S3E4: Ask the expert- Starting up with Legal featuring Lauren Creel of Cooley LLP

Welcome to The Room Podcast. My name is Madison McIlwain and I'm a partner for seed stage investments at DefyVC.

And I'm Claudia Laurie, a co-founder of Pryve. We're a founder and funder who are in the room where it happens. If you're a first-time founder or an emerging venture capitalist, we're glad you found us. We share inspiring, authentic, and insightful stories from founders, funders, and operators who have been in the room and provide tactical feedback on their early aha moments and learnings along the way. Before we dive into this week's episode, we have a short message from our partners.

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Cooley is a global law firm built around startups and venture capital. The firm has been devoted to entrepreneurs and investors, partnering with both to transform breakthrough ideas into successful companies. Cooley works with thousands of entrepreneurs and newly formed companies to ensure that they are structured for growth and long-term success. Since 2005, Cooley has been ranked the number one most active law firm representing VC-backed companies going public. Learn more about the firm at cooley.com and also at cooleygo.com, Cooley's award-winning free legal resource for startups. Lauren Creel, partner of emerging companies at Cooley LLC.

Cooley is one of the world's leading startup law firms. And Lauren has seen it all. We are excited today to chat a bit about my experiences with legal teams as a founder, hear Madison's perspective as an investor, as well as Lauren's advice and answers to your questions. Let's open the door.

Hi, how's it going?

Going well. Look, excited to talk about early-stage startup legal needs today.

Yes, it is a really important part of the startup journey and I think a lot of founders have a bunch of questions as to what to do with your legal needs, who to hire. It's often a founder's first time interfacing with a lawyer. For me, it was the first time interfacing with a lawyer, period. I just wasn't sure what to do. And so I knew that I was raising my first round of fundraising and I needed to put everything in order, but where do you start? And so I think being able to chat with Lauren from Cooley, who is an incredible early-stage partner there, is going to be really helpful for a lot of the folks who are thinking about their first fundraise or even just starting a business and incorporating.

I learned a lot from some of her insights on the terminology that's used in early stage investing documentation and maybe a couple dos and don'ts, and also just the incredible resources that they have on Cooligo's website for first-time founders who maybe have not even raised capital yet, so therefore can't even afford the billable hours of a lawyer. Maybe walk us through for a, for a quick second, what was it like? When did you and Alex first reach out to lawyers in your process with Priv?

Yes, absolutely. So during the fundraising process, I was so heads down focused on talking to investors, and one of my really, really good friends, she's an investor out in New York, and she was like, hey, by the way, if you need a lawyer, I have a really great intro for you. And I was like, a lawyer? I'm fundraising. You need to get all of this together if you're doing a proper priced round, especially if you're not doing convertible notes, just talk to him. And I was okay, this seems a pretty urgent call to action. I chatted with a bunch of other people that I rely on for advice, and it seemed because the fundraise was imminent, we needed to get a lot of the things in order, in order for that to happen. And so it was right in the middle of our fundraise, we had this initial chat with a lawyer and just got a brain dump of all the information and all the different steps you would need to think about when raising a round, and there was a lot more than I expected. So I think it's fair to say that if you're doing a proper priced round, especially if you're not using convertible notes or doing convertible debt, it's pretty critical to have a lawyer in your house or on your team to help you through that process. I think one thing that startups do, and I think I was starting to fall into that trap, is feeling you need a lawyer and a professional to do every little thing, to cross every T and dot every single I. That's not necessarily the case because you're gonna end up with a $200,000 legal bill at the end of the day when there are so many resources out there to help you do a lot of the small things, filing, chartering your company, incorporating, sending out NDAs, all of these other little parts of the process in terms of establishing an entity and making sure things are legally sound. You don't actually need a partner to do, but in terms of coordinating the financing, it was something that I definitely would not have been able to do without them.

You mentioned a partner. There's partners at law firms. There's also associates. I think there's analysts. Did you work with the same partner for your whole process? Was it less expensive to work with an associate at a law firm? What's the hierarchy that you're aware of within working with a law firm? And is someone easier or cheaper to use?

Yeah.

