In today’s episode, we have Matt Hyde, who is a partner and the co-founder of Catalyst Law Group, which is a Colorado based venture and technology law firm. Matt is going to go through the ins-and-outs of being a lawyer working with startup founders as well as venture capital firms.
Here’s a closer look at the episode:
Matt LinkedIn: https://www.linkedin.com/in/matthew-hyde-bb79564/
Catalyst LinkedIn: https://www.linkedin.com/company/catalyst-law-group-llp/
The information provided on this podcast does not, and is not intended to, constitute legal advice; instead, all information, content, and materials discussed here are for general informational purposes only.
Listeners should contact their attorney to obtain advice with respect to any particular legal matter. Only your individual attorney can provide assurances that the information contained in this podcast– and your interpretation of it – is applicable or appropriate to your particular situation. Access to this podcast do not create an attorney-client relationship between the listeners and Catalyst law group or their affiliates.
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You know, what's also great about this environment is it's like, there's we talk about lawyers, like, we have lots of firm not lots, but there's definitely other firms, you know, in the ecosystem that do what we do. And I guess technically we consider them as competition. But it really is collaborative. Like, we come across something, I'll get a call and said, hey, you know, particularly SVB, again, just, there's a lot of, it's a big market, there's plenty of work, but people really support each other.
This is Found in the Rockies, a podcast about the startup ecosystem in the Rocky Mountain region, featuring the founders, funders and contributors, and most importantly, the stories of what they're building. I'm Les Craig from Next Frontier Capital. And on today's episode, we have Matt Hyde, who is a partner and the co-founder of Catalyst Law Group, which is a Colorado based venture and technology law firm. Welcome to the show, Matt. Nice to have you.
Thanks, Les. appreciate the invite. Glad to be here.
So all right, we got a lawyer on the show today. So naturally, of course, everybody knows where we're going to, we're going to start here. I'm going to start off with a disclaimer, because we got to do that. Alright, so here it is. And then Matt, evaluate me, tell me how I do. All right. So the information provided on this podcast does not and is not intended to constitute legal advice. Instead, all information content and materials discussed here are for general information purposes, only. listeners should contact their attorney to obtain advice with respect to any particular legal matter. Only your individual attorney can provide assurances that the information contained in this podcast, and your interpretation of it is applicable or appropriate to your particular situation. Access to this podcast does not create an attorney client relationship between the listeners and Catalyst Law Group or their affiliates. The views expressed at or through this site are those of me and the guests alone on my individual capacities. All liability with respect to actions taken or not taken based on the content of this site. And podcasts are hereby expressly disclaimed.
How'd I do? Did I miss anything?
That’s, great. You’re hired.
Okay, Boy, I'll tell you if I were billing my audience at 1/10 hour increments. I'd be pretty good for the week at this point. That's almost a whole episode. Yeah. All right.
Well, there you go. I hopefully that's the most legal part of this, this podcast. So thanks.
Yeah, of course. Thank you. So Matt, to begin, well, I guess we've already begun. But to begin the fun part, why don't you tell our audience a little bit more about who you are, where you came from, and your sort of very fun path into law?
Sure. So I am originally from New England, and actually made it to Colorado, probably in middle school for a few years, which is kind of how I ended up here. But like you Les, I went to a service academy and went to the Naval Academy.
I thought you weren't gonna admit which one would you say, a service academy. And I would understand that being a Naval Academy grad, I would understand why you'd want to just
Well, actually, I know your I know, you've got West Point pride, but we actually have a lot in common and that every Naval Academy graduate also got admitted to West Point.
That's the oldest joke in the book. But I'll laugh.
I’m sure your listeners haven't heard it. Anyway, I digress. So I did 12 years as a pilot in the Navy, 10 years of active duty and two years of reserve. The two years in reserve was actually during law school. I went to law school at University of California, Los Angeles. And from there went into a traditional, really big law firm, it was called Latham and Watkins, it was based in San Diego, but it had, I don't know, 1500 or 2000, lawyers and several offices. But the more interesting, and probably the crux of your question is why did I go into law? And the reason was, I really was fascinated and really wanted to engage in a profession that really prized critical thinking and analysis. You know, a lot of folks when they leave the military, go into business school or into business, some go into law, and some go into, you know, various areas, but it was really intriguing to me and I thought, Well, boy, this would be a really, I think, interesting career. I know that I would be surrounded by, you know, really smart and capable people. And I would learn a lot about law and business. I never had a desire to go to court and litigate and fight about things I wanted to kind of be a deal maker so that the firm that I went to out of law school was really focused on.
But were you were you living in San Diego then at the time is that so you went from LA to...
I was fortunate enough in the Navy to be stationed in San Diegi, in Coronado, specifically with this beautiful little island right out in the bay.
Probably one of the the best military posts, I would argue, it's like,
It was a pretty nice. I will not lie. But Southern California in general was great. But I went to law school in Los Angeles, so stayed in the area and hadn't known about the firm and had talked to folks and how it works. When you are in law school, you do a summer internship. And if you, you know, do a decent job there, they bring you back. But that selection process is really kind of based on your grades in law school, but you don't, when you graduate law school, you have really no idea what it's like to be a practicing lawyer particularly, as a business lawyer, because it's not about citing cases and footnote and precedent, it's about what market forces are and really forces you to engage with the business. The challenge for me was, you know, I came out of the Navy with, you know, all of this experience and leadership. And I really wanted to be able to leverage that. But at the same time, I was basically starting over so I was a first year, yet I had no idea how deals got done and what, you know, project finance and venture debt and all of these things. So I was really soaking it all up,
Probably made it probably man made, like landing, you know, a helicopter on an aircraft carrier just seemed like a cakewalk. Compared to the challenges of starting over. Right?
