David shares invaluable insights on common legal pitfalls startups face, from poor investor relations to IP protection missteps. He breaks down the key clauses to watch out for in term sheets, the importance of vesting periods and ownership of intellectual property rights, and how to set realistic expectations with investors.
David’s journey from earning a university scholarship and working in recycling and landscaping to support his education, to managing international nuclear material shipments, showcases his determination and drive. Now a Director at Fennemore’s Business and Finance practice group, David leverages his deep understanding of blockchain technology as an adjunct professor at Sandra Day O’Connor College of Law at ASU. His course covers essential topics in blockchain and cryptocurrency, benefiting from expert contributions. Additionally, as Chair of Fennemore Labs, David pioneers the use of generative AI in legal services, demonstrating his significant impact on the legal profession’s approach to technological innovation.
You don’t know how big of a problem these things are until they become a big problem.” In this episode of What The 3, the no-bs podcast for emerging tech startups, we sit down with David McCarville, Director at Fennemore Craig, to dive deep into the legal landscape that every founder must navigate.
David shares invaluable insights on common legal pitfalls startups face, from poor investor relations to IP protection missteps. He breaks down the key clauses to watch out for in term sheets, the importance of vesting periods and ownership of intellectual property rights, and how to set realistic expectations with investors.
Throughout the episode, David emphasizes the criticality of engaging a lawyer early on, budgeting appropriately for legal services based on your funding stage, and having clear communication and contracts with partners, employees and contractors. He also shares prudent advice on conducting due diligence when accepting investor money and the risks of relying on online legal templates.
Whether you’re a first-time founder or serial entrepreneur, this episode is a must-listen for anyone serious about building a startup in the emerging tech space. Tune in for David’s expert take on how to safeguard your startup, avoid costly litigation, and set yourself up for long-term success.
[00:00:00] Charlie: Welcome to What the 3, this is the [00:00:05] podcast where we tell you our audience how to get from zero to one, [00:00:10] essentially a book, a podcast built in course format to ensure that if we [00:00:15] were starting from zero, answering any of the questions that we would have with the assistance [00:00:20] of people like David to really know their craft or experts in their field, and can give us the answers that [00:00:25] we wish we had when we were starting our businesses.
[00:00:27] Charlie: Today, welcome David, to tell [00:00:30] us about legal insights and navigating the legal landscape as well as addressing common [00:00:35] pitfalls and safeguarding or startup as you’re working in the emerging technology [00:00:40] field. Thank you for being here, Dave.
[00:00:42] David: Thank you, Charles. Looking forward to our discussion.
[00:00:44] Charlie: I think we, we [00:00:45] both share a bit of shared history here in that I started my career way back in, [00:00:50] in, in, when Web3 in 2017.
[00:00:53] Charlie: Of course I was consulting before [00:00:55] that, finance before that, and. Was tapped on the shoulder to [00:01:00] say, look, I’m going to work in this cool new thing called blockchain to which my response was, of course. [00:01:05] That sounds cool. What is it? I know your your first sort of [00:01:10] story here is about the ICO times in 2018.
[00:01:13] Charlie: I mean I was [00:01:15] Operating in in that space from London I think we we launched an average like [00:01:20] 13 raising a serious amount of money for quite a few people How was your [00:01:25] experience back then? Cause to me it was the wild west, like anything was possible and lots of people were raising a [00:01:30] lot of money.
[00:01:31] David: Yeah, that was my experience as well.
[00:01:33] David: So Phoenix was not exactly a [00:01:35] hotbed for ICOs, but there were some people around and there were some conferences and [00:01:40] some, activities that we attended. The numbers were just eye popping as I’m [00:01:45] sure you remember the amount of money that was being raised. And I still think that it will be remembered as a [00:01:50] historic moment where.
[00:01:51] David: Crowdfunding at an international scale basically [00:01:55] took off. And yes, there were a lot of scammers. Yes, there was a lot of vaporware, but there [00:02:00] were also a lot of people with really good ideas and really good teams that I [00:02:05] think could have succeeded. It was interesting [00:02:10] and fascinating for me because it actually put into focus an area of law that I really had never looked [00:02:15] at, And in such a close way, which is [00:02:20] securities laws and in the US the restrictions on investors.
[00:02:24] David: If you’re not [00:02:25] what’s called a qualified investor, you cannot invest in early stage companies. [00:02:30] Basically it’s to my mind, a bit of an elitist type of law where you have to have [00:02:35] money in order to be able to invest in early stage companies, which seems rather unfair and undemocratic. [00:02:40] And I still think it is.
[00:02:42] David: And because of that, plus this, how [00:02:45] we test where you can apply, these principles to determine what’s a stock and what’s [00:02:50] not a stock, most things start to look like a stock, which is what, you know, the SEC’s position [00:02:55] has, has been and continues to be. So I remember those early days talking to [00:03:00] folks and, and, and talking to entrepreneurs who would say, look, we need an opinion letter from a law [00:03:05] firm that says that this token we’re going to issue during our ICO is a utility [00:03:10] token and not a security.
[00:03:12] David: And the firm I was with at the time was a very old school, Arizona [00:03:15] firm, very conservative. And we looked at it and we thought, you know, this just looks like [00:03:20] a security. So, you’re going to have to register with the SEC. You have to register with each state [00:03:25] you raise funds in. You got international people contributing.
[00:03:28] David: Also you have people who [00:03:30] are not qualified investors. You’re going to have a very difficult time, you know, doing [00:03:35] this without spending a lot of money on securities lawyers and, and doing this the proper [00:03:40] way. And then I would see from the same [00:03:45] entrepreneurs, a copy of an opinion letter from another law firm that said, this is a utility token and not a security.[00:03:50]
[00:03:50] David: And I said, okay, that’s great. But what if they’re wrong? What happens [00:03:55] when the sec comes knocking and you have to shut this down? Because. Their opinion [00:04:00] is incorrect. Are you going to sue that law firm? And if yoUSue them, are you going to be able to [00:04:05] recoup in damages what you’ve lost here? I mean, is this realistic?
[00:04:09] David: And [00:04:10] it was hard to, have that conversation and basically had it repeatedly from [00:04:15] 2018 up to probably last year or two years ago when people stopped asking the [00:04:20] question. But that was, you know, it was a painful period. And still it [00:04:25] is, I think in the US unfortunately, our regulators have made it very, very difficult [00:04:30] for startups to actually operate.
[00:04:33] David: And [00:04:35] we’re seeing now the cases that are coming through and I think eventually these cases will [00:04:40] decide the area of law going forward for a cryptocurrency. There’s a [00:04:45] chance, but an outside chance that our federal government will actually pass legislation that will clarify [00:04:50] things, but that doesn’t seem to be happening anytime soon.
[00:04:52] David: So. That was my inception [00:04:55] point was the ICO boom. And, and, you know, I’ve been teaching at ASU law school class on blockchain [00:05:00] and cryptocurrency law and policies since 2018 in the fall. And that’s [00:05:05] been a great course to teach because every year it changes and every year there’s, there are new things for [00:05:10] me to learn and to talk to the students about.
[00:05:11] David: So. That’s, that’s a bit of my background
[00:05:14] Thomas: and [00:05:15] probably, probably enough, examples to discuss in class as well. Like given [00:05:20] the speed of how fast, you know, blockchain and I think emerging [00:05:25] tech is moving, in combination with law, right?
[00:05:29] David: Absolutely. Yeah. And I [00:05:30] do my best to try to get guest speakers to come in, people who are actually in the field and, you know, [00:05:35] buying groceries, in this field.
[00:05:37] David: And it’s been great. The guests I’ve had have been phenomenal. [00:05:40] I have to give a shout out to Jameson Lopp, who has an excellent, [00:05:45] Bitcoin, website, and I was preparing for my very first class back in 2018 on [00:05:50] Bitcoin, and I came across his website, which has incredible information, and [00:05:55] I, it said on there, if you have an opportunity for me to speak to anybody about Bitcoin, please send me an [00:06:00] email.
[00:06:00] David: I sent him an email thinking he’s never responded to me, and he responded right away. And, [00:06:05] you know, he’s been to each one of the Bitcoin classes since 2018. He’s appeared for the [00:06:10] full two hours and walked through the slides with me and helped educate the students on Bitcoin. [00:06:15] And I think a lot of them are, you know, more impressed as time goes on.
[00:06:19] David: They [00:06:20] realize what a luminary he is in that, in that space and having him teach the law students [00:06:25] about Bitcoin. It’s been a real pleasure. So. That’s just one example of people that have come in to, [00:06:30] to really help out. And that’s, I think, speaks to the community too. People in this community generally want to help [00:06:35] each other out, which is a great ethos.
[00:06:38] Charlie: Absolutely. Absolutely. I [00:06:40] mean, well, something that struck me that’s really interesting was the way the law [00:06:45] encapsulated, what, what I would classify [00:06:50] as early ICOs. We saw it in a different way. We saw it [00:06:55] as the third way to raise project finance. And that during those [00:07:00] times, which, which is why, where, like the way we were pitching the kind of having the conversation.
[00:07:04] Charlie: So [00:07:05] we were working with billion dollar businesses. We didn’t make a billion dollars a rev. We weren’t talking to you kind of [00:07:10] thing. And the idea was that, you, you know, you had [00:07:15] your, your standards, two ways of raising project finance in the past, which was [00:07:20] either going to give yoUSome equity and you buy that.
[00:07:22] Charlie: The stocks and shares, as you imagine [00:07:25] securities, or you’re going to essentially be loaned some money and then I’m going to pay you interest. [00:07:30] And that, that will gradually drag my profits into the dust, into the dirt. If I [00:07:35] continue doing that too long. So, the, the third way was like, we’re [00:07:40] going to provide value that’s going to be tokenized, whatever value that may be, whether it be [00:07:45] Golem or.
[00:07:46] Charlie: Ethereum use of the chain, some form of value encapsulated [00:07:50] into, you know, A token that you’re going to buy ahead of time to support the production Of [00:07:55] that business or that piece of technology Was that a similar way that you guys saw it [00:08:00] back in the day?
[00:08:01] David: Well, I mean that was certainly the the promise right was you could raise [00:08:05] the funds and then use those funds to build out the network and I think what ended up happening [00:08:10] with the startups in the u.
[00:08:11] David: s was Regulatory problems across the board. We have 50 [00:08:15] States, which all have unique jurisdictional issues when it comes to securities law, but also when it [00:08:20] comes to money transfer licenses. And then we have FinCEN, the Financial Crimes Enforcement [00:08:25] Network, which sits at the federal level. So, issues that some of the startups ran into is not [00:08:30] just the SEC issues, which are huge and pose existential risk to [00:08:35] startups in the U.S.
[00:08:35] David: If they are in this space, but also just getting the licenses. If you [00:08:40] are considered a money transfer business, Getting an MTL license at [00:08:45] all 50 states and at FinCEN is going to cost you years of your life and [00:08:50] probably millions of dollars to get that done. So when people started thinking about these [00:08:55] crypto tokens that were going to have some value attached to them, that’d be transferred around the [00:09:00] US that was another issue.
[00:09:01] David: Again, my consultations with early startups [00:09:05] I was basically just a dream killer and they would go off and find another attorney who would help them, you know, figure [00:09:10] out how to launch. But you know, in retrospect, I think I did him a [00:09:15] favor. I’m just trying to be very, cautious and especially when you’re dealing with other people’s [00:09:20] money.
[00:09:20] David: I think it’s so important to really be sure that you’re not taking their [00:09:25] money and 100 percent risking it on a regulatory body, [00:09:30] shutting you down or, you know, worse putting you in jail. I mean, there’s, there’s some real serious [00:09:35] ramifications from securities law violations and MTL violations in the US.