So that's the other really important thing. Not only do you need to know when you can just use a Cooligo doc and that's totally fine, or you can use some other startup service to incorporate, you also need to know what level of lawyer you need for various needs. So we We, throughout our process, worked with a partner. We worked with an associate and we also worked with a paralegal. So the partner was there for all of these strategic conversations that we needed, any direct interfacing with other investors, lawyers, things that were a little bit more complicated. He set up the overarching structure and gave us pretty great advice, but actually most of the tactical things were handled by the associate, such as putting together docs, making sure people signed signature packets. And then there are other things that were a little less important, but really critical for us to do, such as making sure that we're paying taxes, making sure that we're putting the docs in the right place, making sure that we are working in California, even though we're incorporated in Delaware. A lot of that more paperwork-y stuff was done by a paralegal, and all of those different types of lawyers have vastly different fees. So definitely do not get a partner to do a lot of your paperwork.

Really helpful. And I think as someone speaking who's never had to work with a lawyer herself, as on the venture side, I don't work directly with our lawyers typically, although sometimes we do when it comes to depending on the round or depending on the stage, really helpful just to get the overview of the landscape and what the experience is for the founder.

Yeah.

And your, your relationship with your lawyer doesn't end at the fundraise or the next fundraise. It's been really helpful to have a legal team that you can lean on for a lot of other things, especially depending on the type of business you're in. If you have questions around IP law, if you have questions around your first employees and their stock option pool, and we're going to chat a little bit about that with some of our other guests, but lawyers are really important for a lot of hard questions because if it's a hard question and it's not directly related to your customers or product market fit, there's probably some legal implication there. The other thing I will say is that it is critical to have lawyers who are incredibly familiar with startup law or tech law or whatever domain expertise you have, because there's just so many different edge cases and so many different companies face different things that if you're a SaaS business, you probably want to be working with a lawyer who's worked with 10 other much larger SaaS businesses who have seen every single edge case or issue under the sun and then know exactly how it's going to play out for you.

Super helpful. And again, would not have known some of these specifics that you're talking about. And Lauren's going to talk about on today's episode. So I'm excited to dive right into her suggestions and, uh, subject matter expertise on all things startup law.

Yes. Let's hop to it.

Hi, Lauren.

Thank you so much for being with us today in the room.

My pleasure. Thanks for having me.

Really excited to dive into all things startup and legal needs. And for those listening, you are a partner at Cooley, which is a law firm here in the Bay Area, but Really, you're all over the country and I think even the world, but your focus is on emerging companies. Could you tell us a bit more about your early career and how you ended up in startup and tech law?

Yeah, no, happy to. Yeah, so I'm a partner in the Palo Alto office of Cooley. As you mentioned, we're a global firm. Our sweet spot, or one of our sweet spots, is startups. Our bread and butter, and we think we can partner with you early and then go with you wherever you head. So I originally actually started my career in Texas, in Austin, which is great now, right? They're blowing up. It wasn't a decade ago, but I'm from Texas and then moved out here, I guess, 7 years ago and have been at Cooley ever since. And then my day-to-day truly is startups. So 70% of my work, I would say, is startups from great idea, haven't even formed a company, up until quite late stage. And then there's a portion of that practice that's representing VCs when they're investing in into companies, right, in a financing round.

So you really have seen a lot of different angles of the startup experience from early days to all the way through, and helping people with those early challenges that arise with— that you don't even know maybe you're there, but you've now seen hundreds of times.

Yeah, yeah. And I think that's what we'd like to think is, right, like, I mean, we hope table stakes is you can do good law, but that where we can help differentiate is Exactly what you said. This is what we do day in, day out. So, we can see around the corner a little better because we've just, I know that question you're going to ask because 10 other founders have been in the same boat, right? And asked that question. So, yeah.

Well, Cooley is known for being one of the top tech law firms in the world, and you have these resources, as you alluded to, for early-stage founders. Maybe just taking a step back before we dive into some of those specific questions that we've been asked and that we have. Tell us a bit more about Cooley and how it became focused on helping tech startups throughout their life cycle.