For sure. I mean, the stakes are different, that there are some similarities. And, you know, there's when you don't, when you're just learning don't know what you're doing, whether it's, you know, in flight school, or in law school, or, more importantly, in practice, that's where you really have to rely on good mentors. And that's why I picked the firms that I did, because they were the top of the game. And I wanted to learn from the best. So So I did that in San Diego for two years, and then had the opportunity through a kind of a random conversation to transfer to Hong Kong. So I moved in my family and we went to Hong Kong, and we were there for about five years, I was doing U.S. deals. But the deals that I was doing, there were really private equity, you know, billion dollar deals, and you know, big client names that everybody knows about, and they look impressive, you know, I could call my dad and say, Hey, do you see that deal in the Wall Street Journal? Yeah, that was me. Well, what was me was way, way, way, way at the bottom of the pyramid looking…
Every T crossed every i dotted, take that and out and put an or in there, that stuff you're doing that's exactly right.
But I will tell you, that's really important. And and that's what partners expected of me was, listen, we know you don't have years of legal experience, but we expect that what you give us is going to be as high quality as possible. And that was a really good lesson to learn early in my career. But I will say that I, I felt like I was very detached from the business and from the founders. And I think the part that appealed to me about venture law, and eventually my move back to the United States, specifically to Colorado, was to re-engage with that when I had first started my career, I was working with startups, mostly in the biotech space. But I really appreciated the energy, the enthusiasm, the fact that maybe I didn't have a ton of legal experience. But a lot of the problems that I was addressing were human problems. It was fights between founders, it was, hey, I want to, you know, I want to talk to an investor about this. But I'm trying to set this up, because I actually don't know what I'm doing, or I have questions. And so the advice of a counselor, like a legal counselor was actually a lot of, you know, quasi marriage counselor, personal advisor, a life coach, just, and I really liked that I did a lot of that in the Navy. And that was where I really thought, wow, I can actually leverage this experience. And now, you know, I'm five or six years in and I actually do know what I'm doing. And I do have several deals under my belt. And that, that drove me to really focus on kind of venture law. We're working with startups and been doing it ever since.
I love how you characterize that because I think sometimes, and you know, like we we crack on lawyers and make jokes all the time on Found in the Rockies unfairly. But I think but I really, I what you just said is really important, because there is a very human aspect to all law. That is it's like, it's coming to agreements. It's coming to mutual understanding, and it's like papering it, right? That's, that's the nuance there that is like, It's not trivial to get the words down. And it's also not trivial to get the agreements, you know, like, negotiated, but it's really at the intersection of that is like philosophically where, you know, especially in securities law, right, like that's in venture law, that's what you do, right?
Absolutely. No, there's the, you know, there's kind of, it's usually around two thirds of the way through the deal where people are committed enough. But now the real issues are, the real fights are coming. And I'm not to say that it's contentious, I would say, and mergers and acquisitions, which is a big part of our practice, because that's usually where startups hopefully end up as they, you know, we represent smaller companies whose usually on the sell side, but those tend to be zero sum game, the buyer gets whatever the seller gives up, and vice versa. But in the venture and Les you know, this with Next Frontier is it, once the venture money, the investment money comes in, it really is collaborative, I'm not saying that the incentives are in lockstep going forward forever. But generally, they're aligned. And that's the part that I really like is, you know, when I represent VC funds, hey, this is what we're trying to protect against, right? Never have I got instructions from a fund that says, Okay, I really want to screw over the founders and dilute them down as much as possible and squeeze every drop every dime, I can out of a company, nor have I worked companies that say, I just want to take this couple of million dollars, and then tell the venture guys, hey, go back, and don't bother me, I'll tell you when I need more money, neither of those types of clients, we would want to work with, it's always, hey, this is what I'm trying to protect against and the fund would say, Well, this is what we're trying to protect against. And I think the one of the advantages of working, you know, with funds and companies is that perspective and be able to interpret that. And I think that really, that really helps get deals done. And then of course, the personal relationship that, you know, we have, when we're talking to our founders, we know a lot about what's going on with the business, maybe with their personal life. You know, we sit in on board meetings, we understand what their burn is how much runway, they have, you know, events like Silicon Valley Bank, you know, that collapse about a month ago. I mean, that really got some shockwaves. And, you know, we're one of the first calls and we don't, someone's panicking, you don't want to call somebody that's also panicking. So we, you know, we really want to be thoughtful.
Yeah, you’re like the mom or the dad that puts the oxygen mask on the on themselves, themselves before the kids like, yeah, or whatever, however, that goes. Yeah. Yeah. Interesting. All right. So Latham and Watkins. So yeah, this kind of great career, early career launch, you know, traveling abroad, you know, living abroad with a family in Hong Kong. Super cool. Like, what was the decision for you? You said, you went to middle school in Colorado, but what was it Colorado or bust? Was it like, let's get to the Rockies? What was the decision for you to do? Because that's a, that's a big decision?
That's a great question Les, because the answer was a question from one of my kids who was four or five at the time, we’re living in a high rise in downtown Hong Kong. And it was an amazing experience, and not nothing against Hong Kong. But we used to come back for the summers, my wife would take the kids back to New England and see all of our family and they'd see their cousins and do all of the things that you know, people kids in Hong Kong don't do. But she asked me this question. And she said, Dad, do you think someday we could live on a cul-de-sac?
And you're like, well, there's not a whole lot of us in Hong Kong.
Know, there's a very much entrenched in the expat life. And I thought, boy, if I, this has been a great experience, but pretty soon, I'm going to be pigeonholed like, I'm going to be in Asia, I had some really interesting opportunities outside of the law that I, frankly, if they were in the US, I don't know if I'd still be a lawyer. But it came down to a decision with my wife and I, and we thought, boy, if we stay here much longer, we're probably going to be here. And we're going to raise our kids here for the next whatever, 15 years. And, you know, it was hard. My you know, my parents are in their late 70s or mid 70s and same with my wife’s, and, you know, having them fly 17 hours to see grandchildren and vice versa. We just thought, you know, this has been great, but we really want to go back to the States. And that was, once we made that decision, it was really liberating. We opened up a map and thought, Where do we want to look and live. We didn't necessarily want to go but wanted to be close, but not too close to New England didn't really have a lot of appeal. We looked at Silicon Valley back in San Diego, some other places and it really became between San Diego or excuse me, Seattle and Denver. And I had worked at a firm called Cooley before I started Catalyst and I almost went to Cooley out of law school. I knew this firm. They knew me. I kind of already been cleared had an offer out of law school. And I knew that they were really startup focused and thought, boy, this would be a really great way to get back to the states and learn, you know, see what I've missed in the venture world. And Colorado was just a great place for the host of reasons probably like why you’re in Montana? Yeah. So that's what we
What a beautiful question. And what an incredible response, you know, that changed. It really changed the trajectory, probably of your guy's entire path as a family. That's amazing. Thanks. Thanks for sharing that. So when you did decide to make the move to Colorado, was it I was that when you decided to start Catalyst then? Or how did well?
