How lawyers work with VCs

Published on: 17 Feb 2018

After the 2007 financial and economic crisis, the world went into a new era that brought with it amongst others, salary cuts across industries, disruptions, startups, cryptocurrencies and venture capital firms. Indeed venture capital firms (VCs) have grown drastically alongside the startup ecosystem that flourished across the globe. 

One of the industries that got a big shake off after the crisis is the legal industry with salaries going down as much as 30% compared to salaries in 2006. This led to a tsunami across law firms with lawyers leaving and law firms imploding. Lawyers had to face the new realities that did not include hourly rates, huge retainers, bonuses and loads of money. These new realities included working harder and in a totally different way with different types of clients and one of these types of clients are venture capital firms. 

So how do lawyers cater for venture capital firms? Lawyers, especially in Lebanon and MENA, are very competent and have a diverse scope of capabilities that can be very beneficial for venture capital firms and startups. Nevertheless, there is a specific way to deal with venture capital firms in order to provide the accurate level of legal services required. Indeed venture capital firms are a mixture of private equity firms and investment funds trading on risky assets. Any professional investor would understand the complexity of the venture capital firm's work and its ability to catch the next big thing. This requires a high level of integration in ecosystems and within startup communities in order to better catch startups in their early growth stage. Another strategy is to invest in series B and later and this also requires a good knowledge of how a startup grows and generates profits for its investors and stakeholders. 

Venture capital firms have to surround themselves with the right collaborators so that they can get a feel of the ecosystem around them and so they understand the startups they approach and they try to invest in. A lawyer is one of these collaborators that have to be really knowledgeable in startups and new corporate law and understand how to prepare the right legal due diligence and the right examination so that investors can really assess the growth potential of these targets. A startup lawyer must understand the startup dynamic in order to apply the right legal approach when transacting on behalf of venture capital firms. 

A startup lawyer has to have a wide knowledge in business, taxation, intellectual property, financial services, corporate law and communication techniques. Yes, these components have to be strongpoints in a lawyer’s personae in order for this lawyer to succeed in doing his/her job. A startup lawyer working with venture capital firms has to understand the fast pace in which he must act and the position he is in. He must understand he is in a position of legal consultant and is acting as an internal legal counsel to the venture capital firm. He must really grasp the importance of being there and moving between the venture capital firm’s offices and startups in order to follow up on matters. Agreements are the least demanding of all in comparison with the need for his input in due diligence, negotiations, and other strategical restructuring of investments and target companies. This lawyer has to act as a deal maker and transaction manager in order to succeed in his tasks and be an added value to VCs and startups. All of this adds up to the need for his/her expertise in taxation and regional/international corporate structures and corporate laws. 

Taxation? Yes weirdly a lawyer with VCs has to understand taxation structures and has to be able to deal with basic tax advice even though the final decision has to come back to an accountant and an auditor. Taxation for venture capital firms and startups is crucial at this point in time when profit margins are low and tax percentages can heavily decrease these margins and hence jeopardize growth and expansions. 

A few law firms in the region have been able to understand VC work and adapt to the new way of doing legal but rare are the law firms that were able to actually provide the true added value to venture capital work and investment work. This means that there is still a lot of room for lawyers to actually move further towards venture capital law and work with venture capital firms. So if a lawyer is looking to move towards that field they have to: learn closely about startups and the ecosystem by going to events and finding information online and through references in startups not only in legal but also in business; They have to put themselves in the mindset needed to understand startups and venture capital firms; they have to strengthen their knowledge in all the fields mentioned above and then sky is the limit. 

Last but not least, a lawyer working with venture capital firms has to be proactive, confident and aggressive in his/her approach to deal flow.