[00:09:39] David: So [00:09:40] it’s one of the reasons why securities lawyers are really. Looked up to in the legal [00:09:45] community here and also why a securities issue that comes across a lawyer’s desk, who’s not a [00:09:50] securities lawyer, it’ll make their blood run cold because, you do not want to be messing [00:09:55] around in securities law and get it wrong because you can definitely go to jail, your clients go to jail, and there are some serious [00:10:00] ramifications.
[00:10:01] David: So, it’s a scary area of law, which is also, [00:10:05] you know, something that makes it a little bit attractive in terms of, you know, Understanding more [00:10:10] about it, but it is definitely not one to, to trifle with or to play around in. [00:10:15]
[00:10:15] Charlie: Fair enough. I mean, given the go to prison aspect, I think that [00:10:20] segway might be onto, estate planning because you get [00:10:25] that wrong, especially if you’re, you’re not, you know, you’re working as a partnership or [00:10:30] you haven’t got that limited tag stamped on the ass of your product, then, then [00:10:35] you’re, you’re really in trouble.
[00:10:36] Charlie: How, what’s your take on. Estate planning and how have you seen [00:10:40] that evolve since 2018?
[00:10:42] David: Yeah, it’s been interesting So, um for me, [00:10:45] you know estate planning is such a practical area of law. Everybody needs it, right? [00:10:50] I don’t know anybody who’s immortal, we’re all going to die. And I think statistics [00:10:55] about disability and becoming incapacitated are pretty alarming when you think about it.
[00:10:58] David: 50%, I think [00:11:00] is the number of people who will have a serious disability during their lifetime and [00:11:05] incapacity is, is a growing issue as well. So, you know, all of those things taken [00:11:10] together, if you’re looking at it just from a rational, logical standpoint, this is something that you can do. You need to [00:11:15] take care of.
[00:11:15] David: And when yoUStart looking at unique assets and entrepreneurs who have, [00:11:20] interest in companies, not just cryptocurrency, but if you have shares in a [00:11:25] company, a private company, or if you have membership interests in LLC partnership interests, [00:11:30] these things are notoriously hard to value. And when you hear that [00:11:35] phrase hard to value, you should be thinking about litigators and attorneys who love to argue and Make [00:11:40] money from arguing because that’s what happens on them.
[00:11:43] David: And I’ve seen a lot of situations where [00:11:45] business partners need to part ways, for whatever reason, they have a difference of opinion on how to run the [00:11:50] business. And how are you going to value the business? A lot of times they [00:11:55] haven’t agreed upon it ahead of time. They don’t have a good buy, sell agreement.
[00:11:58] David: And so [00:12:00] they’re left to their attorneys telling them what it’s worth. And of course, They’re going to have [00:12:05] differences of opinions. And when you get into litigation in the US over value, a company, [00:12:10] you can guarantee very high attorneys fees and very high accounting, third [00:12:15] party evaluation, expert fees, because lots of ways to value a company [00:12:20] and your litigators are going to value it one way.
[00:12:23] David: And, and then, you know, the [00:12:25] other side will devalue in another way. So it’s just guaranteed litigation. The best thing [00:12:30] that I’ve seen happen is preparing. Partners for, eventual [00:12:35] divorce or for one partner to step back. And I do have a real old story here where we had a client [00:12:40] that it was a company was the client.
[00:12:42] David: So we, we said, we’re not representing you guys individually, [00:12:45] representing the company and in the interest of the company, we need to have a good buy sell agreement that [00:12:50] says how the company is going to be valued. You’ll all agree to it. We’ll have [00:12:55] evaluation done so you can know what that looks like right now.
[00:12:57] David: And you can agree to that value. And then [00:13:00] we’ll have an insurance policy in place. In case somebody is dead, you can have [00:13:05] that payout take place. We’ll have terms in place that show how long it will take the [00:13:10] company to pay the estate of the deceased partner [00:13:15] and on what terms of what interest rate, which we, we spread it out over 10 years.
[00:13:19] David: I think we changed it [00:13:20] 15 years later. At a very low interest rate. And by doing that, we’re [00:13:25] able to navigate some real challenging life situations. The first one [00:13:30] was one of the partners went through a divorce and in Arizona, where you have community property laws that [00:13:35] implicated his one half interest in the business.
[00:13:38] David: And so having that valuation [00:13:40] done ahead of time and having a known process for liquidating half of his [00:13:45] shares was helpful. Then he wanted to take a step back. He got remarried. He wanted to [00:13:50] semi retire from the business. So the business started a stock buyback process, [00:13:55] which made sense. And everybody had already agreed to the value.
[00:13:57] David: So we’re able to handle that. Then [00:14:00] later on, he became incapacitated and couldn’t, couldn’t manage his work at [00:14:05] all. So then we kicked in the real buy, sell agreement and actually started buying shares and then later [00:14:10] on, he passed away, which then resulted in litigation between. The second [00:14:15] spouse and the first spouse.
[00:14:16] David: And again, the company was able to stay out of all of those [00:14:20] life events, right? If you think about all of those events, the chances of them happening are very [00:14:25] high, you know, over a course of a lifetime. And so we’re able to navigate all of that. That was very [00:14:30] proud of that, that work and happy to help the client through that process.
[00:14:34] Thomas: I, [00:14:35] I’m not sure which of our previous guests said it, but, and it might have been Ian [00:14:40] that mentioned that there’s a hundred percent chance that one of your founders will leave. And [00:14:45] I, I it’s been stuck in my head and I’m hearingyou sayy this again, that, you know, it [00:14:50] always starts. And I come from a tech background, or at least I’ve worked with a lot of tech people.[00:14:55]
[00:14:55] Thomas: And I’ve seen a lot of young, young guys, or not even young [00:15:00] guys, people in their thirties starting a company and then like, Oh yeah, you know, this company is going to [00:15:05] live forever. We were three guys. We’re going to live forever. You know, these three people we’re going to, we’re going to do great. Really [00:15:10] great together.
[00:15:11] Thomas: And it, it’s, it never turns out that way. There’s always one of those three [00:15:15] that leaves at some point, sometimes early something, but it will happen a hundred percent of the [00:15:20] time. I think that, that, you know, when you’re talking about estate planning in this, this case, I think it’s so [00:15:25] incredibly important to start early with that, like a lot earlier, than, [00:15:30] I think your average, entrepreneur expects.[00:15:35]
[00:15:35] David: Yeah, I think that’s right. And Thomas and Charles, I’d appreciate your view on this, but I think most [00:15:40] founders, when they formulate their valuation for investors, that’s [00:15:45] one way to do it. But is that the way that you would want to be bought out [00:15:50] or would you want to buy out your partner valuation, probably not, I’m [00:15:55] guessing.
[00:15:55] David: Right. So. Let’s go ahead and have an agreement on how we are going to buy each [00:16:00] other out. That’s fair to both of us that we’ve agreed upon beforehand. [00:16:05] And, and that’s, that’s so important because that alone will limit the litigation [00:16:10] risk a lot, right? Just, just having the valuation understood and known by both parties.
[00:16:14] David: [00:16:15] So huge, huge recommendation there. Please just, you know, work with your partner and recognize that [00:16:20] one of you may want to leave, sooner or later. And how you do that is going to be, [00:16:25] either, the right way, very smoothly, or it’s going to be the wrong way and it’ll [00:16:30] be really destructive to wealth.
[00:16:34] Charlie: So I, I had [00:16:35] two points on that when, when you asked one was, how’d [00:16:40] you value goodwill?
[00:16:42] Charlie: It’s just the Everett question. I’ve, [00:16:45] I’ve studied the accounting side of it. That’s a mystery. And then the [00:16:50] legal side I can only imagine. So yeah, so when, [00:16:55] when you come to trying to value a company, especially if there is heated feelings around a [00:17:00] quote unquote divorce, We’re talking business divorce in this case, [00:17:05] right?
[00:17:06] Charlie: Like what, what wouldyou sayy are the steps? Let’s say it’s a young business [00:17:10] that Um are sort of at the beginning of their journey. What would they do? [00:17:15] What should they think about or should they bring this to a lawyer and say just help us?
[00:17:19] David: Yeah, I mean, I think [00:17:20] they should talk to an experienced lawyer in the jurisdiction that they’re in too. That’s another [00:17:25] cryptocurrency and blockchain businesses because it is global and people [00:17:30] reside in different jurisdictions and Understand your choice of law And where [00:17:35] you’re going to have any disputes resolved and, how to apply that law to, to the facts is [00:17:40] super important.
[00:17:40] David: I think it’s important also to have a discussion about. You know, what is it that [00:17:45] each one of the founders is going to contribute in terms of time, energy, skills, [00:17:50] because, you know, you’ve seen this, I’m sure where partnership starts off [00:17:55] one party is doing maybe the technical side, the other person, the marketing side [00:18:00] and, guess what?
[00:18:01] David: They don’t both work the same amount of hours or they’re not as [00:18:05] effective in their job. And so having real honest conversations with your partner is about, [00:18:10] Hey, this is what’s expected. Here are the metrics. Here’s what we’re going to put into it. [00:18:15] And, and just checking in with each other to make sure you’re holding up both sides of the agreement, [00:18:20] or if there’s multiple partners, making sure everybody’s doing what they’re supposed to be doing.
[00:18:24] David: Because [00:18:25] that becomes super important when you’re coming to valuing their interests, right? [00:18:30] If somebody is expecting to get paid out, but they haven’t put in the effort, [00:18:35] then, that’s going to be a challenging situation. So it’s better to just be very frank about that and [00:18:40] discuss those issues. Right up front.
[00:18:42] Charlie: Definitely. I mean, with that, [00:18:45] once you get beyond, once you grow beyond the, the core sort of founding team, [00:18:50] we’re, we’re then sort of talking about employees, contractors, [00:18:55] outsourcing. I mean, Thomas and I are both fans of outsourcing because there’s a bit of [00:19:00] a run, right? Like we think outsourcing is better than trying to hire a big team just as soon as you raise because [00:19:05] why you can’t quite hire 10 people and expect them to be all be good.
[00:19:08] Charlie: But beyond [00:19:10] that, when you’re looking at. Classifications for employer versus employee, independent [00:19:15] contractor. I mean, where, like, what are the things founders [00:19:20] should be thinking about when, when they’re starting on that journey versus, you know, trusted [00:19:25] employee management, like, how does that work in, in, in your head, [00:19:30] from the legal point of view?
[00:19:31] David: Well, there’s a lot there. And in the US that is a highly [00:19:35] litigated issue, both by the potential employee or independent contractor, as [00:19:40] well as by the government agency. So one thing to really understand here is that. [00:19:45] And how do you classify an employee as an employee or a contractor is going to [00:19:50] implicate the tax liability that the business has to the state and federal [00:19:55] tax authorities.
[00:19:55] David: And the last thing any business wants to do is end up in litigation with. A [00:20:00] state or federal agency, because you’re going to lose and they’re probably going [00:20:05] to drag it out. They’re going to have resources that you just can’t match. So being very [00:20:10] clear on what your tax obligations are, whether it’s an employee or [00:20:15] independent contractor.
[00:20:16] David: That’s super important to make sure that you are [00:20:20] compliant with state and federal law in the US with regards to tax payments, because you do not want to [00:20:25] accrue a large tax bill. The IRS is the ultimate creditor and they can put you in [00:20:30] jail. They do have guns. So, you don’t want to mess around with them.