Oh, no, no, no. So I worked at Cooley for gosh, probably five, or maybe six years. And that was great, because I really was, all I did was venture, and early stage work, the Colorado office was and still as a tremendous, you know, resource. And they work with, you know, a lot of the local startups and many around the country. And so that was
It wasn't even a thought it wasn't even idea that like maybe someday, like you thought your would find a job that would anchor you to Colorado and then that would be the new path.
No, I never thought I never thought of, or I really thought well, yeah, I want to be a big law partner. I always thought I'm gonna go in house and maybe be vice president of business development and kind of be a CEO and because, you know, I was a naval officer, and that's what you do, you're in charge and do you know, but I will say that in a big impetus was my co-founder Chris Kiyan, he actually started the Cooley's Boston office, I don't know 15-18 years ago now, with with some folks, and he moved out to Colorado from Boston. And we really focused along with kind of a small group with Silicon Valley Bank which is obviously no longer SVB now, but really, really said, Hey, let's, let's go out and try and find the early stage companies with the Tech Stars and Y Combinator companies. And we really focused on that. But I think when you know, when you're hanging around entrepreneurs, and you're talking about product, market fit, and building relationships, and kind of all of the things that you preach as an attorney, or that you could find on any blog post, the more you start thinking about, boy, you know, I understand why entrepreneurs do this. And I'll tell you, when Chris and I started in 2015, you know, we left both have families and, you know, we left a very prestigious firms with great salaries to kind of do this, and, and all of a sudden, in the market, when folks heard about this, you know, we had street cred a little bit, it's like, wow, you’re an entrepreneur now too you're kind of hanging it out there and going for it. And I think it's that it's the confidence to take what you know, into a realm of what you don't know and say, and what we didn't know is, is this going to work? Or, you know, are clients going to, you know, follow us or, you know, we basically started a Catalyst saying, Alright, we're gonna start from zero, we're assuming, yeah, we, all of our relationships are rolled back to day one. And fortunately, it worked out really well. And we're going strong, but I will say, just like any other entrepreneur in a business, we spend a lot of time working on the business. You know, we've definitely made some mistakes, and you think about things with, you know, trying to preserve, particularly with COVID, firm culture and hiring and how we do things. And even dumb things are presumably like, what our documents look like, and how what's our brand going to be? So that's where that really kind of for me, checked that box of, oh, I need to be a CEO someday, because I want to deal with these things. And now I got to really have the best of both worlds where I get to work with a lot of great clients, and I still get to run and co-manage the business.
Yeah, it's super cool. Because on this episode, where we want to, I'm about to go there. We want to talk about some nuts and bolts and give some people some things to think about, kind of demystify some of this venture law stuff today. But it's cool, because you are a founder, you are a founder in the Rockies. I mean, not in the classical sense of like, tech founder, but you found it Catalyst in the Rockies.
No, that's true. And normally, I tend to downplay when people are trying, you know, oh, you're this or that? I'm like, yeah, no, I am. And I'm not immune to any of the mistakes like all the good and the bad that's come with it. I've experienced and it's been just invaluable that when I talked to folks at big firms, they're think, Hey, I'm thinking about making this move. I can't be more enthusiastic about it. I'm like, go do it. If it doesn't work, go back to a big firm, but it's going to work and you're gonna love it. And you're gonna be working way harder than you were before. But it's so much more satisfying, at least in my that's been my experience. And I know Chris feels the same way.
Yeah, that's great advice. So speaking of like, so you started callus, what year what year about 15? Right. Great. So I mean, yeah, it's been a good seven, eight year is now that's awesome. What? What are you? What do you think about when it comes to, you know, giving good thinking about startups that are ready to bring in a lawyer? You know what advice people come to you, they want to start a company, there's two people or three people there, say, Hey, we got this idea. We need, like, when is the right time to engage? And like, what does that look like?
Sure. Yeah, I mean, this, this, obviously, is going to sound self-serving, kind of like asking a barber if you need a haircut, but the answer is as early as possible. And the reason why is when we are talking to founders, and let's say they haven't even formed an entity, you can get a really good sense of a founding team, and when you're talking to them, and she's explaining, oh, we have this great, you know, company, it was a services business, but boy, we developed the software platform. And, you know, we think we can use this. And we always kind of work backwards. So we say, Hey, where's the what's the ultimate goal? And if it's, well, I want to build this as quickly as possible and sell it to Google for a billion dollars, which, that's a just fine goal. And that's a goal of a lot of the high tech growth companies and probably the ones you invest in. But then some, maybe the other founder says, no, no, I want to keep this company. And this is going to be our baby. And we're going to cashflow this for the rest of our lives. And so we can, when we see things like that, and have asked certain questions, it really helps us, you know, determine what the right entity choices may be, you know, make them have some hard discussions as founders now, so we're not four years into it. But that is, unless you have someone to help you with that with that, ie a lawyer, then you're just deferring, you know, cost and headache down the road. So if you kind of do things early the right way, it's a lot easier. But we're also live in the real world. We know that startups, early stage startups are often capital constrained. And so they don't have the resources or they don't, you know, have lawyers, sometimes there's lawyers in the family, we always use the proverbial Uncle Joe, the divorce lawyer, yes, he has a law degree. He's helping me with some legal things. But you really need somebody that is in this space, because things you do now can make your life much, much easier. But listen, sometimes our, one of the things that's really important to Catalyst is we're that we're the right tool for the right job. And sometimes we will talk to folks and say, hey, you know, I have a services business, I need to form an LLC, or I have a bakery. And we'll say, Well, those are great. And we'll talk to them for you know, 45 minutes, give them some advice, and either say, you know, what, you'll be fine on Legal Zoom like, this is just you, where founders need to be thinking about getting things right, and is when they, if they're taking investment, right, if nobody's turning over rocks and looking, and it's never going to be scrutinized, then the risk really is about between them and the IRS, and maybe, you know, a missed filing with the state or something like that. But there's a lot of this business law that that can be home lawyered or, you know, available, you know, cookie cutter resources. But if you're going to be asking people for money, and you have plans, and you're hiring employees, and you're giving employees equity, just just it's not hard, but there's a lot of, you know, technical pitfalls, and a lot of non-intuitive advice. And there's a lot of advice on the web and in blogs, but it doesn't necessarily tell the whole story. So long answer,
Oh, no, that's great. That's a great setup. i What about structurally, you know, it's like, if I'm a founder, and I'm like, Oh, I've already incorporated I'm a I'm an LLC, I'm a partnership or I'm a Montana S Corp. Like, is there structural reasons why there's a certain entity structure that we you know, startups need to consider or like, they must always be x. Little bit of a leading question.
