Sloppy Legal Lost Me A $1.5mil Investment

Blake Smith
September 22, 2021

We were in our third year of my last business, and out raising our first institutional round of funding. My family and I had packed up our van and moved to Silicon Valley - and I was pitching 3-4 VC’s a day - 150 VC’s in 6 weeks. There was a lot of rejection - but finally - I had a VC say they were interested in investing. They’d met the team, looked through the product, conducted phone interviews, and all that was left was the final meeting. I flew to LA for a 4 hour meeting with all of the founders. We poured through everything - and everything was going great. Then they asked - “ok - pull up your data room - cap table, key documents, that kind of thing.” So I shakily opened up the dusty folder on my desktop, and opened a crusty excel document entitled “CAP TABLE.” In it there were 50 investors in common stock, 4 stacks of convertible notes, and it was a couple months out of date. They found employee agreements that had yet to be signed. They found terminated employees who never signed their IP transfer agreements. It was a mess.

The stopped the meeting, and they said,

“Blake - to be clear - “You would’ve had a $1.5M term sheet if we hadn’t seen this.”

But because of this - we will not be moving forward with your business. I lost the deal. And the thing is - it’s not like I’m an idiot - I was a hedge fund analyst - I knew legal documents mattered, and that the cap table mattered… so what happened.

You see - the first 2 years of a company are what we call “the wilderness.” Here - the only thing that matters is survival - find product market fit and a business model. We cut corners and delay on everything else to save cash and save time for the fundamental risks of the business - and we justify to ourselves that we can fix anything we break later. 

And an area we cut corners on most is foundational legal documents for the business. And with good justification…These things are complex. What seems like a simple filing, ends up compounding into running around for hours trying to pull it all together - and at the end you’ve wasted time and you’re not an inch closer to product market fit.

But the stakes are high. My story is actually pretty tame - we ended up closing the round with someone else and spent $100K to fix our earlier decisions in the wilderness. For some people - early decisions sink the company.

So what can we do? Well - we can go DIY - but we’ll likely mess it up and waste time. Or - we can pay expensive experts - but you rarely get the attention you need and it’s extremely expensive - often spending 10-20% of your funds just on legal. And finally, you can pursue what we call “The SAAS monster” which is use expensive and complex tools for later stage companies - like Carta - but you end up overpaying for tech you won’t ever use.

The system is broken - not only is the founder wasting time and money - but so is the lawyer - who says founders area  loss leader, and the investor - who spends time working with companies like mine then can’t follow through because of legal risks. We realized that if there was going to be a solution - it had to work for all three frustrated stakeholders.

That's why we made Jumpdocs - our purpose is to free up founders  to focus on what matters most in the first 2 years of a startup - while setting them up financially and legally for success in the future.

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