[00:20:33] David: And the same states are very [00:20:35] aggressive to some states, more than other California is, is very aggressive in collecting on [00:20:40] taxes and, and the tests that they use to determine whether somebody is an independent contract or an employee. [00:20:45] Are very heavily, heavily weighted towards finding that a person is an [00:20:50] employee rather than independent contractor.
[00:20:52] David: So you have to be extremely [00:20:55] careful in how you classify, do talk to an employment law attorney, especially in the jurisdictions, your employees [00:21:00] are coming from or your independent contractors are coming from, make sure you have a good agreement. [00:21:05] This is a place where having a form from the internet is probably not a good [00:21:10] idea because the risk to your company is large.
[00:21:13] David: Okay. Disproportionate. [00:21:15] When you talk about litigation from the employee slash independent contractor [00:21:20] who there are a lot of plaintiff’s lawyers out there who will represent them and take a percentage of [00:21:25] what’s collected on a contingency fee, those can just be pure nuisance [00:21:30] lawsuits where they really don’t have a case, but they know it’s going to cost the business 100 grand to litigate and [00:21:35] win, which at the end of the day, if you can pay them 50 and have them go away, Yeah, they might take that [00:21:40] deal.
[00:21:40] David: So you just want to be on point with regard to how you bring these people on board. Make [00:21:45] sure you understand the proper classification, make sure you have a good agreement and [00:21:50] just try to mitigate all that risk because it is significant.
[00:21:53] Charlie: I think that’s excellent. Thomas, [00:21:55] do you have any questions on this piece?
[00:21:57] Thomas: No, I mean, like I’ve been [00:22:00] working with a lot of us startups and, and I, I would always argue that even with outsourcing, make sure [00:22:05] that your contracts are water tight, asyou sayid, jurisdiction matters. [00:22:10] If you, if yoUSign, with, with an European entity, [00:22:15] then, you know, European law is, is, being used.
[00:22:19] Thomas: If you assign with [00:22:20] a, with a us entity, then us law is used. And I think that people sometimes forget about [00:22:25] that, because they go with yeah, but I am in. State one, or I am in [00:22:30] country X. So, you know, it goes for that. It’s like, no, it goes where you, but where the, where your [00:22:35] business business entity is and where the contract comes from.
[00:22:37] Thomas: Right.
[00:22:38] Charlie: I mean, for me [00:22:40] also, the IRS as, as is the HMRC in the [00:22:45] UK, they, you know, police needs a warrant to enter your house, the HMRC does not [00:22:50] they’ll kick your door in and take your TV, you [00:22:55] know, that they’ve, they’ve got the special dispensation, which is something that people don’t really know. Right. You, you [00:23:00] have that conversation over a barbecue that I watch like, yes, the tax man can come [00:23:05] in and grab your stuff and they are belligerent about it when you get to that point.
[00:23:09] Charlie: So it [00:23:10] is one of those things that’s really worth considering and having top of mind when you’re thinking about [00:23:15] a way you’re going to set up your business for me personally, you know, do I want to go for a Delaware [00:23:20] C being an English national? Probably not. Do [00:23:25] I, are there, are there better options for me here in Europe?
[00:23:28] Charlie: Definitely. Right. [00:23:30] So it depends on, on whether you want to have the [00:23:35] IRS as, as someone that you even want to be in the same room as or not. [00:23:40] So I think it’s, it’s, it’s a big deal. And it’s also a big deal [00:23:45] with respect to hiring people, on a contractual role. For [00:23:50] example, We have, we experimented with hiring people [00:23:55] from Latin America and sort of a program where we wanted to bring opportunity to that part of the world.[00:24:00]
[00:24:00] Charlie: And it was just really, really difficult to navigate their taxation system, [00:24:05] ensuring that we were the right side of, they are contractors performing a specific task [00:24:10] versus performing a role. It’s really difficult because You, [00:24:15] you want to offer an opportunity, but there are all of these hurdles to being able to do that.[00:24:20]
[00:24:20] Charlie: And it’s something, it’s something to keep top of mind when you’re thinking, all right, this, this is a [00:24:25] contractor or is this a firm? Is this a one man show that’s a [00:24:30] company or is it a company that has numerous people that are going to do the job for me? [00:24:35] One of the things to think about when you’re hiring, an individual, especially here in the [00:24:40] UK, is that you can hire them to do the job.
[00:24:43] Charlie: You can’t tell them how [00:24:45] you want them to do it. And that’s a really important [00:24:50] differential. When you ever get asked a question as to whether or not they’re an employee or a contractor. [00:24:55] I mean, is that, is it the same in the US yeah,
[00:24:58] David: it’s similar here. I [00:25:00] think if you’re going to dictate to people when and where they work, what tools they’re using, [00:25:05] and you’re going to basically manage their, their work product, [00:25:10] to a degree you’re going to end up probably having them classified as an employee, and then [00:25:15] you have situations where an employee can, especially in this day and [00:25:20] age, bring an action for unpaid wages because maybe they received a text during [00:25:25] off hours or they.
[00:25:27] David: We’re looking at email in the middle of the night, [00:25:30] you know, those emails sent in the middle of the night show as evidence that, Hey, you expected this person [00:25:35] to be on call working at these times. And now you owe them [00:25:40] back wages for overtime, and also you owe the state, [00:25:45] wait, you know, some of the taxes associated with those overtime wages.
[00:25:48] David: And so it becomes a [00:25:50] very tricky proposition to try to prove that, okay. This was [00:25:55] sent, but they didn’t actually look at it or they weren’t actually supposed to be working at this time. We [00:26:00] didn’t expect them to be doing overtime and all those issues become very challenging for the [00:26:05] company to win those arguments.
[00:26:06] David: And so, that’s why you do have a lot of plaintiff’s [00:26:10] lawyers out there who love those cases because they can win them most of the time. And they usually will sell [00:26:15] before they expire. I think the court, so another [00:26:20]
[00:26:20] Thomas: reason to outsource.
[00:26:23] Charlie: Okay. So, [00:26:25] so you’re telling us a little bit of background, a little bit, like three [00:26:30] little anecdotes around where you come from and experiences that you’ve had, things to watch out for. I [00:26:35] think the, the next component I’m going to hand over to Thomas, this is where we go through the [00:26:40] 10, I think key, quite like fundamental questions when it comes to legal, [00:26:45] where if you’re a startup founder, you’re thinking, okay.
[00:26:49] Charlie: I’ve got to build a product. [00:26:50] I’ve got to run the product. I’m going to keep my team happy. And a lot of the time, some of these things fall [00:26:55] by the wayside and are, or not taken [00:27:00] as given them as much attention as they need to until they become a problem. So [00:27:05] I think the piece I’ll, I’ll add to the introduction of this section [00:27:10] is you don’t know how big of a problem these things are until they become a big [00:27:15] problem.
[00:27:16] Charlie: So to learn from our experience, in England, we [00:27:20] have a phrase, which is the by marks on my ass, you’d [00:27:25] rather not have, and do take in this, this, these [00:27:30] insights from David Thomas over to you, Chuck.
[00:27:33] Thomas: I am very glad that I can actually [00:27:35] ask, David, all these, these questions about his 10 startup advices, because I, I[00:27:40]
[00:27:40] Thomas: do business in at least three jurisdictions. And I, in the [00:27:45] prep of this episode, David threw out some nuggets that I was like, shit, I think I need [00:27:50] to engage David after this podcast to probably use his services. So I hope that our listeners [00:27:55] also feel the same way, or at least I get some more clarity after, after this.
[00:27:59] Thomas: So [00:28:00] let’s start with the first one, David. Oh, what should I look for in the first lawyer [00:28:05] that I’m, that I’m hiring, for my business?
[00:28:07] David: Yeah, I think the first thing you want to look for is [00:28:10] somebody that you can communicate with effectively, especially when the lawyer is getting paid by the hour. [00:28:15] You want somebody who can communicate with you in a way that you understand the risks and is [00:28:20] not drowning you in legalese.
[00:28:22] David: You want somebody who’s going to be responsive and that’s one of the [00:28:25] biggest complaints to all the bar associations in the U. S. is that A call was made or an email was [00:28:30] sent to an attorney and they didn’t respond. So having somebody who can communicate effectively with you [00:28:35] and, timely is probably what you’re looking for and, and realize [00:28:40] that this person is not going to be able to answer all of your legal questions if they do, or if [00:28:45] they attempt to, you should be very afraid because no one lawyer is going to be able to provide [00:28:50] all these answers for a certain.
[00:28:52] Thomas: So you should kind of have an, an, a lawyer with a, [00:28:55] with a big black book that can at least like recommend other lawyers if there is a [00:29:00] need. Yeah, I think so. I mean,
[00:29:02] David: we, so the firm I’m with has, you know, hundreds of [00:29:05] attorneys and we’re in the AMLOT 200, 200 biggest firms in the US, but we [00:29:10] also are in other, jurisdictions through SCG legal is one of the [00:29:15] groups that we work with and they have attorneys in different countries and different states that we’re not in, [00:29:20] and we also will refer work back and forth.
[00:29:22] David: So having a network of. Attorneys and law [00:29:25] firms that you can connect with quickly, is very, very important for, an [00:29:30] international type startup, for sure.
[00:29:32] Thomas: This, this is very interesting. And [00:29:35] I, it kind of goes back to my own experience with, lawyers here, at least in Europe, [00:29:40] I found, you know, to the credit of, of us lawyers, like generally quite [00:29:45] responsive, to foreigners.
[00:29:45] Thomas: But I, I have a lot of issues with like timely responses, and I [00:29:50] think that that is such a major issue. And this was. Or, you know, some, sole tradership [00:29:55] issues and not for an LLC, but I can imagine that if you run a high velocity LLC, [00:30:00] whatever entity you run, you want to have your, your lawyer almost on a speed dial, right?
[00:30:05] Thomas: [00:30:05] And, and it kind of rolls into that second point is like, okay, so I, let’s say I have a, I have David [00:30:10] on speed dial, in what kind of situations is it critical to have, [00:30:15] your advice as a lawyer?
[00:30:17] David: Yeah, I think, the situations where you want to have a [00:30:20] lawyer are those situations where litigation is not out of the question and [00:30:25] the dollar value associated with that litigation is, is high.
[00:30:28] David: So for [00:30:30] example, if you’re signing an agreement with your cell phone provider, you probably don’t need a lawyer to look at that. Okay. But [00:30:35] if you’re taking investment from venture capital, you definitely want a lawyer to look at that. If you’re hiring [00:30:40] somebody. You want a lawyer to look at that. And I would just add to that, to, to be very clear [00:30:45] what the scope of the legal services you’re requiring is.
[00:30:48] David: I mean, that’s something that we [00:30:50] put in every engagement letter is our scope is limited to X and [00:30:55] we do not like just being general counsel for a company [00:31:00] on all issues because that’s impractical and it’s way too broad. So we want to be very [00:31:05] specific and I’ll do free initial consults with clients all the time just to say, all right, let’s talk about your [00:31:10] issues and let’s go Figure out exactly what the scope of services will be, and then I’ll [00:31:15] disclose to you who’s going to be working on it, they’re all great, and we’ll talk about what the desired outcome looks [00:31:20] like, but being very clear with your attorney in crafting what it is you want them to [00:31:25] do.
[00:31:25] David: In terms of scope of services is super important.
[00:31:28] Thomas: Yeah, no, that, [00:31:30] I think that, and definitely if you pay a lot of money for [00:31:35] it, you, you want to, you don’t want to call your, your lawyer indeed for like, Hey, my, my [00:31:40] provider is like, I don’t know, changing my contract. What should I do? Yeah. Well, [00:31:45] that, that just costs you 500 bucks.