Yeah, no, I mean, and of course, my my lawyer answer is, is it depends. But let's just say, you know, you're a high growth startup technology company looking for venture money. The answer is almost always a Delaware C Corp. C Corp for some pretty significant tax advantages and some flexibility on number of investors and things like that, Delaware, because that's kind of the gold standard and the most familiar jurisdiction. So I'm a, you know, I'm licensed in California and Colorado. But I know Delaware law because that's all I do, and in most, and frankly, all good. Can a business corporate VC lawyers know Delaware law, because that's kind of the coin of the realm. So that's important, but, you know, limited liability companies, if you were to go on the web and say, hey, I want to start a company with the first thing you'd see on Google's SEO would be started an LLC for 25 bucks and that's true that you can start a limited liability company. But it may not be the best choice or maybe the good a good choice now, but not later. And there are ways to move from one entity to the other. Some are very straightforward, depending where you are and what jurisdiction you're founded in. And then other ones have like more complicated tax issues. For example, if you were to go from a corporation to an LLC, that's a lot more complicated than the other way around.
Yeah, for sure. So other than kind of that early, getting that sort of early assessment, what do I want to be when I grow up? Is it if it does end up being a venture backed entity, Delaware? See, okay, I'm moving out, I got my formation docs, I got my counsel to represent me anything between that sort of early stage foundational stage from a legal perspective that founders should think about, prior to what I would say is like, and we'll get there in a second, but like, the first term sheet, any anything else worth thinking about ownership? Anything else?
Yeah, I mean, less than one of the big issues that we get, you know, basically, day one companies was, well, how much equity should I give? And how much equity should I give to my co-founders? And there's no answer for that, right? That's like, again, that's one of those hard decisions that we want you to go have now. So that we're not doing this in the middle of a transaction or something like that. A couple of things,
And have the conversation with your counsel, right? Not independently,
Or just hey, this is what we came up with. What do you think? And then questions, I mean, Les like, they're uncomfortable, but we have husband and wife teams that come to us and their co-founders. And we've had we've, you know, a couple that are clients. But one of the questions is, well, what happens if you guys get divorced? Right? And that's not something that couples want to think about?
Why are we planning for this. I don't want to plan for this. But you got to plan for it.
Yeah, exactly. It's just like, well, you know, it's like, well, you know, we've been together since High School like, that's great, right? But this, just, these are my, this is our job. Because when you do take money, or you do have employees, now you have people counting on you. And now all of a sudden your personal life is now crept into the company, right? And it's like, well, now we, we can't get a word we’re at a stalemate, because we're 50-50. And we can't get anything done. And there's, it gets really personal. So, you know, of course, I'm not, you know, cold about it. But I said, you know, here's some of the things that we think about or in founders, you know, one of the things sometimes founders are resistant to impose vesting on their own shares. Because like, wait, I founded this actually get to keep these shares. And then I will, you know, part of the conversation will say, Well, what happens if founder, number two's mom gets sick, and he has to go away for three years? Does he get to keep all those shares? Or you or, you know, you have a big fight or blowouts? And so it's kind of just giving them the scenarios and letting them run with it rather than it's, you know, it's not a checklist, but it's more of a discussion.
Sure. Well, and by the way, I think one of the other great values you talked about, as a legal counsel is counselor and legal adviser, you've seen a lot, you haven't seen it all. But you've seen a lot, you've seen a lot more than these new, you know, a singular new founder has seen so you can leverage that experience with, you know, have you thought of this? Have you thought of that? You’re probably seeing new stuff every day.
And I think having specific examples, it's like, well, you know, I understand that, you might think that, but I mean, I again, we try and couch it in a way that's constructive, rather than if I had a dime for every time I heard that, right. But it's true, we just see a lot more and, and a lot of the themes just are recurring. And you’re making these iterative course corrections, as we give advice, as different things happen, you know, the Silicon Valley Bank, that was kind of a surprise for most people, right? It's, and it's so now the questions are, hey, well, where should I put my money? Which bank? How many banks, things like that, where that was not, you know, on the table before. So it's a learning process both ways. But sure, no, the lawyer's job is to do the homework and do the heavy lifting so that we give advice. You know, we don't like two-handed advice, which is, well, on one hand, you could do that. That's not helpful, right? We say, Well, here's the risk. Here's kind of what we think, you know, the probability is and maybe the magnitude if things go bad, but generally, this is what we think you should do. And then at the end of the day, what they want
Yeah, and an important thing to emphasize here is like you don't as a as counsel for the company, you don't make those decisions that CEOs do the founders do, right? But you lay out lay out the framework. Yep.
So So as we're on so we're on this journey, we've started this company, we got our foundational docs, we got our ownership. We got things set up. What happens when now it is time to raise money. All right, and instead of Uncle Joe, our lawyer, we have Aunt Susie the investor that wants to put some money in. I imagine this is the next kind of a hurdle that you end up working on with companies. What do you see at that stage call it like the preseed, preseed stage first money in what? What legal stuff? What scenarios? What kinds of things to think about?