Yeah, I mean, I think some of it's probably just a lot of the companies here that are from Silicon Valley, right? I think this is where I should know my Cooley history better, but I think we were formed in the '30s and did maritime law, right? But just that Silicon Valley just naturally evolved into being a thing, and we were here and part and parcel of it. And so I think that's just— it's in our DNA as we grew up, as the Valley became a thing. But then around, I think what you're alluding to is the resources that can be helpful, and this would be what I would direct anybody who's a startup, if you just have your very basic questions, is we've— we try very, very hard to make this information easily accessible without even having to hire us, right? We're not trying to hold you up for it. So if you go to Cooley Go, it's our website, we have a ton of topics that are just— it's very simple language, not legalese, about what's an 83(b) election, right? Just the questions that you've got. We try to make it so that you could read it with a cup of coffee or— and not have to dig in deep. The other plug I'll make is if you— if anybody ever sees a question, they have a burning question, it's not there, I want to know, right? Our whole point is we're trying to answer the questions that startups have, and maybe we've missed one or two. The other thing is, is we make a lot of our very simple documents that are standard. So think of your standard incorporation package, or the ones that you need to get up and running— offer letters, consulting agreements— all that is publicly available. What is there is what I use with my client. It's not the generic version where you get the fancy, you know, version if you hire us. It's, it's one in the same, right? So we just, I think we try to be really helpful and add back to the community, right? I think we just think that there's this virtual cycle that if we all help each other out, it'll be that everybody benefits, right? And then the other thing that I personally love for my startups is if you go, it's under trends, if you're on the KooliGo website, is we pull. So if you follow, Kooli is number one or number two every quarter in doing the most financings of any of the firms. So we're just, super active— our clients, I should say, are super active. But we pull all that data and then we make it available in an anonymized fashion. So if you're like, hey, what's a Series C valuation trend look for the past year, you can pull that and you can differentiate by tech. You can— so it's, it's just a great way to get a snapshot of what's going on in the market. Um, and it's very dynamic, right? You can filter it to be your stage of funding and such. So I find that one super useful too.

I, uh, as a founder, can plus one that comment. Have definitely been an avid user of Cooly resources and it's definitely helpful because when I started, we, we fundraised and we had a lot of different docs that we needed to put together, NDAs, offer letters, so on and so forth. And we started just engaging directly with lawyers who we were using and you get charged by the hour for every little thing. And I was starting to think these should be standardized forms and there you had it. Cooly has it all online. So it's definitely not just a Cooly plug, And me as the founder in the room can definitely attest to that. I would love to speak from the founder's perspective, some questions that I had and questions that a lot of my friends who are founders were asking me now that they're going through the process and would love to get your take on debunking a lot of these common myths or common questions. One of which is around your first fundraise, whether it's a pre-seed or it's labeled as a seed. I think that's the first time a lot of founders start to engage with a law firm and a legal team. That was very much the case for us. There's a lot of jargon around what is a SAFE, what is convertible note, what is a preferred priced round, and a lot of founders don't have the full facts on the implications of these different financing structures. Could you walk us through how you would advise someone on the differences between these different structures, a SAFE, convertible note, priced preferred, debt fundraising? What's the quick TL;DR on that?

Yeah, no, great questions. And so some of it's going to vary about how much you're raising and who you're raising from is going to dictate what you're using. In very broad terms, if you're raising not a lot, and that can vary— not a lot varies by what you're up to, but let's just say sub-a-million— a very efficient way to fundraise is to do it through either a SAFE, and so Y Combinator puts that out, it's a publicly available document, or a convertible note. They're not identical, but they largely function in the same fashion. And so it's just, it's, if you think about it, it's, it's basically an investor is giving you money and you are promising to give them stock when you get to your first priced round. So the words you were using, when you actually get to, for example, your Series A financing, and they get it at a discount, is usually some version of a discount. So maybe the easiest way to think about it is when you get to your Series A, if an investor is paying a dollar a share, your people who invested through either a note or a SAFE, they'll say, for example, get a share for 80 cents. They're getting a 20% discount. All of this is negotiated, but that's the general gist of the idea. And that, you know, thinking there is these early investors are taking risk on— you are riskier now than when you're at your Series A, right? And so that's why they get this discount. It's— this is, you know, their reward for being willing to take a little more risk. And so those— I mean, between the two A SAFE and a note, they're at the edges, reasons why you might do one or the other. Sometimes it's just driven by what your investor's more comfortable with. The lovely thing about a SAFE is that it is a publicly available document, and so you can go pull it down from a website. Everybody is very familiar with it. Notes sometimes can be a little bit different depending on the firm, so you can have a little more room for negotiation. And so just if you're trying to be super cheap efficient, right, here's the form, A lot of people choose the SAFE. And then when you get to the convertible, your priced round, those are generally bigger raises. You're gonna have generally a VC is going to, well, not generally, but oftentimes a VC is going to be backing that. And that's gonna be where you truly are issuing stock. So, right, if you think about your founders, they got common stock at the beginning. Notes, SAFEs, not stock, right? Common, your founders are still owning all of the stock. When you get to that Series A raise, That's when they're actually gonna have investors show up on your cap table and own stock.