[00:31:48] Thomas: No, that’s fair. [00:31:50] To that point. And this is something that, that I have found, in, [00:31:55] in either, companies that I’ve worked with or, or looked at myself because it’s, you know, [00:32:00] there’s, there’s fast ways of doing things, here in the world. Like we now have GPTs out there. We have [00:32:05] templates on, on, on the internet.
[00:32:07] Thomas: The [00:32:10] question that I, I always have, and I think everybody. Probably shares, but you know, [00:32:15] never can ask is like, how much can I trust these legal documents that I find online [00:32:20] or are GPT generated? Like, are, is that 90 percent is 80%? Should [00:32:25] I actually not look online for these things? And should I just talk to a lawyer?
[00:32:30] Thomas: [00:32:30] Probably depends case by case, but how do you, how do you look at that? What’s your advice here?
[00:32:33] David: Yeah. I [00:32:35] mean, I think you can’t trust what you’re, you’re seeing online. I think there’s a lot of nuance in the [00:32:40] law just doesn’t show up in online documents and. I can tell you from experience as the [00:32:45] chair of our federal labs committee, looking at AI applications, even the really good [00:32:50] ones have hallucinations and have errors, and we’ll give you conflicting information depending on how you [00:32:55] prompt them.
[00:32:55] David: So, and this is with very specific, you know, legal tech, AI [00:33:00] applications, let alone chat GPT, which is pulling from the entire internet. You [00:33:05] can get some good information. I’m not saying that they all have value. It’s just that. When [00:33:10] you’re dealing with other people’s money and you have litigation risks that are tremendous and [00:33:15] potentially pose existential risks to your company, you definitely want to have a lawyer who [00:33:20] understands those issues and is familiar with the jurisdictions you’re working in and can give [00:33:25] yoUSome good legal advice based on experience as well as, you know, what is [00:33:30] current in terms of the correct form to be using, but also, helping you look around [00:33:35] corners that you will otherwise wouldn’t be looking around.
[00:33:37] David: It’s super important.
[00:33:39] Thomas: It’s, it’s [00:33:40] interesting that you’re saying that I heard that advice a while ago where somebody said, a lawyer said to me, it’s like, well, if you [00:33:45] need to, if you’re in need of a legal document, you should probably talk to a lawyer. [00:33:50] I’m like, okay, that, that, that’s something. And, and the interesting part was that I asked the same question to the specific [00:33:55] lawyers.
[00:33:55] Thomas: Like, Hey, I found a couple of templates and I’m not even sure what it was, but it was something relatively simple. He’s like, well, [00:34:00] Even looking at the templates. And this was, I think for European jurisdiction, but also, you know, [00:34:05] countries here in EU, you are also different. It’s like, well, you want to [00:34:10] look at, at not these templates.
[00:34:11] Thomas: Let me help you find. You know, the, the right legal [00:34:15] document then do this just to get it right. Very important. And I think [00:34:20] very easy mistake to make because of so much accessible information, I guess. So [00:34:25] let’s, let’s then, hit, hit the most, the next point, which is, I kind of [00:34:30] mentioned it already, right?
[00:34:30] Thomas: Like it’s easy with so much information. Lying around, like playing, playing your own [00:34:35] legal, advice. But what are the most common legal mistakes, made by startup [00:34:40] founders?
[00:34:40] David: Yeah, I think not, not engaging an attorney early on and [00:34:45] ending up in litigation is obviously the one that I see the most. But you know, that, [00:34:50] that can be from forms they were using and just sort of, pretending to be lawyer at the same [00:34:55] time they were a startup founder, or it can just be not appreciating, you know, what we talked about earlier, [00:35:00] which is.
[00:35:00] David: You know, the need for a real agreement amongst our parties [00:35:05] about what the value of the company is worth and how their interests are going to be vested over [00:35:10] time, how they’re going to get paid out if they decide to leave, or if they basically just stop [00:35:15] working, right? I mean, that’s all of these things end up in litigation or at least the threat of [00:35:20] litigation and, that will destroy a company’s value.
[00:35:22] David: So. Trying to minimize [00:35:25] your litigation threats should be at the top of your agenda because [00:35:30] part of, you know, making a successful company is just surviving. [00:35:35] And, it’s very difficult to survive when you’re involved in litigation. It’s so expensive. It’s [00:35:40] such a distraction. It’s, it takes an emotional toll too.
[00:35:43] David: I see it on clients. Like it’s, it’s [00:35:45] very challenging sitting through depositions and having requests for productions of documents and things. [00:35:50] It’s just a grind. And so. If you can avoid all of that, you’re, you’re better [00:35:55] off.
[00:35:55] Thomas: How often do you see those cases? I mean like obviously you’re a lawyer, so [00:36:00] you seem pretty often, but how often do you see those cases where you see like, Oh shit, they, they’ve been too late [00:36:05] or they’ve not, looked for legal counsel.
[00:36:08] Thomas: Early enough. [00:36:10]
[00:36:10] David: Yeah, often. I mean, almost all the time because the nature of the startup [00:36:15] is that we’re running on a shoot streak budget. We need to get things going. We need to move fast. We’re break things. And [00:36:20] so, there’s a supreme amount of confidence that goes with the startup founder. And that’s good [00:36:25] for some things.
[00:36:26] David: But, generally speaking, you’re, you’re going to end up in [00:36:30] a situation where. The company is in a compromised position with regard [00:36:35] to a third party who has a lawyer that knows your compromise and they’re going to take [00:36:40] advantage of it. Because they have a client whose interests have been affected.
[00:36:44] David: And so, [00:36:45] you know, trying to survive through the early stages is going to be [00:36:50] important. It’s really about mitigating your risks. So when you think about your legal spend, think [00:36:55] about it that way, that this is going to keep us alive. So that we could see if our [00:37:00] business actually will make money will survive the early stages.
[00:37:04] Thomas: It’s [00:37:05] interesting, you’re saying that it’s one of those points that, that we actually have, I [00:37:10] think it’s 0.10. You know, your, your budget spend, [00:37:15] and, and I, I would like to, to address that in a little bit, but that you did already [00:37:20] mentioned, it’s like some red flags, right? Like what, what kind of red [00:37:25] flags, you see in startup founders, like you already mentioned, like, you know, survival shoot [00:37:30] who’s shoestring budget.
[00:37:31] Thomas: And how, how do you like steer them [00:37:35] away from that? That must be not an easy task to do. And, but [00:37:40] also as an advice to a founder from you as a lawyer, like how can you see as [00:37:45] a founder that you’re, that you’re actually having those red flags, right? [00:37:50]
[00:37:51] David: Yeah. I mean, I think it’s important for your attorney.
[00:37:53] David: And this goes back, I think to the first [00:37:55] question too, which is effective communication between the attorney and the startup founders means [00:38:00] that they’re going to tell you when they think you might be making a mistake or you’re, [00:38:05] you know, needing some assistance here, from, from, from a lawyer. [00:38:10] Too often, I think founders will basically [00:38:15] override legal advice.
[00:38:16] David: They’ve been given for the pursuit of a business interests, which [00:38:20] sometimes that’s the correct decision, right? Business judgment is always going to [00:38:25] be an important part of being a founder, but, recognizing when it’s [00:38:30] important to take legal advice and to seek legal advice as a founders is paramount to [00:38:35] just, you know, keeping, keeping alive.
[00:38:37] David: So red flag for me would be. [00:38:40] A founder or a group of founders who’s just extremely overconfident in terms of, [00:38:45] not appreciating the legal risks that they might be taking with other people’s [00:38:50] money.
[00:38:51] Thomas: Do you see, a big difference between first time founders [00:38:55] and serial entrepreneurs for that matter?
[00:38:57] David: Yeah, I think that’s true. I mean, it’s just like with lawyers, [00:39:00] right? Lawyers who are relatively new, don’t have a lot of experience to draw on, [00:39:05] whereas founders who are. More experienced, like a more experienced lawyer, they’ll have [00:39:10] their life experience to, to, to learn from hopefully, and to, [00:39:15] course correct.
[00:39:16] David: When they start to see things that fit a pattern, a lot of, you know, [00:39:20] most professions, I think is just pattern recognition. To see the same things [00:39:25] over and over again, and we start to deploy that harder in the wisdom over time. So [00:39:30] it’s important, to respect that, you know, when you’re, when you’re hiring a [00:39:35] professional to help you and, and they have that pattern recognition, they’re trying to tell yoUSomething.
[00:39:39] David: [00:39:40] It’s good to take that kind of advice.
[00:39:43] Charlie: See, I thought that was interesting because [00:39:45] I, when, when we were setting school up, I read that differently. Thomas, I read that as. [00:39:50] What are the red flags you see in startup founders that make you not want to work with them, David? [00:39:55]
[00:39:55] David: Well, I think in in between the lines there you can probably see what I would be [00:40:00] avoiding as a super overconfident founder Who doesn’t listen to what i’m saying, you know, [00:40:05] I think that’s Those are the kinds of clients you don’t want to have because, [00:40:10] it’s just, it’s, it has to be a good two way communication, right?
[00:40:13] David: You can’t have [00:40:15] it be just, just my way or the highway. It has to be a partnership. And in [00:40:20] fact, between the lawyer and the founder to try to accomplish the specific work scope [00:40:25] that’s being worked on.
[00:40:26] Thomas: It’s interesting because I think that we all like share that. [00:40:30] Like when I have overconfident founders, that generally is not a good sign because you [00:40:35] know, when we definitely built blockchain tech, like, Sometimes people are actually [00:40:40] really good blockchain founders, but they, they won’t know that the rest of the business, right.
[00:40:44] Thomas: We always say [00:40:45] like, know what you don’t know and hire for that, right. Like at least, or outsource for that. [00:40:50] The reason why Charlie and I started working together and collaborating and starting this podcast was exactly this [00:40:55] point, you know, know, know what you don’t know as a founder. And if you don’t know that, [00:41:00] hire for it and, and listen, and then.
[00:41:03] Thomas: More importantly, listen to the advice that the [00:41:05] people that you hire because you pay them, give you, so yeah, it, it, it’s a [00:41:10] pretty, pretty common topic and, and we see that kind of as a red thread throughout all the episodes, and all the [00:41:15] people and all the guests that we’ve been speaking to over the last.
[00:41:20] Thomas: [00:41:20] Last month or so.
[00:41:21] Charlie: Like an extension to the most common legal mistakes is [00:41:25] term sheets. What are the main things that startup [00:41:30] founders need to think about with respect to term sheets, because this is the bugbear, there are so [00:41:35] many traps in this, where do yoUStart, where do you begin, what are [00:41:40] the things that you want to tell the audience and get the word out about?
[00:41:44] David: Yeah. [00:41:45] I think when you’re looking at term sheets, you have to appreciate that, you the [00:41:50] term sheet itself probably was drafted by. An attorney for the investor [00:41:55] who’s coming in. And so you want to have an attorney on your side, look at it [00:42:00] from the perspective of the business, and you may want to have an attorney look at [00:42:05] it from your personal perspective as well.
[00:42:07] David: And those are different interests. And the [00:42:10] example I talked about earlier, we were representing the company and made it very clear to all of the [00:42:15] owners of the business that we’re not representing you. We’re going to represent the company and we’re going to advocate [00:42:20] for the best interest of the company in terms of cash flow and how it’s going to work.
[00:42:24] David: And so, [00:42:25] In a term sheet, you really have multiple parties with different interests being [00:42:30] represented there. You have the investor’s interests, you have the company’s interests, and then you have the [00:42:35] individual founder’s interests as well, and those are different. And so [00:42:40] recognizing that inherent conflict of interest and getting legal counsel.