Sure, no, that's good question and happens a lot. This is the friends, family and fools round, right. And again, these are just expressions meant to be pejorative, but it's just, it's the reality of raising money. You know, if you're just out of grad school and starting a company, you're going to find the resources that are close to you, or people that want to encourage you and, and that's great, I would say the pitfalls. The biggest one is, there's actually a couple, the first is selling to everybody that wants to buy. So all of a sudden you have 20 investors, each for, you know, $2,500 or $5,000. A lot of times, they don't know what they own. And frankly, the founders may not know what they own. So I'm going to sell you 5% of my company, well is that in the form of shares? Is it preferred stock? Is it common stock? If that's an LLC? Is it units? Is it preferred units? Is it profits interest, there's just kind of a whole new world of language and considerations. So, and again, most family is just gonna say, you know, what, Les, I'm your uncle, I trust you. And here's 10 grand go, you know, go forth. And sometimes the expectations are pretty high. Well, Les, you were really smart guy, and you're at West Point, and you're a VC now, and I expect a really good return, because I know you're not going to lose my money. But as you know, in the venture world, a lot of money gets lost, and that can make some really awkward Thanksgiving dinners for family where, you know, it's like, well, yeah, sorry, you know, sorry, I couldn't come I had to take the red eye, because I gave my money to Les.
Oh, hopefully it's not that bad, really.
But it is there's, you know, there's the good and the bad that comes with that person was. The other thing is, on the SEC side, there's some requirements that if you're selling private securities, there needs to be the securities needed to be registered in the form of like, you know, an S one going public, or an exemption from registration. And the one that, that most of the deals in this ecosystem rely on that is under Regulation D. And specifically, there's a requirement under one of the tenants of reg D, that reg D investors be accredited, so they have to meet certain net worth requirements and certain sophistication, requirements. And often, that inquiry is never done. And if it was the most, or a lot of the people may not pass those, and that that can introduce problems when now you're going to go raise a VC round. And there's and it can almost taint the follow on round, depending on the timing of the prior round. So it's something that we deal with a lot.
So if it's done, right, the inquiry happens, and those folks have to basically sign sign that they are and that protects the company, right? That's right, if they started, right, yeah. So they can so it's really about protecting the company and doing the necessary things. So that Aunt Susie, you know, does not have a claim against his unregistered, right. Yeah,
That's right. That's exactly right. And that's a great point that, you know, with a corporate lawyer, our client is the company, it's not the founder, even though at the beginning, it's kind of one in the same, but eventually, you know, the advice we're giving is, hey, I know this might be good for you, personally founder to have acceleration on your vesting, but, you know, that doesn't set really good precedent for future hires, and your investors are not going to like this. And so those discussions start to creep in. But the client most definitely is the company. And I may have to make, you know, a call with Aunt Susie's lawyer telling him or her why Aunt Susie doesn't have certain rights or needs to sign certain documents. Yep.
So assuming we do a lot of that the right well, we're assuming we do it all the right way. Because that's what we're doing the right thing here with this company journey we're on today. What is it typically, like, what could it look like? Because these documents, these financing rounds can cost a lot of money if you're doing them in like the standard, NVCA doc format. But like at this stage, what is the typical doc format that is used? Or is there a typical,
And that's an important part because our goal and it may sound counterintuitive, is to get the transaction done as quickly as cheaply as possible that's in our interest is lawyers because we have other things we need to work on. And from the company side, it preserves capital and it's certainty of closure, right? Everyone's heard the term time kills all deals. So in the where we are now it's been kind of an interesting evolution. There's the traditional priced round, right, which is, I'm going to sell equity. I'm negotiating with an investor for what my company is worth, they're gonna give me X dollars, and they're gonna receive y percent of the company. But that typically is a lot, not a lot longer but a longer process, more expensive. There's usually more documents involved, typically, you know, five primary financing documents and National Venture Capital Association has some form documents that kind of serve as a good starting place. But then there's these, what we're seeing and have seen in the last probably 10 years is a prevalence of what we call SAFEs - Simple Agreement for Future Equity, or convertible…
Oh, it’s “safe” so it's not risky. It's safe. There’s some irony there, I’ve always thought that. Yeah, no, I'm sorry. I interrupted, though.
No, no, but that's actually a good point. Because it's venture investing is not safe. And I'm sure you can attest to it. It's high risk, high reward.
But it's a simple agreement. So that that goes back to your get it done fast. And you know, cheaply. As cheaply as possible. And it's for future equity. How does that work?
So so both a convertible note and a safe are similar in that they say, I'm going to the investor says I'm going to give you money now. And when you raise a round a price round, then my the amount that I gave you, in, in the form of the SAFE or the note, that money is going to convert roll forward into the equity that the new investor is going to receive. Now, there's a couple, there's a couple wrinkles there. One is, it might not be exactly the same type of equity, because the equity that I'm going to receive if the new investor is paying $1, because I took this risk, a year ago, I purchased a SAFE or convertible note that is going to convert at a discount. So maybe I get those shares for 75 cents instead of $1. And that's where the investors will, that's where they're rewarded for taking that early risk. The SAFE is nice, because it has standard documentation. So Y Combinator came out with this man, probably eight years ago, maybe longer, it's gone through a couple changes, the most notable change is that it moved from a pre-money SAFE to post money SAFE. Which if you're an investor, you're very happy about if you're a company, you're probably not as happy about that.
What's the difference? Worth saying a couple of things on that?
Yeah, sure. So in essence, the post-money SAFE now locks in the percentage of the company that the investor is going to get for their money. And in essence, it applies full ratchet, anti dilution, such that it's the founders that suffer the brunt of the dilution going into this. And this is there's more and more debate, I think about the appropriateness of this, I know, Carta, which is a cap table management system, they've introduced a form of SAFE that is a pre-money SAFE. But this change was made probably four years ago, but it can be significant. And for founders, they really need to understand this. And and even though it's the Y-Combinators, you know, most recent form. And that's not the end of the discussion, necessarily. And so, and again, the part I left out was that I went into law because you know, math wasn't my strong point. But I got good at venture math. And so when I do things, and founders should do this as breakout a spreadsheet and there's different models and see how this, see the differences and see what the difference in valuation and really understand this because you don't want to be a CEO that's agreeing to take on money and not understand the impact of that. It's bad in that it's dilutive. And frankly, probably makes you a little amateurish if you get into any thing other than a very high level discussion with investors and you don't want to, you don't want to present that way you want to present like I've done my homework, I understand what I'm doing.
