is leading the deal and the founder; this relationship is many-layered and evolving, and it is both personal and professional (sometimes very business-like, sometimes emotionally close and friendly, sometimes distant and resentful); partners and associates devote a lot of time to keeping this relationship strong as a tool to ensure the fund gets good allocation, so as a VC fund’s lawyer, you must not sour this relationship.

#2 the institutional + fiduciary relationship between the VC fund and LPs; the lawyer’s duty is to steward the LP’s capital by doing adequate due diligence and insisting on “market” legal protections, but it is easy to get paralyzed with this idea and become underweight an even more important duty - maximizing the LPs’ returns by taking calculated legal risks if needed.

When you’re in-house counsel for a VC fund you have to look at every negotiation through the lens of these relationships, and to do so you need to have better context on these relationships - how the relationship was formed, who holds the upper hand, what are the expectations/needs of the relationship, what is the state of the relationship, etc. The more context, information and background, the better informed the call you can take when a sticky negotiation point or risk call comes up.

And now here are a few anecdotes.

Anecdote #1 I was watching a panel at a crypto conference and one of the speakers was the GC of one of the Tier 1 crypto VC funds. During the Q&A, I asked her “What happens when a super-hot deals comes across your table, but you can’t diligence the founder because the founder is anon? How do you do a background check, how do you get comfort that the founder will be well-behaved because of social accountability in the small crypto VC world?”. She thought for a second and said “Well honestly, I think our LPs signed up because they want the alpha that comes from oftentimes anon founders in crypto so - they are ready to accept this risk, and I’m not too fussed about anon founders”. I was struck by how her answer was simply based on a super-pragmatic reading of the VC fund < > LP relationship - nothing more needed.

Anecdote #2 We were negotiating a side letter in a pre-seed deal. I wanted the founder to promise not to sell his stock and to be personally on the hook if he did. The founder pushed back hard and threatened to walk away (such founder lock-in terms are not standard in US VC deals, something which shocks me given how much hate founder secondaries get). The founder had a super credible background, this deal was right in the sweet spot of our fund’s mandate, and this deal was important to show our fund’s continued expansion and expertise in a new (but super promising) geographical area. We thought about it and we decided that the founder’s incentive was to keep maximal equity ownership until the project had some value, so he was unlikely to sell down before the series A round (at which time hopefully investors with more negotiating power would step in and implement a founder lock-in). That’s not to say we did not have negotiating power in this deal (we were co-leads in a pre-seed round), but the consensus was that it was more important to capture upside by closing the deal than to protect for this kind of downside.

All of this to say, reading context is matters a lot when negotiating a VC deal.

The VC fund I work at is not one of the funds that gets to pick and choose deals - we have to fight to get into competitive rounds. The dynamic in competitive rounds is that the founder has an oversupply of capital, so the founder can often pick and choose VCs who get to invest in the round. We can’t really dictate legal terms of these rounds to such founders - we may not be able to push too hard and might simply have to take what’s on offer, or else we might miss out on the deal - and that means missing out on the upside, which is an intolerable outcome for a VC fund. You need to really put yourself in the GP’s shoes and answer imaginary questions from the LPs: “What?! We missed out on THAT deal because the founder did not agree to XYZ legal term?”. Not a nice conversation to have…

Of course, this is not to say a VC lawyer should never push hard for reasonable legal protections (you miss 100% of the shots you don’t take), but you can never be predatory or unreasonably harsh (word gets around fast and we often desperately want to be seen as “founder friendly”). You also definitely cannot hold up a deal for unreasonably long (the company has a bunch of competitors and needs to focus time and money on building).

In addition, unless there is a really nasty red flag, the VC fund’s lawyer should not kill a deal.

Why should you never kill a deal? Mostly because of allocation. The VC game is essentially an access game. You have to get access to the best deals. Getting this access is quite hard. The fund works hard to convince the founder to take their money, citing their expertise, brand name, ability to help with BD, etc. etc. If it’s not a “hot” or competitive deal, the VC fund’s partner / associate has gone to significant lengths to zero in on the deal, often selecting a deal from hundreds of inbound decks, diligencing it over weeks, steering it through the IC. By the time this process is done and we get to the legal diligence and investment docs, you can be damn sure that this is where they want to put their money. Thus, the allocation is precious and valuable, especially in a “hot” oversubscribed round. At this juncture, the fund’s lawyer should not kill the deal and throw away the dearly won allocation.

Since we’re living in the “It Depends” Dimension, I have to backtrack a bit on that - you can kill a deal in select situations.

There was one project where the founders refused to provide details of management’s stock comp or confirm that management had entered into employment agreements with the company. Founders were super-slow in responding to legal DD questions and basically had a “take it or leave it” attitude. Founders insisted the stock option pool would be created post-closing, enriching management but diluting the VCs. Everyone got bad vibes very quickly and we passed on the deal.

Another anecdote (this time shared by a friend). The VC fund she worked at had finalized a deal and legal negotiations were ongoing. There was a big strategic already invested in the company. The VC fund asked that the strategic’s veto powers and governance rights be scaled back (makes a lot of sense since the strategic and the VC fund would be very misaligned on pricing the company and possibly even strategic direction). The founders and the strategic refused, and the VC fund passed on the deal. This is maybe one of the only examples I’ve heard of a deal falling through because of legal terms.

Okay, stream of consciousness over =)

Since it’s Sunday and I’ve got time to kill, here are some shower thoughts on my day job (in-house counsel at a small crypto VC fund).

