Startup Attorney Amir Raz on Handling Cofounder Disputes and Choosing Your Investors Wisely
Launching and growing a business comes with many different challenges, many of them involving complex legal questions. Labs expert Amir Raz, partner at GKH Law Offices in Tel Aviv, has helped companies consisting of two people all the way to large tech M&As and IPOs, and along the way he’s seen what to do (and what not to do). He held a Labs session all about the legal side of the startup journey. Here are his top do’s and don’ts.
Do: Know what you’re looking for in a cofounder
The exact traits you want in a cofounder likely vary a bit by person, but there are a few bedrock characteristics that you should focus on, Raz says. “Trustworthiness is really important, along with their ability to attract talent and their ability to stay motivated.” Motivation is key to staying in it for the long haul. “Some people are sprinters, and some people are marathon runners,” Raz says. “A startup is all about keeping a very high pace for a long distance.”
A desire to keep learning and growing is crucial, too. “You want someone who’s really eager to acquire knowledge. You don’t want someone with an ego who thinks they know everything and have nothing left to learn,” Raz says.
Don’t: Sweep cofounder disagreements under the rug and assume they’ll go away
“One of the ways to maintain a good relationship between founders is to have open communication,” Raz says. “Find time on a weekly basis to have lunch or dinner together, in a place outside of work. Find time to discuss things, discuss them openly, and always bring up the issues that are bothering you. You have to talk about these things because the stakes are high. Everybody involved with the company is looking to you—employees, investors, customers, etc. You have a lot of people relying on you and your cofounders to be able to work together professionally.”
“I’ve seen that oftentimes, founders are just so stressed about achieving the next milestone that they don’t find time to resolve issues between them,” Raz says. “And we’ve found that this lack of communication between founders often comes up in Board meetings or in front of investors, which is unprofessional.”
Do: Bring in a third party if things become heated
“If you’ve tried your best and still could not resolve the issues between you, I suggest that you approach a third party, like another entrepreneur that you both agree on, or a mentor who’s been through something like this before, and ask them to advise you on how to fix things,” Raz says. In a best case scenario, this person will be able to help you resolve your differences and move forward with a productive, communicative relationship. “If there’s been a complete loss of trust between you two, then the right thing is to split and do it swiftly, because it’s very difficult to resolve a mistrust in a startup,” says Raz.
Don’t: Wing it on your valuation
While there is a certain amount of gut feeling that goes into a valuation for very early-stage startups, there are a few parameters you should always look at when deciding on a valuation. “First, you have to look at similar transactions of similar companies,” Raz says. “Next you have to look at the quality of your team, and that’s incredibly important because investors will look at the team before they look at the idea. Look at the potential market size, whether it’s a high-growth opportunity for investors, whether your solution is disruptive or really needed, and finally the investment potential return—try to be realistic about that. If the potential return of investment is significantly higher than it is at other companies, then this would suggest a higher valuation.”
Remember though that a high valuation isn’t necessarily your goal. “You would think that a high valuation is great because it would be less dilutive on the founders, but it also creates higher expectations,” Raz says. “And it may come with more stringent conditions from investors. And eventually, it may block great transactions. For instance, if you’ve raised at a $50 million valuation, it’s less likely that you could accept an offer to purchase the company at anything below $50 million although it may be a perfect fit for the company and good deal for the founders and earlier investors.”
Do: Be selective about your investors
“Selecting an investor is like selecting a cofounder. A really great investor has a positive impact on the company by assisting in the strategic direction of the company, bringing potential customers, and even helping recruit talent,” Raz says, so you need to think carefully about who you’re bringing into the fold.
How do you make sure the investor or fund is a fit? “Do your due diligence,” Raz says. “Talk with their portfolio companies and their founders to see how they feel about the investor or fund. Did they offer support in good times and in bad? Because any company will have its ups and downs. The real test is whether the founders felt supported in the bad times.”
You should also be asking the potential investors themselves tough questions. “Ask whether they have expertise in your field of business or whether you would be their first investment in the area. Ask how many companies they’ve funded. Ask what they look for in their portfolio companies. They may be a perfect investor for another startup, but not for you, and that happens,” Raz says.
Lastly, “tap into the expertise of your attorneys and accountants, because if they’re experienced, they’ve probably met these investors or done business with them,” Raz says. “But overall, the experiences their portfolio founders have had with them and whether they know your industry are all important issues to find out instead of just taking the first one who’s willing the write the check.”
Learn more about the legal side of launching and growing a business.
This post is based on content from a WeWork Labs programming session.
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