Yeah. And let me tell you, the investor’s always gonna have a model to backing up their framework. So that's the other that's the other side of this too. As a founder, you got to do the work. Yeah. What What about so the other the other important thing here I want to just highlight on the SAFE is, you're basically so you're basically agreeing to sell shares, you know, you know, at a future date, but that date, there's going to be a reckoning like that. I see founders sometimes like raising SAFE, upon SAFE, upon SAFE. Suddenly, you've got millions of dollars that all need to convert in the next financing. And by the time it converts. It's that money's been spent right. I mean, it's, it's dead.
Yeah, that's right. That's right. The originally the when I mentioned earlier, there's a SAFE and a convertible note, the convertible note used to be called a bridge note for bridge financing. And investors would say, Hey, I know you're about to sign this big commercial contract in three months. But I also know you're out of money and two, so I'm going to put money into the company now, and that note will convert and a convertible note is debt. So it has a maturity date, and it has an interest rate. So the longer that it's outstanding, the more principal and interest gets converted, and you get to buy those discounted shares. A SAFE doesn't have a maturity date or an interest rate. It just kind of sits out there. And basically what happens is, either a financing happens or a liquidation event happens. And then at that point, that's to your point Les, that's when you are running the math and say, Okay, well, geez, I raised all this money, and there's different, there's different features in the SAFE, that maybe give me very variable discounts. And it can get complicated, but some of the things that happen is founders say, Well, you know, I just finished TechStars, and I'm doing the TechStars convertible note. And, you know, somebody saw me at demo day. And so now they want to, they want to have three new investors that want to invest on the same terms as TechStars. And rather than thinking about, Okay, well, what's, you know, is that valuation still appropriate, they just keep selling and selling. Next thing, you know, they've got $2 million worth of convertible notes, with a 3 million valuation cap, and then they raise their first round, and the dilution can be a little staggering. And so this kind of goes into the, you know, if you have a lawyer that is on call, listen, if you need the money, you need the money, but at least you're aware before you take it or Hey, guys, maybe next time, we should think about, you know, bumping the discount down or the valuation cap up. And so that that dilutive effect is really important. Now, good investors don't want the founders diluted to the point where they're no longer interested in the company, right? They want to be incentivized so, so oftentimes, you'll have investors come in, they'll say, Geez, that Seed round really cleaned you guys out, I think we need to, you know, do some true ups, maybe in the form of option grants, things like that. So it's not necessarily that zero sum analysis when it comes to, you know, ownership, because if you have a really great CEO that really understands the technology and the business, and as a great leader, you want that person taking this thing to the finish line. And, and they need to make sure that they, you know, they feel like they're still part of the company, they may not have control of the company. In fact, founders don't often understand that at some point, you're not going to have more than 50%. And there's going to be a lot of other types of control, you’re giving up. And also when you take investor money, you're basically agreeing to sell the company at some point. It's not a absence certain structures, but in the venture world, that there is an anticipated exit at some point. And I think folks need to appreciate that as well.
Boy, you're making the hair on the back of my neck stand up. I mean, Matt, we could do a whole episode with you interviewing me on that dynamic as a founder, because yeah, I've experienced I experienced that. And that's yeah, that can be well. So the story goes for another time anyway. What about anything else? Accompanying in the SAFESAFE anything else kind of other than the this the docks? Anything on the side that needs? Well?
Yes, oftentimes, because the docks are, quote, unquote, standard. And I would say it's one of the few documents that actually people tend to respect a form. Because it's so quick and easy to do, you literally fill in a couple blanks. And you know, you have to go through board consents and things like that. But it's, it's very easy to do. But oftentimes investors want additional rights, or maybe there's things that that are special to the company. And so if you think about those extra things, it's very common for investors to ask for a side letter, and what a side letter is saying, Okay, we have these primary documents, and these are what all of the parties are going to sign. But investor, see, well, you know, we have, we actually have, you know, limited partners that are pension funds, and we have certain reporting obligations, some additional restrictions. And according to those and for tax reasons, we need to have some special oversight of the company. So I need to be able to meet with management and talk about things and exercise some sort of control. So for example, I may have a requirement in my fund, either for those reasons, or just this is our policy, that we receive financial statements, or I actually want to be on the board of directors because this isn't a, you know, $100,000 SAFE Investment. This is a $2 million SAFE investment and my investors want to know that. I'm there, you know, as part of the company and seeing what they're doing and how they're spending our money. So those extra rights often get put in a side letter. And the side letter is a two party agreement between the company and the investor saying, okay, Les, I'm going to send Next Frontier, my, my quarterly and annual financial statements. And, and yeah, we were going to give a board a board seat, or, Hey, if if we raise another round you, we're gonna give you the right to participate in that round, as kind of an extra benefit of being an early investor. So there are all sorts of, of rights and go in those. But they typically typically around information rights, like financial statements, board governance rights, or pro-rata participation. Sometimes there's something called a Most Favored Nations clause, which says, Hey, I issued this SAFE today under these terms, but if I issue another SAFE, usually within a certain time period, that has better terms, I'll tell you about it. And if you want to upgrade to these terms, I'll give you that opportunity. That's another thing that we often see.
Yeah, for sure. So yeah, so a lot of standard terms, a lot of just to say to like, a side letter, like getting used to it like this is going to be part of a SAFE, probably, but it's also going to be part of every subsequent financing. Is that safe?
