Friday interview with lawyer Suzanne Dingwall Williams
This week we are going to talk to the dark side. At least a representative thereof.
Lawyer Suzanne Dingwall Williams advises entrepreneurs on how to get a better deal from the venture capital world. As a former VC (BCE Capital) herself, its a bit like a prosecutor switching sides and becoming a defence lawyer. Her firm is called Venture Law Associates LLP. And, by the way, she writes a blog as well.
Question #1. What’s the number one mistake made by entrepreneurs when they look for a corporate counsel?
Choosing a lawyer who hasn’t been (a) in-house or in a start up themselves, and (b) who isn’t involved in the same industry or market niche as you. Entrepreneurs are best served by someone who’s lived the start up cycle from their perspective, and who understands how to make risk appropriate decisions based on constrained resources. A relevant network is an added plus, too.
Question #2. Would you call yourself a reformed VC, or a reformed in-house counsel?
Mostly, I call myself a size 6. It helps the cookies go down easier.
Question #3. You recently held a seminar on the “friends and family” round. What were some of your key messages?
1. Friends and family currently are the most significant source of seed capital in Canada. For every venture capital and angel deal closed, there are probably 30 friends and family deals done. It’s therefore critical that these are done right.
2. “Doing it right” doesn’t mean creating a deal burdened by lots of paper and complexity. If it did, I’d drive a better car. Use simple model documents, and keep complete, accurate records. There’s no quick fix later for errors or sloppy record keeping now. You will end up spending far more, and your credibility may be so adversely affected that a future investor may decline to proceed.
3. Don’t take money from anyone who can’t afford to lose it.
Question #4. You’ve recently written in your blog that the U.S.-based V.C.s have largely vanished from Canada. What do you think is behind it?
At first, the retreat was part of the so-called venture capital cycle. When the market cooled down after 2001, there was less competition for deals in the US. US VCs no longer had to get on a plane to come here to access great deals.
But now, the market south of the border has re-heated, and there’s a significant capital overhang in the US that needs to be spent somewhere. But we’re not yet seeing that overhang return to Canada. I think the tax rules for US LLPs investing here are the biggest gating factor, and the one that could most easily remedied. I haven’t seen any progress there yet. This scares me more than the prospect of female pattern baldness. Which is saying something.
Question #5. When you are acting for an entrepreneur on a VC round, what are the key terms that you push back on, each and every time?
Any term that can eradicate any stake in the company for a founder is unacceptable. Buyback provisions can do this unless they are carefully scrutinized. These lurk in shareholders agreement and employment agreements here in Canada. Also, any clause which purports to put a disproportionate amount of risk on the founder, such as the indemnities that a small minority of VCs will try and extract from founders.
My colleagues in the US are beginning to pay more attention to clauses that allow VCs to freely transfer their shareholdings. On the one hand, it’s usual to permit a VC to distribute shares to this limited partners. But what happens if a VC team breaks up and – as some are doing – splits its portfolio among the partners to manage? It’s one thing to have a team of VCs with a number of controlling rights (there’s always another partner to complain to if the VC rep is acting arbitrarily), but another to have one former fund member with all of that power. Also, what happens when a VC has trouble raising its next fund? This can have a chilling effect on new raises, as other VCs may be reluctant to join a round that includes someone with limited follow on capability. Should the investee be allowed to encourage a sale of that VC’s holdings to someone in the secondary market? Not matters we negotiate in financings here, but something to watch. It’s more important than ever to understand where your VC is in its fund raising cycle.
Question #6. When you were a VC, how many founder entrepreneurs wound up still running the company 3 or 4 years later?
Very few. In many cases, though, I think we replaced our founders far too early on in the cycle. There’s a certain cultural and technology momentum that’s necessary for company growth that should not be interrupted for the sake of bringing in a “professional” manager, unless the new guy is Jack Welch. Replacing a world class founder with a Tier 2 operator hasn’t worked yet.
Question #7. What’s on your iPod?
Bobby Goldsboro- “Watching Scotty Grow”, Terry Jacks -“Seasons in the Sun”, Looking Glass- “Brandy” – all the great ones. When I was starting out as a lawyer in New York, one of my colleagues started a list of the worst songs of puberty. It got faxed to young lawyers all over NYC, then the rest of the country, as we added to it. All of them downloaded from PURETRACKS, of course.
Thanks Suzie for doing this, but “Seasons in the Sun”?
Hey – we all love bad ’70s music. But to REALLY give yourself a thrill, it is more or less obligatory to WATCH the concert performance of “Brandy” by Looking Glass.
Back when rock stars didn’t have image consultants, would be my guess…
More seriously, I thought Suzanne’s answers to 5 and 6 were brilliant. Too often VC deals protect people with nothing but money in the game, and gut the motivation of the people who actualy built (and continue to build) the firm.
Great comments. In particular, Suzanne’s warning of clauses that allow VCs to freely transfer their shareholdings is to be heeded.
VC money is supposed to be about the growth of the a living business – we are partners with the entrepreneur and all that.
When shareholdings can be transferred, it’s one short step away from the ATM machine thinking of the dot com. Pretty soon, these shareholders are wanting money and that kills a business.
And what’s wrong with the song, “Seasons in the Sun”?