There are 2 relationships at the core of a VC deal that the VC lawyer must pay attention to:

#1 the relationship between VC fund’s partner/associate who is leading the deal and the founder; this relationship is many-layered and evolving, and it is both personal and professional (sometimes very business-like, sometimes emotionally close and friendly, sometimes distant and resentful); partners and associates devote a lot of time to keeping this relationship strong as a tool to ensure the fund gets good allocation, so as a VC fund’s lawyer, you must not sour this relationship.

#2 the institutional + fiduciary relationship between the VC fund and LPs; the lawyer’s duty is to steward the LP’s capital by doing adequate due diligence and insisting on “market” legal protections, but it is easy to get paralyzed with this idea and become underweight an even more important duty - maximizing the LPs’ returns by taking calculated legal risks if needed.

When you’re in-house counsel for a VC fund you have to look at every negotiation through the lens of these relationships, and to do so you need to have better context on these relationships - how the relationship was formed, who holds the upper hand, what are the expectations/needs of the relationship, what is the state of the relationship, etc. The more context, information and background, the better informed the call you can take when a sticky negotiation point or risk call comes up.

And now here are a few anecdotes.

Anecdote #1 I was watching a panel at a crypto conference and one of the speakers was the GC of one of the Tier 1 crypto VC funds. During the Q&A, I asked her “What happens when a super-hot deals comes across your table, but you can’t diligence the founder because the founder is anon? How do you do a background check, how do you get comfort that the founder will be well-behaved because of social accountability in the small crypto VC world?”. She thought for a second and said “Well honestly, I think our LPs signed up because they want the alpha that comes from oftentimes anon founders in crypto so - they are ready to accept this risk, and I’m not too fussed about anon founders”. I was struck by how her answer was simply based on a super-pragmatic reading of the VC fund < > LP relationship - nothing more needed.

Anecdote #2 We were negotiating a side letter in a pre-seed deal. I wanted the founder to promise not to sell his stock and to be personally on the hook if he did. The founder pushed back hard and threatened to walk away (such founder lock-in terms are not standard in US VC deals, something which shocks me given how much hate founder secondaries get). The founder had a super credible background, this deal was right in the sweet spot of our fund’s mandate, and this deal was important to show our fund’s continued expansion and expertise in a new (but super promising) geographical area. We thought about it and we decided that the founder’s incentive was to keep maximal equity ownership until the project had some value, so he was unlikely to sell down before the series A round (at which time hopefully investors with more negotiating power would step in and implement a founder lock-in). That’s not to say we did not have negotiating power in this deal (we were co-leads in a pre-seed round), but the consensus was that it was more important to capture upside by closing the deal than to protect for this kind of downside.

All of this to say, reading context is matters a lot when negotiating a VC deal.

The VC fund I work at is not one of the funds that gets to pick and choose deals - we have to fight to get into competitive rounds. The dynamic in competitive rounds is that the founder has an oversupply of capital, so the founder can often pick and choose VCs who get to invest in the round. We can’t really dictate legal terms of these rounds to such founders - we may not be able to push too hard and might simply have to take what’s on offer, or else we might miss out on the deal - and that means missing out on the upside, which is an intolerable outcome for a VC fund. You need to really put yourself in the GP’s shoes and answer imaginary questions from the LPs: “What?! We missed out on THAT deal because the founder did not agree to XYZ legal term?”. Not a nice conversation to have…

Of course, this is not to say a VC lawyer should never push hard for reasonable legal protections (you miss 100% of the shots you don’t take), but you can never be predatory or unreasonably harsh (word gets around fast and we often desperately want to be seen as “founder friendly”). You also definitely cannot hold up a deal for unreasonably long (the company has a bunch of competitors and needs to focus time and money on building).

In addition, unless there is a really nasty red flag, the VC fund’s lawyer should not kill a deal.

Why should you never kill a deal? Mostly because of allocation. The VC game is essentially an access game. You have to get access to the best deals. Getting this access is quite hard. The fund works hard to convince the founder to take their money, citing their expertise, brand name, ability to help with BD, etc. etc. If it’s not a “hot” or competitive deal, the VC fund’s partner / associate has gone to significant lengths to zero in on the deal, often selecting a deal from hundreds of inbound decks, diligencing it over weeks, steering it through the IC. By the time this process is done and we get to the legal diligence and investment docs, you can be damn sure that this is where they want to put their money. Thus, the allocation is precious and valuable, especially in a “hot” oversubscribed round. At this juncture, the fund’s lawyer should not kill the deal and throw away the dearly won allocation.

Since we’re living in the “It Depends” Dimension, I have to backtrack a bit on that - you can kill a deal in select situations.

There was one project where the founders refused to provide details of management’s stock comp or confirm that management had entered into employment agreements with the company. Founders were super-slow in responding to legal DD questions and basically had a “take it or leave it” attitude. Founders insisted the stock option pool would be created post-closing, enriching management but diluting the VCs. Everyone got bad vibes very quickly and we passed on the deal.

Another anecdote (this time shared by a friend). The VC fund she worked at had finalized a deal and legal negotiations were ongoing. There was a big strategic already invested in the company. The VC fund asked that the strategic’s veto powers and governance rights be scaled back (makes a lot of sense since the strategic and the VC fund would be very misaligned on pricing the company and possibly even strategic direction). The founders and the strategic refused, and the VC fund passed on the deal. This is maybe one of the only examples I’ve heard of a deal falling through because of legal terms.

Okay, stream of consciousness over =)