That is prep? Yeah, I'd say it's less than 5% of investments have are side letter free there. It's not, you know, there's not like a form of side letter, but you should expect it, and certainly from an institutional venture capital fund, almost certainly what they call a management rights letter, that they have limited partners that are pension funds and things like that. That's, that's just a requirement. And they're not, they're typically not onerous. But you as a founder, if you're asked for one, or if there's discussion, you don't need to be outraged. Again, if your attorney does this, they can say, Yeah, this is pretty standard. But let's make sure that they don't get carried away with it. And that's one of the things that we see all of a sudden, it turns into this, of, you know, a whole, like long list of bells and whistles.
And who gets to see those, like, even on the even on the management rights letter side, like what is that? Is that a private letter? Do other people get to see those we need to be careful about?
Yeah, if I'm a new investor, and I'm saying, hey, and companies maintain data rooms are usually it's, you know, online. So Google Docs, Dropbox box, there's some special platforms that just host these, where you keep all your documents in one place. But if I'm an investor, I'm gonna say, hey, you know, I want to see any kind of side agreements that you have, I see the main documents that you have with the investor syndicate. But is there anything else I need to know about and you do have a duty to to disclose those, however, it's, the other parties in the deal are not signing those. This is, again, a two party agreement. But if you're a founder, and you don't tell people about side letters, then that can really change a lot of the investment assumptions, and the math and the economics, particularly around pro rata rights and things like that things, information rights, you know, it's not a who cares type thing, because you're probably going to be sending them to someone. But yeah, if when those usually get disclosed, and as part of the diligence process and future rounds,
But sometimes other more substantive stuff like board observer seats, and things can be in those as well. Right?
That's right. Yeah. Yep.
Yep. So there's, there's definitely, it's definitely worth, I mean, that's something worth paying a lot of attention to as a founder, understanding, understanding what an MRL is, and as we said, all along in the episode, talk, get your counsel's advice on a talk, talk to them about it before you agree to anything there. What about if you mentioned data rooms a second ago, I'm curious, you know, obviously, a founder can expect a VC firm to do pretty significant diligence on the investment, legal diligence, is that something that happens? Or what is that separate? Or what? How does legal diligence work and data rooms?
Yeah, so the data room, as I mentioned, is kind of a repository for all of the company's documents. And when we talk to companies, and it's a common question, it's a fair question, Hey, how can we save money on this transaction, top of that list is be organized. So you know, there's a typical folder structure, maybe it says, you know, charter documents, or capitalization or employee agreements. But if a company is really disciplined about uploading PDFs, of executed documents, not drafts, not unsigned things, it makes the process particularly in mergers and acquisitions. Much, much more quick and cheap, cheap and easy. It also has the added benefit of for example, if I'm doing diligence, and we're representing the VC Fund in the deal, and I go to these documents, and I'm like, wow, I went under IP and they have all of their confidential information assignment agreements, dated and signed and I went to the charter and I, you know, it was filed properly and I go to there board minutes and they have signed minutes for each of the meetings. That's a, that's a: gives me a lot of confidence. And frankly, I can then turn to our client, the fund and say, hey, they are squared away, and I, everything looks really good, you should feel really comfortable. Alternatively, if things are missing, incomplete, never thought about, we don't have these, you know, never thought about it. That that is, that just is really, really tough. Because now, on the company’s side, when it's, you know, oftentimes we have companies come to us after they've been with prior counsel, and maybe they're not as organized. That's a tough discussion. It's like, you need to do this, this and this, and oh, by the way, there's the tax liability that's still accruing, and we need to make this filing or do these things. That's not a great way to start a relationship with another, you know, we don't like to, and particularly with an investor, you know, you don't want to hear, hey, Les, I looked at this company, and it's a dumpster fire and they're you. They need, you know, they need to figure this out before they even have anybody else look at this. And, and, and oh, by the way, it's going to cost a lot more money and take more time. And it's just the whole parade of horrible things. Organization is gold. Definitely.
Well, one of the big advantages of a having counselor who's a former naval aviator, like that attention to detail, just a little plug. But yeah, but finding, finding counsel that has that. That's, that is that's a key skill of both technically, on the diligence side, but also on the in the prep side. I'm glad you highlighted that, because you're absolutely right, Matt, there's nothing more impressive than when you open up that data room, whether it's business diligence, or legal diligence, and it is buttoned up. Yeah, right.
It just, it just says a lot. It's like a somebody for buying a used car, and they've taken really good care of the car. And you can tell that, that they you know, and I, you know, not a psychiatrist, but I feel like there's some connection there with how people, you know, organize their company. And listen, some people are like, Hey, I've been so busy selling product. I haven't had time for that, like, yeah, yep. Not the driver. But it's something to think about when you're getting ready to go to the market.
What about on the other end of the spectrum? You know, like the person that that, you know, as opposed to having the binder of all of the oil changes that they've ever had they like, what's an oil change? Like, are there any kisses of death? That you see with whether it's on the document side? Or like on the founder side? That just makes deals really difficult to get funded at the early stage?
Yeah, yeah, for sure. I think, and I always tell folks this, and, you know, we go on, and we talked to law school classes, and, you know, various presentations about kind of like legal mistakes, 101. But our mantra is, listen, there's two things that we need to you need to make sure your company is ready to do and that's to take investment or to sell. And the things that get in the way are that from an investor and acquirers perspective is in specifically in a technology company. One, is there a question about who owns the company who owns what is there another promise of equity to founder, number five that doesn't appear on the cap table? And you know, when we have discussions with founders, they're like, Oh, well, you know, that person left. They didn't. They just wrote some code. And they were only here for six months, whatever. That's sounds innocuous, but that can present real problems.
Oh, they'll be back once there's an offer. Founder five returns. Yeah.
So capitalization and then intellectual property, you know, does the company actually own all of the IP that it needs to make money. And so things like, you know, assignment of intellectual property, and that's the confidential information inventions assignment agreement, or the CIIA, that's really critical. So when we're doing initial diligence, we kind of hone in on those two areas. So so that, oftentimes is one of the areas particularly if they haven't been represented or haven't been represented by kind of venture counsel, that we spend a lot of time on promises, kind of based on a percentage and an offer letter. So let's,
Non-dilutive kind of stuff?
