Forums: Discussions for entrepreneurs and small business.

Our attorneys have created our Delaware Corp for a certain amount of cash and stock when/if we’re VC financed, and the opportunity to participate in the round.

My question is; is this a conflict of interest? They will be looking out for their best interests on a term sheet and in any future investment rounds. As our attorney, they should have our best interest in mind, but how can they when they are also preferred stock owners.

Thanks

jays,

A situation could arise where that is a possibility. What is clear is that you have a trust issue.

Why did you incorporate in Delaware?

Do the attorneys already own stock in your company?

 

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robertj

Our attorneys Incorporated us in Delaware for tax proposes.
No they don`t own stock at this time.

I don’t have a trust issue; in fact, they also helped with our last VC financed start-up. That’s why they are doing the work now and will take payment only when we secure financing.

I’ve been learning more about valuation and term sheet details, and there just seemed to be a conflict of interest.

I only wanted to see what other people had to say.

Thank you for your input.

Being a shareholder does not necessarily give rise to a conflict of interest for your attorneys. A potential VC investment is likely to benefit every shareholder as it increases the value of your stock without entailing the risk of a subsequent sell-off because there is no secondary market for your securities.

Since you have already been dealing with VCs, you will probably know that they usually don’t follow traditional valuation techniques because they have their own perception of value and present their term sheets accordingly. So unless your attorneys hold a shareholding substantial enough to shift the majority voting power among shareholders, it’s probably too early to worry about this.

On the other hand, there are lots of shades of grey in entrepreneurial finance and fewer and fewer deals are done as straight equity deals. So you might be well advised to retain a seasoned corporate finance professional to balance the legal expertise of your attorneys with an intimate understanding of early-stage deal making. It will probably help you rest easier, too.




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