[00:42:44] David: [00:42:45] So you’re comfortable from the business perspective and from the individual founder’s perspective, that [00:42:50] the term sheet is going to work for you. Super important. And I think, you know, within the [00:42:55] term sheet, there are a lot of variables that can be manipulated to the advantage of one [00:43:00] party or another.
[00:43:01] David: You know, a lot of times, founders will rush in to [00:43:05] take the money and not appreciate maybe what can happen with a further dilution of their [00:43:10] interests or vesting. Periods. I mean, there’s a lot of terms that, [00:43:15] that, you know, can work against them if they’re not fully appreciating, [00:43:20] what is in there and how this can play out.
[00:43:23] David: And so I would always recommend [00:43:25] clients think about best case scenario and worst case scenario. Probably [00:43:30] neither one of those is going to happen, but make sure you go through that thought process and then recognize it’s probably going to [00:43:35] be somewhere in between, and get comfortable with the legal advice you’re getting for the company and for [00:43:40] you individually.
[00:43:41] Charlie: Oh, that’s such a stoic answer. I’m going to, I’m going to press you for, for [00:43:45] something a little bit of a little bit of fun. What, what wouldyou sayy are the top three [00:43:50] clauses or things that startup founders have to have to be aware of? For [00:43:55] example, vesting periods. Who gets paid out first? Like [00:44:00] where if, if they get this sense that something smells a little funny, [00:44:05] what should they read first to get an indication of, [00:44:10] of, of how things are going?
[00:44:11] David: Yeah, I think vesting period. Also [00:44:15] ownership of intellectual property rights, how that’s gonna be, how [00:44:20] vesting definitely is huge because the founders need to know how long they’re gonna have to stay in this [00:44:25] business. To get their money out also dilution of their interests over [00:44:30] time, because additional investment probably is going to be needed down the road.
[00:44:33] David: And when that happens, you [00:44:35] know, they’re going to lose more of their share of the company. And [00:44:40] ultimately control over the direction of the company is usually, you know, [00:44:45] in the term sheet somewhere, somehow, and recognizing that when yoUStart [00:44:50] taking other people’s money. You’re going to lose some of your, [00:44:55] independence and how that’s going to happen, whether that’s board seats that are, that are going to be planned [00:45:00] by the investors and hopefully that’s all good, right?
[00:45:03] David: I mean, ideally you’re getting money from [00:45:05] somebody who’s going to help your business and actually take an interest in it and give you good advice and [00:45:10] position you for success, but that doesn’t always happen, you know, as we know. And [00:45:15] so, yeah, there’s a, there’s a lot to that, and a lot of moving parts [00:45:20] and, Super important to get good counsel when, when you go through that process.
[00:45:24] Charlie: I mean, [00:45:25] I just wanted to say, this is the kind of conversation I wish I had. Like when, [00:45:30] when I started my business, I was just like so many questions. You just [00:45:35] kind of had to work your way through without any [00:45:40] advice. Cause you just didn’t have the money, right? You didn’t, I couldn’t, I couldn’t call a lawyer and be like, [00:45:45] listen, I’ve got all of these questions.
[00:45:47] Charlie: Could you please just give me an hour or two of your [00:45:50] time to help me Figure out when I need a lawyer, how I need a lawyer, [00:45:55] what is it exactly that I need a lawyer for? Because you get [00:46:00] into that that space when you’re sort of early days in your business and you’re thinking, okay [00:46:05] I know I need a good contract in order to be able to sell stuff, right?[00:46:10]
[00:46:10] Charlie: I don’t want to I don’t want to sell a product or a service and then get that wrong kind of thing [00:46:15] And I just yeah, I just want to say thanks for taking the time. It’s really it’s really being [00:46:20] Illuminating.
[00:46:21] David: Oh, that’s been good. Yeah. I appreciate the opportunity. So thank you.
[00:46:24] Charlie: No, [00:46:25] more than, more than welcome.
[00:46:26] Charlie: So I guess the next bit, and this is kind of a trigger question for [00:46:30] a lot of people, and I’ve, I’ve seen some people burnt by this, some people not. [00:46:35] And, it actually strikes quite close to home for a lot of people in terms of [00:46:40] how IP and we’re talking tech products here and. [00:46:45] A lot of startup founders I feel are concerned about sharing too much when it [00:46:50] comes to pitch or not sharing enough when they’re, when they’re looking to raise [00:46:55] capital or sharing too much when they’re trying to just sell their products and get people, get [00:47:00] users, right.
[00:47:01] Charlie: How do you protect your IP, secure your IP and [00:47:05] even your brand name? Should you even care in the early instances? I mean, where do you land on that? [00:47:10]
[00:47:10] David: Yeah. I mean, I think you should care about it, especially if you’re planning to build something over [00:47:15] a long period of time. And, and it really goes back to, you know, some of the things we’ve talked about, which is [00:47:20] what is the value proposition of, of the IP?
[00:47:23] David: Like how unique is [00:47:25] it? Do you have a brand you want to build? In a specific [00:47:30] location. So jurisdictionally, like where do you need an IP lawyer? You [00:47:35] know, do you need one in the US anyone in the, you can’t know what, and then maybe you need them in [00:47:40] all those places. Right. So, Cannoth, [00:47:45] emphasize enough that you need to talk to an IP attorney and we have some great IP attorneys in the firm and there are great up [00:47:50] IP attorneys around the world, but you have to have one that understands your business model, what you’re hoping [00:47:55] to do with that IP going forward.
[00:47:57] David: When you come. To [00:48:00] business valuation issues. The IP is going to be a big part of it. And how that [00:48:05] IP is owned, how it’s licensed. You know, that could potentially be a [00:48:10] huge revenue generator for you. So, yeah, anybody in technology [00:48:15] working through, a startup needs to understand what their IP [00:48:20] potentially could be worth, how to protect it.
[00:48:22] David: And make sure that they’re [00:48:25] taking the right steps to protect it on a regular basis, not, it’s not a fire and [00:48:30] forget. This is something you want to revisit frequently, I think. [00:48:35]
[00:48:35] Charlie: Just, I’m going to, I’m going to push you on this one a little bit. What should a [00:48:40] startup founder in the emerging technology space, we’re talking web three, we’re talking AI.[00:48:45]
[00:48:45] Charlie: What should they have locked down? Like from the very instance, from when they start [00:48:50] trying to get customers, What’s there? What are the key phrases [00:48:55] or documents they should look to have drawn up?
[00:48:59] David: Well, I mean, if [00:49:00] they think that they have a unique process that they can get a patent and this [00:49:05] is where they want to talk to an attorney who will tell them like what you’re doing is [00:49:10] unique and there is something here that we can protect.
[00:49:13] David: Then by [00:49:15] all means, get that done and get that locked up as soon as you can. [00:49:20] And that’s where, you know, again, having the right attorney in the right jurisdiction, advise you on [00:49:25] that is super important. Most of these startups are trying to do something unique. I [00:49:30] think, you know, otherwise, they wouldn’t be in business, right?
[00:49:33] David: So what is [00:49:35] that unique thing that you’re bringing to the table that the market hasn’t seen before? What is it [00:49:40] that Makes your process or your blending of the different technologies, [00:49:45] something that not anybody could do. Right. This is, this is what is your [00:49:50] unique value proposition. And typically there’s going to be some I.P. components to that. So [00:49:55] understanding that being able to articulate it, and having an attorney who is an I.P. attorney [00:50:00] in the jurisdictions you’re working in. It can help you protect those things, is important. [00:50:05]
[00:50:05] Charlie: And just a quick follow up to that one, should startup founders be scared of the [00:50:10] big bad, you know, big bad corporate trying to steal my idea?
[00:50:13] Charlie: Should they just go for it [00:50:15] and try and get some traction? And then just think about that later. Should they do it from the [00:50:20] outset? And I know that’s a very wide question.
[00:50:22] David: But yeah, [00:50:25] no, I think it’s good to be paranoid in this situation. But there are limits to that. [00:50:30] And eventually you’re going to have to take some business decisions about who yoUShare that information with.
[00:50:34] David: And you’re not [00:50:35] going to get an investor who, you know, you don’t tell them what your unique selling proposition is that you have to [00:50:40] be able to communicate. To people what it is you’re doing. [00:50:45] And you should be concerned about somebody taking your IP [00:50:50] but that goes back to understanding from your IP attorney.
[00:50:54] David: [00:50:55] What do we do when somebody steals our IP? You know, are we going to have to [00:51:00] litigate? What are the chances of that? What’s good? What is it going to cost? How long is it going to take? Do you [00:51:05] have that as a line item in your budget? If you’re fiercely going to protect your IP, you [00:51:10] should have some money allotted for litigating over IP rights.
[00:51:13] David: And if you don’t, then [00:51:15] maybe you’re not that serious about your IP. I don’t know. I mean, it’s, it’s hard when you’re a [00:51:20] startup, but you have to be thinking next round, next round, because you’re going to [00:51:25] be going back for funding again and again. When, where [00:51:30] are you protect your IP and what resources you dedicate to it?
[00:51:34] David: [00:51:35] It needs to be part of your business plan.
[00:51:37] Thomas: Can I ask a question on this? Because I see a [00:51:40] lot of back and forth on, NDAs when it comes to, [00:51:45] pitch decks, for, for venture capital. And I, I seen like [00:51:50] yays and nays on it. I think the general consensus is like, we don’t have time to set to sign [00:51:55] an NDA and don’t worry, we’re not going to steal your idea kind of perspective.
[00:51:59] Thomas: [00:52:00] What is your take on that?
[00:52:03] David: That’s a tough one because I do know [00:52:05] you can see both sides. Look, as an attorney, I’m always going to tell you to have a very good NDA and have it locked [00:52:10] down. That’s my advice. I, I do see situations where people are like, [00:52:15] look, we’re, you know, we’re not going to sign an NDA, so don’t even bother sending it to us if we’re going to invest in [00:52:20] you, right?
[00:52:21] David: You know, some of that comes down to just character [00:52:25] judgment and your, track record with the investors and what other people, [00:52:30] might know about them. You know, fortunately in this day and [00:52:35] age, people who don’t treat other people well, usually [00:52:40] will leave a trail of bodies in their wake. So do your due diligence.
[00:52:44] David: Anytime you’re [00:52:45] talking to somebody about your. Very precious business ideas and your intellectual property, [00:52:50] either get an NDA in place that you understand and you recognize what limitations are, or if you’re [00:52:55] not going to get an NDA in place, do some background check. And that’s some of the work that we can do for clients too, [00:53:00] is, you know, we can do a search on a person, an entity, how many lawsuits have [00:53:05] they’ve been involved in, you know, what, what is their track record, what are some of their business [00:53:10] associates say about them, you know, having that kind of intelligence.
[00:53:13] David: Helps you make an informed [00:53:15] decision and certainly you wouldn’t want to just plunge in blindly and give [00:53:20] somebody all of your IP, because who knows what could happen to that, right? It could take a [00:53:25] walk and, you know, You can end up competing against somebody who has the exact same IP that [00:53:30] you have.
[00:53:30] David: So, yeah, I think it pays to be a little bit paranoid. Ultimately it’s going to come [00:53:35] down to a business judgment. But have, have an informed decision, whatever you [00:53:40] do.
[00:53:41] Thomas: Yeah. I like that. And I just want to add before we go to the next point, [00:53:45] like from, from our company, we, we proactively send NDAs with our clients.
[00:53:49] Thomas: So if our clients [00:53:50] come like, Hey, we want to build software. Like, Hey, great. First conversation. Here’s an NDA. [00:53:55] We can, we’re also very happy to sign yours, but you know, here’s an idea just to make sure that, you know, [00:54:00] we’re, we’re at least looking at trustworthy and we’re covered so far, right? [00:54:05] Like, we’re not going to steal our clients ideas because we’re no means like having, looking forward to [00:54:10] raise a large amount of capital for an idea.