For us, we went straight to the priced round, and I think we were in that gray zone where we were trading off going with a convertible note or going straight to a priced round. What would your pros and cons be between that decision?

Yeah, so I mean, again, I think it's what your VC wants or your investor wants, right? That's gonna drive a lot of it. If it's, if you are raising, it's very easy to raise on notes. It's very cheap. It's very fast, right? So your legal fees are going to be lower if you're raising on notes. Or SAFEs, and it's going to be faster, right? A price round can take— it depends, but let's just say a month, right? But each deal is a little different. The other thing is, is, right, when you get to a price round, you truly are baking in your valuation, right? That's— you've got to determine a price that you're, you're issuing your stock. You don't always have to do that with a note or a SAFE. Sometimes you just give people a discount, you don't do a valuation cap. And then also, when you get to the stock, you really are giving people rights as a stockholder, right? They're going to have voting rights. And with SAFEs, at least in notes, traditionally there's no contractual rights other than I equity when you get to your preferred round. And so you have to bake in more protections and do more negotiation when you get to the priced round. But again, if you're raising a legit round, there's no reason not to do a priced round. So that makes sense to me.

And as the funder in the room, yeah, sometimes depending on where the company is in its life cycle, we have a preference, you said, of priced versus SAFE or convertible note. Another question that comes up before we change topics, but in the realm of convertible note is the cap or an uncapped note. What's your perspective on capping a note?

Yeah, I mean, market, market practice is that there's going to be a valuation cap these days. If, if truly, if you're raising from friends and family, you can oftentimes get away with just a discount. And just historically thinking, that used to be the world that we worked in, is just a discount. But what happened is, is that companies over time, it was a note, was just supposed to be a bridge for some period of time, a couple of months. That's not the world we live in, right? Plenty of companies raise on a note or a SAFE, and then they don't do their price round for years. Well, the company's valuation has massively changed, right? And so the valuation cap is offering some protection to those early investors that are, look, I invested when you were really risky and your valuation was very, very different than 2 years from now, right? So if you've got a VC, you'll largely be pushed to put a cap in place. It, it's just where the market has evolved.

Another question that, you know, speaking of controls, provisions, having investors really as stakeholders and shareholders in your company, another question that has come up from a bunch of my friends is around standing up a board and having investors on the board. Typically, I believe that that's something that is very common for slightly later stage companies. But it seems that's actually happening now earlier and earlier on where an investor might be a board observer or actually have a board seat at a seed stage. And that's often a common line item in a term sheet. Could you give some advice to our founders listening in on setting up a board, some of the pros and cons of setting that up at the seed stage and really what to look out for there?

Yeah. And the one thing too I'll flag here is it's always this misconception I think you get with, with sometimes with founders is to be very clear, like, the board is who makes all the material decisions for the company, right? So it's super critical because a lot of times, right, founders will optimize around ownership, and that's important, but the decision makers are the board, right? So that's actually where I'll always funnel my founder's attention. And so you're right, I would say if it's a— if it's a, for example, a Series A round, it'd be very standard if it's a nice good-sized raise that a VC is going to take board seat. And that, but yet you'd still, what we'd say, remain founder controlled. So a standard board would look like 3 directors, 2 of them are your founders, and then 1 of them is the investor. Some of that is, is it's that first money in, and those, that VC is going to help you take and make critical decisions. And so, and they're also writing a really big check in an early stage company, right? And while I know it can be a little scary for founders to think they're ceding control, if you're partnering with the right VC they're going to be adding a lot of value. And then to your point, on earlier stage rounds, or if you're maybe a serial entrepreneur such that you've proven— you've got this proven track record of, I know how to launch a startup, or depending on if you've got maybe a VC that's a little more passive, you're right, they could at a seed stage not take a board seat and then just want to be a board observer. I do think as you fundraise, you should assume that a VC is going to end up on your board. And then with most companies by the time they get to IPO or exit, they are oftentimes— the founders are not controlling the board, the investors are. Not always the case, right? You've got great exceptions to that, and some of it just depends on how successfully the founders are able to execute and how quickly. But that's by and large is your VCs will dominate the board.