Well, that's the question, right? And so you and I are talking as business people. And you're like, hey, you know, let's, let's, let's start this company, or I'm gonna give you this and I'll give you 5%. And we just we write the letter, and it says, Les gets 5%. Well, we've had, you know, several rounds of financing. So, you know, what is 5%? Was it 5% when we made the agreement, because that's a fixed number of shares, or is it 5% Today, so that kind of non-dilutive suggestion, certainly anything that says, I have 5% now and I'll always have 5% that is a that's a big red flag. And listen, early stage founders, maybe they they don't recognize it like, oh, that sounds fair. And on one hand, we don't want to put founders in a position where they are having to re-trade a deal that they made. But on the other hand, it's like, well, this, investors are going to throw up all over this, and you're gonna have to go renegotiate this. So we really help them frame it in a way to even the other counterparty of, hey, listen, I know, this is what we said. But 5% was actually, you know, 12,315 shares. And that's what we should put. And by the way, in any offer letter, we never want to we can talk about percentages, but when we document it, we always want to put it in terms of actual share number, that's really important. The other things are sort of perpetual rights, like, oh, I have a right to buy at a discount. And it basically, you know, it never ends, it gives me the opportunity to sit there and wait 15 years and decide, maybe there's the company is about to sell. And now I'm going to get a screaming deal. Anything where there's kind of future rights should almost always have some sort of sunset or termination some, how do we know definitively in the documents, is this right, alive or dead? And sometimes that's just grafting or just, you know, people cutting deals?
Yep. Some great, great, great points, really, really great highlights. Very good. I'll tell you this has been such a meaty episode. I feel like we could do another one of these. Maybe in season four, we will because I think we could dive into some other cool topics. But I got two final questions. The first I just want to highlight you give, since I've known you, you've always been a giver. You know, there's givers in the givers and takers in this world, you're a giver. Always giving back, you know that you're the General Counsel and advisor for Patriot boot camp, which is how we met, you know, which is cool. And then also, you're an adjunct professor at Colorado Law School. I'm assuming you don't do that for the money. But that's another giveback thing. So I'm just curious, like, how that seems to be very much a part of who you are. I mean, maybe I'm leading the witness here a little bit, but I assume it is. And I just want to know why, like, why is that such a big part of what you do and who you are as a person?
I guess I feel like, you know, it's probably has a lot to do with the idea of service, I think I've had a really rewarding career, I, you know, worked really hard. But there's been a lot of people that have supported me, I remember when I was applying to law school, I called like, every kind of veteran in the San Diego area that I knew as a lawyer and ask them, you know, why did? Why did they go? And, you know, how did they decide on which school and, you know, and people were just always willing to help. And I think the great thing about this ecosystem in the Rockies is that it's prevalent, and if it's kind of comes from an authentic place that people really embrace it, you know, what's also great about this environment is like, there's, we talk about lawyers, like, we have lots of firm that lots, but there's definitely other firms, you know, in the ecosystem that do what we do. And I guess technically, we consider them as competition. But it really is collaborative. Like, we come across something, I'll get a call and said, hey, you know, particularly SVB, again, just, there's a lot of, it's a big market, there's plenty of work, but people really support each other, I see that within, you know, the law firm practice, both, you know, big firms like Cooley, and smaller ones like us are, but also in funds. You know, we've got, you know, sandhill funds from, you know, the Bay Area coming here working with more local funds, but everybody, everybody wants to see this ecosystem succeed. Because at the end of the day, you've got to play the long game. And if you're going to be kind of the person that's taking all the time and just looking at the short term, probably not going to be very much fun for you, and it's probably not going to be a successful strategy. So I think that, I think, to answer the question, I think I have always had that sense of service, obviously, with the military and want to do what I can, outside of that, and now that I'm a lawyer, but also it's kind of like, I feel like, that's kind of what we do here and and that I'm with my people that way. And so I think it's a good way for me to connect and still feel like we're all, you know, contributing to grow the ecosystem. And that's, I think that's really special. I don't, I wouldn't necessarily want to do this in Silicon Valley, or New York or Boston or Austin. I mean, I could, but I'm here and, yeah, wouldn’t change it.
such I love it, man. It's such a meaningful answer. And it's so true to who you are. And as I've come to know you on both sides of the deal, both representing our firm and representing companies, it's been an absolute pleasure, one of the good guys and one of the great firms that we always enjoy working on no matter what side of the deal. My last question, always like to go personal. Yep, I got a special one for you today. Oh, boy. Do you live on a cul-de-sac? And I mean that philosophically, because I want to know, I want to know what has it meant to you to get back to Colorado and raise your family there?
Yes. So the answer is no. But when we moved to Colorado, the first house we bought was on a cul-de-sac.
Wow, I love it. I got the chills.
So yes. Now were my kids riding bikes and playing basketball and doing all the things I thought they'd be doing in the cul-de-sac. Absolutely not. But I'm but but we did we did move on a cul-de-sac and no, I mean, Colorado for us. Obviously, like you have an avid outdoorsman. It's a very, it's a place where I think they welcome a lot of people that are not from Colorado, there's very few actual natives here. The natural beauty of the place, the fact that, you know, there are such amazing technology companies and, you know, law firms, accounting firms, VC firms, both, you know, within Colorado and the Mountain West, it's, you know, I don't want to talk too much about it, because I don't want to, I don't want to spoil it. But it's a pretty amazing place. And for anybody that hasn't come to Colorado that's listening, I would definitely encourage you to come and there's there's all sorts of, you know, venture focused events here. And so, yeah, it's a great it's a great place to live and work.
Why did Colorado get spoiled? Because of Matt Hyde's episode, on Found in the Rockies headline. Oh, man, I love it. Man. I just gotta say thank you so much as a dear friend and somebody I've really grown to admire and just honored to work with. Thanks for being on the episode. Thanks for your time today. And thanks for being part of this amazing ecosystem.
Well, I appreciate it Les thanks. Thanks for having me.
Thank you for listening to this week's episode of Found in the Rockies. You can find links in the show notes or go to nextfrontiercapital.com to get transcripts, links, and contact information for today's guests. If you liked what you heard and want more, please don't forget to rate review and subscribe to get notified as our new episodes drop every two weeks. We'll see you next time.