[00:54:12] Thomas: That’s not us. But it, it, we also [00:54:15] see that the clients generally are very glad about it, like, Oh, that’s nice that you think of that a lot, some of them, [00:54:20] there’s like, Oh, we don’t need it. But some of them are like, yeah, we’re very happy. Or actually say like, Hey, we only. We only [00:54:25] want our NDA signed to your point, right?
[00:54:27] Thomas: Like as I probably have a good lawyer that says, no, no, no, [00:54:30] only sign, sign, our NDAs. So that’s great. You [00:54:35] know, we, we are the next advice, piece that we already talked [00:54:40] about. It’s like the most disputed topics. Basically, you just said like litigation, right? Like that’s, [00:54:45] that’s the thing that you’ve seen coming over your desk most.
[00:54:48] David: Yeah. And I think [00:54:50] when, when you think about where your litigation risks are, I think about where the money is, because that’s where [00:54:55] you’re going to have it. It doesn’t make sense to litigate for most things. And I [00:55:00] do try to talk clients out of litigation as well. Often as I can, but when [00:55:05] it’s about a large sum of money, it’s almost always going to make sense to litigate.
[00:55:10] David: [00:55:10] So you have to understand that mindset as well, [00:55:15] that there is a point in time where you have to, you have to [00:55:20] litigate. There, there’s just too much riding on it and understanding what that threshold is for you, [00:55:25] and for your business is important. Before you get involved in it, because a [00:55:30] lot of times people get wrapped up in emotions and start making decisions that are [00:55:35] not rational around litigation.
[00:55:37] David: And then end up [00:55:40] regretting that and having to drop the litigation later. If you’re going to get involved in litigation, you should [00:55:45] have a clear understanding of how, how much time it’s going to take, how much money it’s going to take [00:55:50] and what your risks are. And, and, you know, the resources that you’re going to deploy [00:55:55] into it, need to be.
[00:55:57] David: Weight against the risk of losing, [00:56:00] and, and understanding, you know, that, that this is worthwhile to litigate or [00:56:05] not. And understanding that quickly is going to be very, very helpful.
[00:56:09] Thomas: Perfect [00:56:10] the next one, I think we discussed it as well as like how much, attention should a [00:56:15] founder pay to contracts is downloading them from.
[00:56:17] Thomas: Uh rocket lawyer enough like we already said like the [00:56:20] moment you you you need to draw up a contract It’s probably good that you’re talking to a lawyer.
[00:56:24] David: [00:56:25] Yeah. Yeah, it’s good to talk to a lawyer again Think about the gravity of the contract. Is it a six figure [00:56:30] contract or you know not so Understanding, you know where you want to have an attorney [00:56:35] Spend the time and money.
[00:56:36] David: Is this something that’s actually critical for the business? Yes. And [00:56:40] is it a lot of money? Yes. And then, okay, let’s get a lawyer in here. And understanding [00:56:45] that the impact of those contracts and where you want to deploy lawyers is very [00:56:50] important.
[00:56:50] Thomas: So, the last two, and then, then we’re moving on, how, how should [00:56:55] startup founders navigate conflict of interest from your perspective?
[00:56:58] David: I think that [00:57:00] they need to be aware of conflicts of interest. First of all, I think a lot of times they, they just consider, [00:57:05] All the co founders are in this together. We’re all doing this, we’re all pulling for the company and we’re all [00:57:10] going in the same direction. And reality is that’s just not true. Even [00:57:15] then, you know, completely equal distribution of equity, which is rare.
[00:57:19] David: [00:57:20] Individuals have different skill sets and some skill sets are more replaceable than others, and some skill sets are [00:57:25] more in demand than others. Some people just have a unique thing about them, an [00:57:30] X factor that is going to make the business go. Recognizing all of that and [00:57:35] recognizing the differences is important and that there are going to be inherent conflicts [00:57:40] of interest.
[00:57:41] David: And the business has a different interest as well. I mean, the [00:57:45] business is there to make money and to return capital to the investors. And, that may [00:57:50] not line up with all of the co founders intent. Or, [00:57:55] capabilities at the beginning as well. So, just taking a step back and trying to [00:58:00] be objective. I think it’d probably be the advice to really think about conflicts of interest from an objective [00:58:05] viewpoint, which is hard when you’re in it, but very important skill to have.
[00:58:09] Thomas: This is also a [00:58:10] piece that is not fire and forget, but continuously evolving.
[00:58:14] David: Yes, it [00:58:15] evolves over time for sure. Cause people change over time. Right. And business interests change over time. [00:58:20] All
[00:58:20] Thomas: right. That, that, sorry, that one business, developer, [00:58:25] becomes a CTO and actually turns out to be really good at it.
[00:58:27] Thomas: That might just be the case. Right. [00:58:30]
[00:58:30] Charlie: Sorry, Charlie, I was just gonna get, I’m just super keen on this last question, which [00:58:35] we had come in, which is how much should companies budget for legal? And I was going to [00:58:40] qualify that. Let’s say you raise half a million dollars, a million dollars, two million [00:58:45] dollars, because those are the instances I see most frequently, [00:58:50] especially For specifically gear to our audience, right there, they’re right at the beginning of that [00:58:55] journey.
[00:58:55] Charlie: If you raise half a million bucks, what should you put aside?
[00:58:58] Thomas: I know I want to add one more [00:59:00] tier to this and that’s something that you sometimes forget Charlie, but that’s the, our audience at [00:59:05] bootstraps.
[00:59:05] David: Ah, right. The bootstrapping.
[00:59:07] Thomas: So the bootstrapping, half a million, million, two million. I [00:59:10] think those are like four categories.
[00:59:11] Thomas: I think that is perfect too. I have some insight on. [00:59:15]
[00:59:15] David: Great question. And I think you have to .Think about what scope of [00:59:20] services you’re going to be requiring. So if you’re going to be going out in the hiring attorney to look at all of your term [00:59:25] sheets, you’re going to be hiring attorney to look at all your employment docs, hiring attorney to look at all your [00:59:30] IP interests.
[00:59:31] David: That is probably not all going to take place on day one, right? [00:59:35] So figure out the scope of legal services you need and when you’re going to need them [00:59:40] and be strategic about it because you don’t want to be deploying your resources out of [00:59:45] order. So you need to be thinking about it from the perspective of.
[00:59:49] David: [00:59:50] What is the first, second, third, fourth, fifth legal service I’m [00:59:55] going to need this year, you know, and, and start with that. And just like any good startup, you’re going to [01:00:00] use iterative decision making and, go through that process. But I think, [01:00:05] you know, realistically, you’re going to want to spend money [01:00:10] on legal services, probably more than you think, [01:00:15] just to avoid.
[01:00:16] David: Getting destroyed by either litigation from a third [01:00:20] party or somebody inside the company or from the government agency that you [01:00:25] are, you know, violating their compliance rules. So those are the things you have to think about. You [01:00:30] want your business to survive and you can skimp on a lot of things [01:00:35] in starting up, but I think skimping on legal services, I’ve seen it destroy a lot of [01:00:40] startups.
[01:00:40] David: And so recognizing what those legal services you need [01:00:45] and when you’re going to need them. And budgeting appropriate for that is, is going to allow your business hopefully to [01:00:50] survive and, and eventually thrive, but you’ve got to, you’ve got to get to that terminal velocity [01:00:55] at some point, and you’re not going to get there by skimping on legal services.
[01:00:58] David: At least that’s been my [01:01:00] experience.
[01:01:01] Thomas: So if I would say, let’s say, you know, 10 percent for bootstrap, 20 [01:01:05] percent for 500 K and a 30 percent for, for a mil, would that [01:01:10] be realistic? Or, and, you know, obviously we’re doing a little bit of guesswork here, right? [01:01:15] Based on. You know, we didn’t specify the industry and the company and the [01:01:20] product.
[01:01:20] Thomas: But because I can’t imagine that if you’re bootstrapping, it’s, [01:01:25] it’s like kind of POC, you know, you throw it on the market, you see what happens. Like you, you probably don’t [01:01:30] need a lot of legal services. Whereas like, you know, you’re [01:01:35] just raised 2 million and you’re gonna, I don’t know, take on Ticketmaster for [01:01:40] instance.
[01:01:40] Thomas: And as an, as an, as example, you’re probably going to need a lot of [01:01:45] legal.
[01:01:45] David: Yeah, I think that’s right. And I think that’s the important thing is for you to [01:01:50] understand when you’re going to need legal services and what type of legal services you’re going to need, and that’s going to help you [01:01:55] with the budgeting and again, order of operations, like, do you need that in the first [01:02:00] quarter, the second quarter, third quarter, fourth quarter, you know, when are you going to be engaging legal [01:02:05] for legal spend?
[01:02:05] David: If you have a proof of concept, maybe you want to spend some money early on with an IP attorney [01:02:10] that you can grow with, right. And, and try to just understand what’s going to happen. And with a [01:02:15] good. Lawyer or law firm you’re working with, they can help you navigate that. Say, [01:02:20] okay, right now you need these services from us.
[01:02:23] David: Come back to us next [01:02:25] quarter. We’ll talk about these services and here’s what we think that’s going to look like. And, you know, go through a [01:02:30] process just like you would in engineering anything you want to have, you know, You know, sort of [01:02:35] milestones that you’re going to hit and you want to have a schedule and you want to resource live that schedule the same [01:02:40] way with Laura.
[01:02:40] David: You got a project manager, lawyers, basically is what you’re going to do it the right [01:02:45] way.
[01:02:45] Thomas: I really like that. I think that is a, a perspective that I’ve [01:02:50] never heard before, but it makes a lot of sense. Definitely from a milestone perspective, because I’d [01:02:55] always assumed like, okay, you just, you know, you have continuous lawyer support.
[01:02:58] Thomas: But as you said, [01:03:00] like, you know, planning it out. And over different quarters and and actively manage that [01:03:05] engagement as well. Yeah, that makes makes so [01:03:10] much sense.
[01:03:12] Charlie: I’m mindful of time gents. I think [01:03:15] having had the conversation we’ve had so far brainstorm. Number one is kind of moot because we’ve done that [01:03:20] to death what is it?
[01:03:23] Charlie: What are the frequent steps you have to [01:03:25] take that’s pretty much been the conversation up till now having that again I don’t think we’ll add as much value and might be [01:03:30] a bit boring for David frankly um What [01:03:35] Other most common lawsuits. I think we’ve, we’ve tangentially covered [01:03:40] that, three, how to build relationships and investors and raise capital [01:03:45] while signing papers that are beneficial to both sides.
[01:03:48] Charlie: We haven’t quite covered, [01:03:50] but I think also it’s a super hot button topic that will get your name and your face out there [01:03:55] a bit, bit faster. What do you think guys? I’m [01:04:00] mindful of the time and I’m thinking probably hit the hot button topic because [01:04:05] we’ve done one already.
[01:04:07] Thomas: Well, I think we hit, we did one and, and [01:04:10] two.
[01:04:10] Thomas: And, and two, like the most common lawsuits, I think we, we’ve discussed it, [01:04:15] like a litigation as you mentioned a couple of times, like risk of claims, spending [01:04:20] more and more hours. Yeah, I, I, I would be up for, for talking about the, relationship with [01:04:25] investors. Have to build them and, and raise capital.
[01:04:27] Thomas: Yeah, I’ll sign any papers that are beneficial [01:04:30] for both sides.