Yeah, that makes sense. So at an early, early stage, you as a founder and the founding team, they want to be in control, and then it is normal to start seeding that as you continue to grow and as you have more and more employees. Speaking of employees, a stock option pool is another hot topic that is often misunderstood. I know when I joined my first big tech company, there was a lot of questions around stock options versus RSUs because we had just transitioned onto RSUs. But now being a startup founder, realizing RSUs really don't make sense for someone who's that early stage, we're back into the discussion around stock stock options, and I had a lot of misconceived ideas around what a stock option pool actually means. Tell us why stock options are actually different from RSUs and what factors a founder should consider in really establishing that stock option pool.

Yeah, you hit the nail on the head that late-stage companies are going to be more the ones that have RSUs, earlier stage or not. And so if you think about what your cap table is going to look when you're early stage is the founders will have bought common stock, so they actually own their stock all outright. And then you'll do this thing, what you call it, you set aside or you reserve some level of your common stock for your option pool. So exactly what you said. If you think about a company that's done its first fundraise, it will generally, until it is later stage, be granting options to service providers. So for employees and consultants, those are options. And so an option is, it is basically a right to buy stock, right? So it's, if I was a service provider and the company gave me an option, it'll say, hey, you Lauren can buy 30,000 shares at a price of 50 cents per share, right? So I don't actually, when I have an option, own any stock in the company. I can't vote. I don't have any rights to information as a result of that. It's the right to get equity. And so if I wanted to buy that stock, I'd actually have to pay, in this example, 50 cents per share to buy the stock. It's— that's a super, super common way. It is by and large how most startups incentivize people. In part because there's incentive stock options. It's all— that's all IRS lingo, but the government has basically set up— it has put some rules in place that if you get options, there are some tax advantages to it. And so that's actually a good thing as an employee. When you get to be later stage, there is sometimes a shift— not all companies do it— where they will start to think an RSU makes more sense. An RSU is a restricted— it stands for restricted stock grant. You actually have equity, right? It's not— it's not a right to buy equity. You actually get equity outright, but I would say if you're— most startups aren't going to be there until they're quite late stage. Pre-IPO is where you'll start to look at that.

And so an important part in thinking about stock options, because you're right, it's, it's the option to buy the stock at a later date. You're not really getting it immediately. The company's valuation the day that you join and the valuation that the company has when you actually have the right to purchase that stock is probably a really important thing to think through. The term 409(a) valuation, that's something that also gets thrown around a lot. Could you tell our listeners what a 409(a) valuation is and how should people think about par value in thinking about valuation and also the stock option pool? Yeah.

And 409(a), it's a reference to a provision in the IRS code. So that just in case anybody's like, why are we talking about a 409(a)? Right. It's not Windex or a window cleaner. And so The, the whole point is, is basically what the government has said is that if company is giving you options, that's, that's a form of compensation, right? They give you cash and then they've chosen to give you equity to incentivize you. And that if it's not granted to you at fair market value, there can be some consequences to it. And so a company, when it's granting options to somebody, is always going to be granting an option at current fair market value. Well, if you think about that, if you're a company and you're a startup and the board is who determines fair market value, if you think of a typical startup board and you go, tell me fair market value of your company, that's really hard, right? You're not publicly traded, you're not getting term sheets on a daily basis that gives you this outside indication of your value. So what's happened for a myriad of reasons is these firms have popped up called 409A valuation firms, and they help determine what that— they'll come back with a report and it says, here is your fair market value as of today. And why they can do that better than, for example, a startup board is they're pulling data from across all of these firms they're evaluating, right? And so they're just going to have a lot more data points than your average startup board. And so that, that's what a 409A valuation is, is it truly is just a what is the fair market value of a share of common stock as of a certain date. The other things you'll hear tossed around is 409A is by virtue of the way that IRS code works, never lasts longer than a year. You'd go stale, right? Because it's saying, hey, as of today, this is the value of the company, and that can't last forever, right? And so just the way the rules popped up is it's never longer than a year. There's reasons why it could terminate shorter. To your par value question, that— it's funny, right? It's a— it's not a legal fiction, but it shows up in your charter. And so you're going to see it's usually set at— it can vary, but it's 0. 0.00001, right? It's fractions of fractions of a penny. You largely will not ever have to care about it. It's for a variety of accounting and other legal reasons we have par value, and you will sometimes see it referenced in your charter, sometimes in your financing documents, but beyond that, you'll never ever have to do anything with it.

