For founders, access to sound legal advice early in their process is a key success factor. That also applies to startup ecosystems: when everyone’s on a strong legal footing, deals can be done quickly and cheaply, which boosts market liquidity.
I reached him via Skype while he was in Delhi launching KISS docs for India to chat about legal for startups, and what founder should watch out for (scroll down for Neil’s 3 tips for founders below).
“We want to be a comprehensive guide for each country so founders can intelligently and legally and properly establish their companies and raise money,” said Neil.
With newly announced funds for India and Vietnam, 500 Startups is in a unique position to educate entrepreneurs, Neil said. “We see ourselves as setting the tone, since a lot of markets just don’t have a lot of venture capital investors, and we might be the most sophisticated investor in that market,” he added. “If that’s the case, I see it as my prime duty to help out founders.”
In markets where VC legal advice is in short supply, Neil’s aim is to lower startup costs, which “allows for liquidity to enter those markets. It’s about contributing to an ecosystem in a way that reduces transaction costs, makes seed investments more economical and makes them more founder-friendly at the end of the day,” he said.
“This isn’t just a problem for 500 Startups, this is a problem for the ecosystem in question, because if the ecosystem can’t make it easy for deals to happen, then fewer investors come into the country to do deals,” he added.
Deal terms vary internationally, but founder-friendly is a universal value, said Neil.
“It’s really about empowering founders to make smart decisions.”
Although US deal terms may not translate abroad, giving entrepreneurs a solid legal foundation “shows them what’s standard in Silicon Valley and how to bring that standard to their country.”
“We need to educate people to understand what the right corporate form is, how do you grant equity, what are common equity terms, how to do you treat IP, stuff like that,” he explained, noting that founders in Bangalore, Barcelona and Berkeley can all benefit from the same advice.
Neil Dugal’s Legal Tips for Startup Founders
1. Ignore The Optics
“Founders tend to go with the prestigious stuff,” said Neil. “If they get two term sheets, one from a very prestigious VC, and one from a less prestigious VC, they will always consider going with the more prestigious one. The problem is that things are not considered equal.”
Neil said founders reject objectively better deals because they “don’t think intelligently all the time about structures and term sheets and how it affects them. They look more at the optics of the investors. Part of the goal of KISS is to give founders the tools to evaluate structures on their own, rather just going in and saying, ‘I should just take this automatically.'”
2. Don’t Seek High Valuations
“Founders are very obsessed with getting a high valuation and this isn’t all good,” Neil cautioned. “Having a high valuation means the equity you grant to your employees isn’t going to be as substantial, which means it’s going to be hard to incentivize employees currently at the company and onboard new ones.”
That stack of cash comes also comes with higher expectations, since high valuations come with higher performance metrics “that they have to exceed if they want to raise funding for the next round with an even higher valuation.” said Neil.
3. Legal Is Boring, But Pay Attention
Neil acknowledged that some founders simply don’t take a strong interest when it comes to educating themselves on corporate structure, funding and governance. “Their eyes just sort of glaze over when they see legalese, but at the same time, it’s so important to understand this,” he said.
“A lot of people are interested in entrepreneurship and in tech and they see the law as a weapon to obfuscate or take advantage, and that weapon is being used by investors,” said Neil. “If people have enough bad experiences, then they realize that they really should understand this stuff.”
“I want to use the law and educational resources to empower founders to feel like they’re not being taken advantage of, or if there’s a term being discussed by a VC fund, they can very easily figure out what that term means, and whether it’s good or bad for them.”
500 KISS also creates value for inexperienced investors, said Neil. “Sometimes you have a lot of investors in a market who are just not seasoned and don’t know how to invest, and you have to step in and provide them with guidance, mentorship, and in some cases, you’ve just got to put them in their place.”
In keeping with the spirit of its acronym, Neil said KISS will be easy to use. “You’ll go on the web site, select which country you’re incorporated in, and it takes you to a portal where you can download all the documents you need, even if 500 Startups isn’t investing.”
Neil plans to encourage founders who aren’t working with 500 Startups to use the KISS portal for their country. “Even if we’re across from them and investing in them, I see it as our duty to set terms in a really founder-friendly way so that the market gets accustomed to those sorts of terms,” he said. “I view it as incumbent upon us to make sure that founders aren’t tricked into bad deals.”
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photo credit: Marcia O’Connor, Flickr