[01:04:31] David: Yeah, with regards to investor relations, I mean, ideally you’re going to have [01:04:35] investors who really are going to put more than just money into the business, that they’re going to help you, you [01:04:40] know, with contacts. They’re going to help you with exposure.
[01:04:43] David: They’re going to help you from a [01:04:45] strategic standpoint, get to where your business is successful. Your interests are [01:04:50] aligned, right? Hopefully your economic interests are aligned. And so, [01:04:55] they should be able to advise you on a number of different things that you can [01:05:00] then take and implement. That advice where we see problems is when [01:05:05] there is a miscommunication between the founders and the investors or [01:05:10] worst case scenario.
[01:05:11] David: There’s a misrepresentation about what’s going to [01:05:15] actually happen. That’s the last thing you want. You want to absolutely be clear with [01:05:20] the investors. The threat of litigation from the investors is real. [01:05:25] They have money. They’re deploying money. This is how they buy groceries and [01:05:30] they have lawyers.
[01:05:31] David: And if you misrepresent them, progress you’re making or things that [01:05:35] you can do, you will find yourself in a lawsuit. So you don’t want to do that. [01:05:40] You want to be very clear with them about your goals. You want to have, you know, real achievable [01:05:45] milestones and goals. Investors will look at, you know, how you’re performing [01:05:50] and want to know, and they have a right to know because you’re using their money.
[01:05:52] David: Are you meeting the milestones you set out? So [01:05:55] be very realistic in terms of setting those milestones and communicating them. With the investors [01:06:00] and just have a good communication workflow with the investors to, some [01:06:05] investors don’t want a lot of updates, but I think that’s probably not good for you.
[01:06:09] David: If the [01:06:10] investors don’t want to engage with you on a regular basis, it might make your life easier in the [01:06:15] short term, but you’re probably better off having regular reporting to the investors and [01:06:20] making sure they know what’s going on with the business. And if you struggle, which you will, you know, make sure you [01:06:25] communicate that in a timely manner.
[01:06:26] David: And say, Hey, this is a struggle we’re having, the challenge we’re having, we’re going to [01:06:30] look at doing X, Y, and Z to mitigate it. Do you have any advice? And look, a lot of times these [01:06:35] investors will have advice because they have been doing this for a long time. They’ll have pattern [01:06:40] recognition. They’ll be able to say, Hey, we’ve had three other companies that have the same problem, here’s what they did [01:06:45] that worked and here’s what they did that didn’t work and, really just try to learn from those investors as [01:06:50] much as you can.
[01:06:50] David: So the recognize that, you know, this is. This is [01:06:55] a, litigation risk for sure. Having poor relations with your investors is not good [01:07:00] for you or for the business. So, having good counsel also that you can talk to about [01:07:05] these issues, and can communicate with the investors on your behalf. Sometimes that’s the best [01:07:10] service lawyer can offer you is having hard conversations with people on your behalf and [01:07:15] making sure that communication is clear and concise.
[01:07:18] David: That’s a good, good use of legal [01:07:20] services.
[01:07:22] Thomas: Charlie, like, remember [01:07:25] we, we, we were speaking to a bunch of, venture capital funds last year [01:07:30] and they all said it’s always so hard when startups [01:07:35] are not transparent about their progress, like we would love to have an information clause, in, in [01:07:40] our, in, in our, documents.
[01:07:43] Charlie: Because doc libraries. Yeah. [01:07:45]
[01:07:45] Thomas: Yeah. Because they, they, they always say like, we’d love to help them. We [01:07:50] really do because that’s why we’re on board. Like at least most of it, some, some investors or some, some VCs will just be cash [01:07:55] VCs, right. But most of them actually come with a black book. And they also like, we really want to help.
[01:07:59] Thomas: We [01:08:00] want to, because we deploy capital in you, we want to help you succeed. But if you’re not telling us where [01:08:05] you are on the milestones, it’s not looking good, but we also can’t like help you moving [01:08:10] forward and it doesn’t matter if you’re a serial entrepreneur that goes into a new industry or is [01:08:15] in the same industry or an, an.
[01:08:17] Thomas: First time founder, talk to your people, [01:08:20] talk to your, to the people that deploy capital towards your company and be very transparent about it. Like [01:08:25] also if it’s not going that well, because generally, asyou sayid, better recognition, they will [01:08:30] be. Able, like most of these people will be able to say like, yeah, Hey, we’ve seen that problem [01:08:35] before in different companies.
[01:08:35] Thomas: We will help you, or we need to, you need to talk to X or Y or Z, or we’ll open [01:08:40] our phone book and you need to have a meeting with this person in order to move forward, it’s, [01:08:45] it’s. It’s very, very interesting that like, you know, we keep on hearing kind of these [01:08:50] signals back, now from you, David, but you know, before that also from, from venture capital firms that we’ve been [01:08:55] talking to, last year.
[01:08:57] Thomas: But what I, what I found very [01:09:00] interesting and I learned that through experience and I think a lot of [01:09:05] speaking with different people and I still find that really hard and. [01:09:10] I’m, I’m an, a contractor or like we’re outsourcers. Like we help people build their [01:09:15] company. But how do you spot, investors that want to take you [01:09:20] for a ride, right.
[01:09:20] Thomas: That are fake, that are not. Like credible. How, how do you spot that as a [01:09:25] first time founder or as a serial entrepreneur that starts in a new industry, for instance, emerging [01:09:30] tech?
[01:09:31] David: Well, I think you have to do some due diligence on the investors. So that’s again, you know, part [01:09:35] of the little services that you should be looking for is if, if you are getting investment from [01:09:40] somebody and you don’t know them very well to begin with, have a background [01:09:45] check though, you know, because that usually will tell you, Hey, this person’s been involved in a [01:09:50] lot of shady deals.
[01:09:50] David: They’ve got lawsuits that have happened. Maybe interview some former, [01:09:55] partners, et cetera. I mean, you can spend some money on due diligence and save [01:10:00] yourself a ton of problems. Again, it’s, you know, being strategic about [01:10:05] your legal spend, part of it should be on due diligence, not just with investors, but strategic [01:10:10] partners, people who come in hot and heavy and ready to work with you.
[01:10:13] David: You know, if you don’t know [01:10:15] them, you might want to pump your brakes and find out what is their background and their story, you [01:10:20] know, where they come from and how does this, how Play out. It’s important to have that information. [01:10:25]
[01:10:26] Thomas: I can imagine that for some of our listeners, they’re like, whoa, whoa, background checks.
[01:10:29] Thomas: [01:10:30] Like these people want to give us, these people want to give us money, you know? And, and I, I, I [01:10:35] generally, I think when we’re talking about larger checks, but are there also. Certain [01:10:40] checks and, and, and perspectives like the founders can do on themselves before they engage [01:10:45] legal. Are there recommendations that you would say like, Hey, look at this or look at that?[01:10:50]
[01:10:50] David: Yeah. I mean, the internet is an amazing thing, right? There’s so much information available right now. So doing [01:10:55] your audit diligence for sure is helpful. Specifically the crypto space. I will tell you [01:11:00] recently we’ve had some situations where people have been paid in USTC that [01:11:05] ended up coming from Tornado Cash or got dusted from Tornado Cash and ended up [01:11:10] causing real problems.
[01:11:10] David: So that’s another issue too when you’re accepting money in cryptocurrency. [01:11:15] I know it’s probably not popular with a lot of folks, but know your client. Any money [01:11:20] laundering laws are real. And recognizing where that money’s coming from, what [01:11:25] wallet it’s coming from, having clear representations and warranties that this money is, [01:11:30] you know, from the people who are supposed to be investing and that it’s not [01:11:35] tainted by some sort of, you know, FinCEN lockup on the wallet or something like that.
[01:11:39] David: [01:11:40] I mean, I’ve seen that cause real heartache for people. So, having that extra [01:11:45] level of care about where the money’s coming from and who it’s coming from is super important. [01:11:50]
[01:11:50] Thomas: Yeah, I think those that kind of like also sits with that point of when to [01:11:55] involve your lawyer into, talks to investors, right?
[01:11:59] Thomas: Because I think for a [01:12:00] lot of people that, Their first, first round or first ever round, or again, like [01:12:05] in a new industry, like when should you involve a lawyer? Is that from the start? [01:12:10] Like, or is that, is there a certain level of [01:12:15] venture capital whereyou sayy, okay, now you should actually deploy a lawyer in order to, to make sure that you’re, [01:12:20] you’re not being screwed.
[01:12:21] David: I think anytime you’re taking other people’s money, you should have a lawyer, you know, just [01:12:25] because that creates a fiduciary duty and you as a [01:12:30] fiduciary, Can get sued. So anytime you take money from somebody else, you [01:12:35] have a fiduciary duty, you have the potential for a lawsuit. you should definitely get legally.
[01:12:41] David: [01:12:40] So I would say anytime you’re taking money, have a lawyer help you with [01:12:45] that transaction.
[01:12:46] Thomas: Is that, and maybe that’s, I’m not sure if you can answer that, [01:12:50] but we just say that, that goes for, any continent because, you know, [01:12:55] obviously you’re based in the US and maybe some of our European listeners maybe think like, Oh, well.[01:13:00]
[01:13:00] Thomas: That’s the US you know, like, everybody sues each other there. What, what, what about [01:13:05] Europe? Like we just say the same thing.
[01:13:06] David: I don’t know. I mean, I, I don’t practice in Europe, so I [01:13:10] can’t say I think morally and ethically, look, anytime you’re holding somebody [01:13:15] else’s money and deploying it and they expect a return on investment, [01:13:20] you probably should have an attorney advise you on what are the [01:13:25] terms and conditions of using that money and getting it back to these people, [01:13:30] whether you’re in a litigious society like the U.S. or not, just seems like [01:13:35] the right thing to do.
[01:13:36] Charlie: I fully agree this next piece I find really interesting [01:13:40] is, and this is in reference to your point earlier about, [01:13:45] yeah. Legal advice and clear communication. When you’re negotiating your [01:13:50] deal, how do yoUSteer the balance of building a relationship with an [01:13:55] investor whilst not for lack of a better term, pissing [01:14:00] them off with proper legal documentation?
[01:14:02] Charlie: I mean, I’ve seen [01:14:05] a few investors try and strong arm their way to a better deal. Through doing that, [01:14:10] how, what’s your, what’s your feeling on that? Is that something that [01:14:15] should we just take the money and run as a first time founder? Should we, should we, you know, cause we don’t have, like when [01:14:20] you first start off, you don’t have to clout where, where, you know, you, who are you?
[01:14:24] Charlie: Right. [01:14:25]
[01:14:26] David: Yeah. I mean, I think you, in, in some of these things, you do have to try to [01:14:30] trust your gut in the sense that if you get the [01:14:35] impression that these people who are giving you money, are strong arming you, are putting [01:14:40] you in a compromised position, that probably shouldn’t sit well with [01:14:45] you at the beginning, and it probably won’t play out well at the end.
[01:14:49] David: So, [01:14:50] it needs to be a partnership, even though, yes, they have money. [01:14:55] There are lots of people who have money. And, if they’re willing to give you money, probably other [01:15:00] people are too. And if they’re the only people on the planet that are willing to give you money, That raises some [01:15:05] serious questions about whether you should be getting money at all, right?
[01:15:09] David: If you can only [01:15:10] get money from these people, then maybe you need to revisit your business plan. But I think, ultimately [01:15:15] a lot of this business judgment comes down to understanding who your partners are, [01:15:20] understanding, you know, can I work with these people a long time? Because you’re getting into a very, [01:15:25] long term hopefully relationship, but it’s a serious relationship, one [01:15:30] that involves a lot of money and the serious threat of litigation.