This is incredibly helpful even for me, and we write term sheets for a job, and I am curious about We take the perspective of the founder in this conversation, but what about early employees? How do they think about entering into a sub-10-person, sub-20-person startup? What should their equity stakeholder expectations be when entering into a company this high risk?

Yeah, no, it's a, it's a great question, right? Because, right, it's— that's the virtue, it's risky. Here's the good news, right? If you're getting into a company that, that is that early stage, generally they're going to have a lower valuation just because they are earlier and haven't been up too much. And so you can get your stock for quite cheap, right? If you think of fair market value of this company, it's going to be very, very low relative to after this company has done a couple fundraisings. And so that— what that translates into is, if you think about it, if I have to buy my stock at a cent, a cent per share, versus when this company goes to go and goes— gets sold or goes IPO, if it's at $10, then that's your spread, right? That's yours versus somebody that came in quite later again, they're getting their equity at fair market value. So the closer you get to an exit, the closer you're getting to this $10 valuation. So that spread's quite small. So I guess the point there is if you get in earlier, there can be a larger equity upside just because you got in at such a cheap, cheap price. Let's use those words. Not to go too far down in the weeds, but there can be also some tax benefits depending on the company. If you buy your stock, if you exercise your option or you actually bought stock quite early, there's this thing called qualified small business stock. And so if you buy your stock in a company that qualifies, which a lot of our early startups do, and you hold it for 5 years, by the time you sell, there can be a lot of— you can have a very low tax bill or no tax bill as a result versus somebody who's getting stock later. Again, that's got to talk to your personal tax advisor. There's lots of caveats there, but that is something that later stage companies don't even qualify for qualified small stock, right? And so that's just if you're joining later. As an employee, I don't think you'd be able to figure, it'll be, I think, harder, I would guess, to figure out what's market on a comp package. For startups, there are a couple of external resources out there to help you figure out what is a typical CTO package look like? What is that? Figure out so you can market benchmark. And so that I would plug for your startups to know that there's resources there if they're trying to figure out, because that's hard, right? You're doing your first material hire and you're like, what is their option or comp package, right? There are resources.

For that. Yeah, that's really helpful because I think from where I've heard Claudia's friends, my friends who are on the founder path, is sometimes people come to them and say, great, I'll be a co-founder, or, oh, I'll be your first hire, but I need 10% equity in your company. And makes you take a step back and say, okay, well, I think you're really great, but are you that great? I've been working on this a while. I don't want to just give up 10%. And so This is a helpful dialogue, and I think those resources in particular would be helpful for founders and first-time employee or first-time early-stage employees as well, to be helpful to have these benchmarks of thinking through, okay, how do I negotiate well but also have reasonable expectations about what that might look like?

Yep. And, and on your point too, right? That's where you're right. I mean, 10% is a lot of your company if it's not truly one of your founders. That's where vesting, it doesn't solve everything, but it can solve some of this too, right? As you think through, I think most founders are smart enough and savvy enough that they've Googled and read enough to know vesting should occur. But to anyone that hasn't heard that, right, that is one of the ways you protect yourself in making sure you've got this good fit with talent is that you put vesting in place such that if whatever reason that relationship doesn't work, you haven't given away all that equity. Yep.

Well, that's a great segue into another type of provision, so to speak, for different stakeholders. And that is is the official protective provisions that sometimes can appear in term sheets that come in from investors. And protective provisions can make term sheets less straightforward for founders. What should they look out for when receiving a term sheet that has some terms they might not be familiar with? Yeah.

