Excerpts from José Ancer, Don’t Use Your Lead Investor’s Lawyers:
Principle: If your lawyer makes more money off of your investors than he does from you, he’s not really your lawyer.
If someone made you an offer to buy your home, but suggested that you use their real estate agent in the process, you’d hopefully immediately notice a problem with such an arrangement. Most people would. That being said, here’s a very common scenario in the early stages of a startup:
Investor (to Founder): Hey, we’d love to work with you guys on a possible investment, but first you need to get your legal stuff cleaned up.
Founder (eager to get investment): Awesome. But I don’t know any good startup lawyers.
Investor: No problem, I know a great startup lawyer, [X]. We’ve worked with him on several deals. I’ll put you in touch.
The problem with this scenario? When things go sideways.
When the interests and desires of the Company become unaligned from its investors, the impartiality of the Company’s lawyer(s) is immensely important, particularly because of the attorney-client privilege on communications. It’s also essential in those scenarios when you need to play good cop/bad cop.
You interact with your investors on a much more personal, on-going basis than your lawyer does, so sometimes you may want (or need) something to be said, without you necessarily wanting to be the person to say it. Put bluntly, you need your startup’s lawyer to be unafraid to stand up, look someone in the eye, and say (in professional terms): "**** You." Not that you shouldn’t do everything you can to avoid such a scenario, but the option absolutely needs to be there.
The point I want to drive here should be clear: if your startup’s attorney relies on your lead investor(s) for a significant portion of his/her business via referrals or direct representation on other deals, you better believe that he’s going to be tip-toing and curtsying around them whenever he has to say something they might not like. His relationship with them may actually be more valuable to him than his relationship with you.
