3 Ways Startup Founders Can Protect Their Interests

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Table of Contents

• 1. Finding the Fit
• 2. Balancing Investors and Founders’ Interests
• 3. Negotiating Investor Friendly Legal Documents
• Key Takeaways

No matter how well drafted the legal documents between founders and investors in a startup, the overall relationship between these parties influences outcomes more than any written words. For this reason, founders seeking to protect their business and legal interests can do so during negotiations before the pen even hits the page.

1. Finding the Fit

You should find investors with whom your values closely align to build an ongoing working relationship. Factors you should then consider include:

• Personal rapport to enable robust discussions and arguments, without damaging the relationship;
• No fundamental personality objections;
• Business acumen and industry knowledge; and
• Clarity on the company direction, such as the key focus points for the business and goals.

Not only will these factors encourage fruitful discussions, but also add upside value to the relationship for both founders and investors. Ideally, you can save legal costs by negotiating a terms sheet that will provide the core commercials for a lawyer to draft a formal document.

2. Balancing Investors and Founders’ Interests

It is important that you commence legal negotiations with a set of documents that balances the interests of interested parties. The starting point for negotiations matters a great deal to achieve a timely, clear agreement.

Depending on the parties’ relative bargaining positions and how much influence the founders can exercise over the negotiations, documents that investors haven’t drafted typically provides a fair starting point. Startup lawyers can also offset the outlay for their legal advice by obtaining founders better salaries, more shares and better prices for their shares upon exit.

3. Negotiating Investor Friendly Legal Documents

Another way to protect a startup founders’ interests is to negotiate the investor friendly document suite that the investor may insist on using. Whether founders can actually change the document again depends on their relative bargaining power.

Key Takeaways

In the first instance, founders can protect their interests most effectively through their selection of suitable investors, in addition to starting negotiations with a founder friendly set of legal documents.

But what about cases where founders lack bargaining power and must negotiate investor friendly documents? We have prepared a series of articles that analyse the key commercial elements of investor friendly startup deal documents. You can read our article explaining who is the Australian Private Equity and Venture Capital Association (AVCAL) to help you identify clauses that tilt the balance too far in the direction of the investor.

Questions about your startup’s legal documents? Get in touch on 1300 544 755.