And so this is, there's gonna be a batch of standard protective provisions. And just to put the context in place, the reason they're there is if you think about it, when you do your first round of fundraise, your investor is going to only be buying, they're gonna be a minority stockholder. Because think of it this way, is they're maybe buying 20% of your cap table, right? So the founders own the other 80%. And so if you think through how things would work in the absence of protective provision, it's a majority of capital stock vote. So truly, your preferred stockholders who have just invested in you would be along for the ride. And so protective provisions, we sometimes call them negative control. The idea is it's a short, generally short laundry list of things that you company cannot do XYZ without getting my investor vote first, right? So it's not, it's not that they have to get your blessing every time, but it's just these things. And generally, if you think about it too, where you go, well, what would they care about? It's things that affect their economics, right? Your investors are putting money into a company with the hope of actually seeing a, you know, a return. And so the typical protective provisions would be things around selling the company, right? They may want to have a say there because they want to make sure they exit at a point such that they think they're getting an appropriate return. It would be if you want to go do a financing at a price lower than what they just paid. That's dilutive to them, right? They may say, not fair, I just paid a dollar, why are you— I mean, right? The company would have reasons why that probably wouldn't make sense in the absence of something having gone south with the company. But it could be if you've got an investor on the board changing the board size. If they agreed it's a board of 3, I get one, well then the next day it doesn't become a board 5, such that I get— my voice is even more diluted. And so the list isn't super long. If anybody ever wanted to go look at it, there's just— for price, this only applies in priced rounds— there's the two kind of forms that are used on all financings, or either the Series C documents. You could go to seriesc.com and they have their, their term sheet, their form term sheet available. So you could always pull it and look there. The other one is that you will see on later stage and bigger rounds The NVCA, it stands for National Venture Capital Association. Same thing, go to their website, pull their term sheet, and it would have the protective provisions. Those are by and large just super, super market standard. You are correct though that there can be negotiations around that. That's where, for a founder, candidly, that's having a lawyer to help you out, because it's going to be harder to know what's market, what does this mean if it's a deviation.

I think something that was really helpful as a founder was when you start getting those term sheets, even just having someone you can email really quickly with the term sheet, get their initial take. Is this a vanilla term sheet? Does everything look good? Or, hey, this is a little weird, you should push back on this. It's just really helpful to get that peace of mind in, in close time, because I think when you do get a term sheet, there's time pressure, it's an emotional time, you're doing a bunch of research. It's good to have a voice of reason from the legal side.

Yeah, no, and I mean, the other thing I'll say there, and you hit the nail on the head, is whoever— if you're a founder and you're getting term sheets, have your lawyer look, because a lot You will find on occasion they sign them and then they have their lawyer look after the fact. And you can have somebody help you with the gotchas. And right, the term sheets are largely— most of the provisions are non-binding, but it's this spirit of we just agreed on these terms and we're going to go now document this. So you'd rather flesh that all out instead of being oopsies, I didn't think of to get input and then try to change it. It just slows the process down and it just makes it less efficient.

Process. So what I'm hearing you say is have your lawyer look at your term sheet before you sign it.

Yes, please. Yes, please. Yes.

That seems a good rule of thumb, uh, to live by. So on that note, Lauren, thank you so much for taking the time to chat with us about these really tactical but incredibly helpful insights around the early startup raising experience and all of the legal jargon and ins and outs of some of these These documents which you shared are more accessible, more in detail available on Cooley's website, which we'll link here.

Thank you for listening to this week's episode of The Room Podcast. We hope you enjoyed today's conversation with Lauren Creel. If you like what you heard, please like, subscribe, follow, leave us a review, and even DM us on social.

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Cooley is a global law firm built around startups and venture capital. The firm has been devoted to entrepreneurs and investors, partnering with both to transform breakthrough ideas into successful companies. Cooley works with thousands of entrepreneurs and newly formed companies to ensure that they are structured for growth and long-term success. Since 2005, Cooley has been ranked the number #1 most active law firm representing VC-backed companies going public. Learn more about the firm at cooley.com and also at cooleygo.com, Cooley's award-winning free legal resource for startups.