[01:15:34] David: So [01:15:35] it should be, you know, something you take very seriously, [01:15:40] not, just take the money and run attitude. That’s, that’s probably going to hurt you a lot.
[01:15:44] Charlie: Oh, [01:15:45] cool. So if I was to say [01:15:50] potentially use, not use the word strong arm, but, but generally if you’ll. [01:15:55] I think there’s a perception that if you’re a first time founder and someone’s willing to invest in [01:16:00] you, that comes with a lot of excitement.
[01:16:01] Charlie: It comes with a lot of, look at me, I’ve, I’ve made it this, you know, [01:16:05] I’ve, I’ve made something that’s viable. How do you, As a legal professional, when [01:16:10] you’re with clients who are looking to raise or are in the process of raising, how do you [01:16:15] think you turn that balance of power and say, okay, listen, like you shouldn’t buy the first deal [01:16:20] that you’ve been offered, but actually take a step back, sleep on it.
[01:16:24] Charlie: Yes, I [01:16:25] know they’ve said sign this by the end of the week, but how, how would you negotiate, [01:16:30] like, what advice would you give to startup founders who are, I’ve got a deal on the table. [01:16:35] Yeah. I kind of want to jump at it.
[01:16:37] David: Yeah. Startup founders and myself personally are [01:16:40] optimistic by their nature, right? Which is good because otherwise wouldn’t be taking any risks.[01:16:45]
[01:16:45] David: You have to go through the worst case scenario with these kinds [01:16:50] of agreements and you have to understand what will happen in the worst case scenario. [01:16:55] And in some of these agreements, what would happen is that your business might continue on [01:17:00] without you, right? They might come in and replace you and move forward with the IP and, you know.[01:17:05]
[01:17:05] David: Just completely take you out of the business. So [01:17:10] understanding what is the worst case scenario and are you willing to take that risk? And if you’re willing to take that risk, [01:17:15] then okay, it may not happen. It probably won’t be the worst case [01:17:20] scenario. But one of the things that a good attorney will do for you is tell you exactly what [01:17:25] the worst case scenario looks like.
[01:17:27] David: And they probably can give [01:17:30] yoUSome inkling of the percentage likelihood of that to [01:17:35] happen. Right. But ultimately you have to be comfortable with that worst case [01:17:40] scenario before you take the money, because, there are going to be things that happen that [01:17:45] you don’t have any control, you know, either of all.
[01:17:47] David: COVID was a good example of that, [01:17:50] right? I mean, you can’t predict, but there are really bad things that can happen that will destroy your [01:17:55] business. Even if you do everything right. So understanding what that worst case scenario looks [01:18:00] like with taking this money is super important and having me explain that to you is [01:18:05] probably a good idea.
[01:18:06] Charlie: Yeah. So I think one of [01:18:10] the, and I certainly felt this when I was starting out. So I think this is [01:18:15] quite a personal question, I suppose, which is [01:18:20] without being drowned in legalese or feeling like a complete idiot, when you’re [01:18:25] setting up your business, you’re going to, you’re going to raise capital.
[01:18:29] Charlie: What’s the [01:18:30] menu? What should you ask for of other legal [01:18:35] professional when you’re, we’ve talked about a lot of stuff, but if we’re going back to [01:18:40] basics and we’re saying, all right, I, I want to start raising capital. I know. I’m like, [01:18:45] I’ve got to the point where I know I need some legal advice. I’ve vetted the firm.
[01:18:49] Charlie: I know what, [01:18:50] what the red flags are. What is it? I’m, you know, what, what’s, what’s the startup pack? You know? [01:18:55]
[01:18:55] David: Yeah. I mean, I think what you want from the attorney is, is [01:19:00] advice now. Like what are you gonna need right now? And then what are you gonna need in the [01:19:05] next six months, next year, next three to five years?
[01:19:09] David: You know, a [01:19:10] real discussion about whether or not that attorney can actually deliver that with their [01:19:15] firm. Or if they can’t, which they probably can’t, they’re probably going to have to [01:19:20] associate with those, especially with international blockchain or currency type business. You know, a business [01:19:25] in this space can have, and I’ve seen it and worked with clients that have had 10, [01:19:30] 15, 20 different law firms working for them around the globe.
[01:19:33] David: Right. [01:19:35] It can grow to that scale. And so. What you want to do in the beginning [01:19:40] is, is have a good scoping conversation with the attorney to say, Hey, this is [01:19:45] what our plan is, you know, realistically, what do you think? Are you going to be able to [01:19:50] help us grow from, from here to there? We understand you can’t do everything, but [01:19:55] do you have the capability to connect us with other people to help us get from here to there?
[01:19:59] David: And then [01:20:00] what does that look like? And having that sort of big picture discussion at the beginning is [01:20:05] probably going to be very helpful. To set expectations for the future of, you know, services that [01:20:10] you’re going to need, expectations are huge in this business. I mean, [01:20:15] whether it’s the investor’s expectations or the client’s expectations, you know, you have to set those expectations [01:20:20] up front and then revisit them off.
[01:20:22] Thomas: I can’t imagine that it’s not always easy for, for founders [01:20:25] to do right to, to come in with, with that scope of like, okay, what, what happens in the next six, [01:20:30] one, two, five years, right? Like, I guess that like a [01:20:35] large part of what you do or what any lawyer would do is kind of come in and help [01:20:40] scoping that out, right?
[01:20:41] Thomas: It’s as Charlie and I would do in our respective industries. We won’t take, [01:20:45] generally won’t take the client and say, give us a bag of money. We’ll run with it until it’s empty. [01:20:50]
[01:20:50] David: Yeah. What’s your exit strategy? That’s always a good place to start. I know it’s, it’s. Weird to ask that [01:20:55] question when you’re starting a business, but that’s a good question to think about because if you just [01:21:00] want to start it up and get out and go start another business, that’s one model.
[01:21:03] David: A lot of people do that. [01:21:05] You know, if you want to start it up and this is your baby and you can do it for the rest of your life, that’s a different deal. Right. [01:21:10] So understanding that upfront is super important.[01:21:15]
[01:21:18] Charlie: A little tradition, which [01:21:20] is if you were yourself going to start a startup, you [01:21:25] have no bags, so no capital. You haven’t got your [01:21:30] reputation, you haven’t got your, your black book. What would you bring if you were [01:21:35] going to go back in time and start a business, what would you bring to your, your startup Desert Island?
[01:21:39] Charlie: [01:21:40] And, from now knowing what you do know now.
[01:21:43] David: Yeah. I mean, this is [01:21:45] probably one of the more boring list is already to be legal concepts, but the first one would be a good buy, [01:21:50] sell agreement. So I’d want to have a good buy, sell agreement with my partners that [01:21:55] lays out how we’re going to value the business.
[01:21:56] David: If somebody wants to exit. How long it’s going to take the [01:22:00] business to pay them off. You know, if we need to have disability and life insurance policies to replace key [01:22:05] members of, of the partnership, and understand what everybody’s tasks and roles are, but [01:22:10] a good buy seller would be the first thing I would want.
[01:22:13] David: And that, that’s so [01:22:15] important for any, any business starting up. Secondly, I’d want to make sure we have a good [01:22:20] understanding of, how we’re going to acquire resources in the form of independent [01:22:25] contractors, or employees or outsourcing and make sure those contracts [01:22:30] are locked down and that everybody’s clear on them and that they don’t want to foul of any jurisdictional issues [01:22:35] specifically with tax authorities in different jurisdictions.
[01:22:39] David: So, [01:22:40] making sure that those internal contracts with individuals and [01:22:45] companies that are going to be writing services are clear and mitigate litigation risks there. [01:22:50] Third thing would be for the investors that we’re going to have. We’re [01:22:55] probably going to be going through successive rounds of raising funds, hopefully if we’re successful.[01:23:00]
[01:23:00] David: And so understanding who those investors are, making sure that they’re committed to the cause [01:23:05] and that they’re going to help us not just with money, but with some strategic advice, [01:23:10] and making sure that we understand the fiduciary duties we’re taking on, and that we’re going to [01:23:15] execute a plan that we can actually.
[01:23:17] David: You know, make work that we have realistic [01:23:20] milestones and we’re going to be able to report back to those investors on a regular basis. Hey, here’s what we’re doing with the [01:23:25] money. Here are the milestones we’re hitting and, here’s, here’s how we’re working. So you maintain those [01:23:30] good relationships and also mitigate your risks from litigation there.
[01:23:34] David: [01:23:35] A fourth thing would be succession planning inside of a company. So you can’t do everything right. You’re [01:23:40] going to have different people taking on different roles. But what happens when one of those people [01:23:45] decides they don’t want to work anymore or You know, God forbid if they pass away or if they become [01:23:50] incapacitated or life just deals with a bad end and they just simply cannot work for you [01:23:55] anymore.
[01:23:55] David: How do you provide for a seamless transition for those tasks? [01:24:00] And what succession planning do you have in place for your business to be able [01:24:05] to withstand a bump, whether it’s you that gets taken out or one of your partners, you need to be thinking [01:24:10] about these things. Those are real, real risks and real world concerns.
[01:24:14] David: And then [01:24:15] lastly, and related to that, how am I going to provide for my people, my family, [01:24:20] my loved ones, if I do pass away in the middle of this startup, or [01:24:25] my estate planning documents in order, are they going to be able to access the [01:24:30] resources that I put into this and the value I put into it? And if so, how long is it going to take?[01:24:35]
[01:24:35] David: Do I have all my other, issues tied up, especially when it comes to [01:24:40] cryptocurrency, you know, if you have crypto, making sure that you have a good estate plan that. Your people [01:24:45] understand how to liquidate it or if you want them to liquidate it, how to access it, how to [01:24:50] secure it. All these issues, from an estate planning perspective are just gonna give you peace of mind so that [01:24:55] you can sleep at night, and, and make sure that you can function properly.
[01:24:59] David: And also just be [01:25:00] confident that your affairs are in order. So those, those would be the five concepts. [01:25:05] Fantastic.
[01:25:05] Charlie: I’m gonna add a quick bonus round to this five [01:25:10] for, two books I recommend. That I found super [01:25:15] useful at the beginning of my startup journey. The first one is Venture Deals [01:25:20] by Brad Feld and Jason Mendelsohn.
[01:25:22] Charlie: They are some of the authorities [01:25:25] in, in essentially raising capital and ensuring that you have the right term [01:25:30] sheet in place. And the second would be The Secrets of Sand Hill Road by Scott [01:25:35] Kapoor. That was essentially understanding how the game [01:25:40] is played and how you get in front of VCs. Peace. So, with that [01:25:45] said, I’d just like to thank you, David, for your time today and explaining all, [01:25:50] like, all the perspectives of how we should be looking at legal when we’re Thinking about taking [01:25:55] a business zero to one in the emerging tech startup space.
[01:25:58] Charlie: Could you tell our audience [01:26:00] where they could find you?
[01:26:01] David: Yeah. So a David McCarville, the director at Fennemore, my [01:26:05] email address is dmccarville@fennemorelaw.Com. And you can find us at fenimorelaw. [01:26:10] com. I’m happy to interact with anybody who has any follow up questions. And, thank you for the [01:26:15] opportunity, Charles and Thomas.
[01:26:15] David: It’s been great talking to you. Appreciate it.
[01:26:17] Thomas: Likewise, absolutely. [01:26:20] Likewise. It was a great conversation and I really, I personally learned a lot. [01:26:25]
[01:26:25] Charlie: Thank you everybody. Like, subscribe and all that jazz and we’ll see you on the next [01:26:30] [01:26:35] episode.
