The potential for large returns makes venture capital investing an attractive option, but it’s also a high-risk endeavor. Those risks include legal matters such as contract negotiations and regulatory compliance. Mitigating those risks is key to making sure your investments pay off, whether you’re operating as part of a firm or investing your own funds.
Following are four legal tips to consider in the course of venture capital investing.
1. Do Your Due Diligence
First of all, due diligence is vital to success in venture capital investing. Not only do you want to make sure you stand a good chance to profit from your investment, but you also want to keep in line with all pertinent regulations and laws. Part of that is making sure the startup is compliant with regulations and best practices.
A few items you’ll want to look at include:
- Corporate governance
- Business formation
- Legal authority to enter into a VC transaction
You’ll want to be on the lookout for any potential liabilities as you look at these and other aspects of the company’s structure, processes, and practices.
2. Focus on What Matters
Another legal tip is that in the course of conducting negotiations and drawing up a contract, it’s important to focus only on what matters. You’re likely already aware of what’s most important in these agreements—valuation, dilution, protective provisions, founder investing, the makeup of the board, etc.—but it can be easy to get sidetracked during negotiations.
Matters that are relevant to the legality and profitability of your agreement should not be ignored. Because of this, superfluous or immaterial matters shouldn’t be allowed to become points of contention. In fact, it may be worthwhile to sever a relationship with a startup that tries disputing every aspect of a contract. Such behavior may indicate a lack of understanding about what matters, which doesn’t bode well for the future of their company.
3. Be Aware of SEC Regulations
Many SEC regulations apply to VC investing, though many of them come into play in an indirect manner. For instance, venture capital provided through financial institutions must conform to the Bank Secrecy Act. Other laws may impact the construction of legal compliance infrastructure.
Laws against insider trading mean you need to take caution when making arrangements to oversee the startup company’s management. Getting access to nonpublic information could put you at odds with these laws, which means assigning someone to be on their board of directors should be handled carefully and with adequate preventive procedures.
Many laws may come into play if you’re using third party funds, so legal due diligence is required to make sure you’re in line with all relevant laws.
4. Retain Legal Counsel
Finally, it’s typically worthwhile to retain legal counsel when investing venture capital. From due diligence to contract negotiations to regulatory compliance, an attorney can help you avoid common pitfalls and create profitable investment relationships with startups. If you’re currently part of a firm or if you are wanting to start into venture capital investing, contact an attorney today.