Thoughts on startups by investors that
fund them & entrepreneurs that run them

How do angel investors typically deal with the legal agreements and similarly how would they help deal with legal issues for a startup they’ve invested in?

All investments by angels (and everyone else) in a company are made according to detailed legal documents that specify everything about the relationship among the various parties, the terms of the value exchange and the various rights and responsibilities of everyone involved. The paperwork can range from 5-10 pages for a pretty straightforward convertible note, up to 120 pages or more for a full Series A round.  Because these are legal documents, both parties (the company and the investor(s)) have their own lawyers, who work together to develop the actual agreements signed by the principals. Typically one lawyer will be responsible for the base drafting, with the other making comments, although in virtually all cases the documents are based on standard models that have been developed for use by anyone who wants to use them.

Once the investment has occurred, regular legal issues for the company are the responsibility of the company’s management, just like everything else. The company would typically have its own lawyer on whom it would rely for advice (often the same lawyer or law firm that handled the original investment paperwork.) Investors might be asked for their advice in certain rare circumstances, but since legal advice should only be given by lawyers, that would be pretty unusual.

Depending on the type of business in which the company is engaged, it may well have different lawyers working for it in different areas, since lawyers specialize in the same way that doctors do. (That’s one reason why it can often be preferable for even a small startup to have a large law firm handle its business: they will have lawyers on their staff specializing in many areas.)

For example, at Gust (although we are in an admittedly complicated business so our needs are somewhat unique) we have specialized lawyers for: corporate work, employment issues, intellectual property, privacy, SEC activities, international activities, and some other areas. Whew!

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Written by David S. Rose

user David S. Rose Founder and CEO,
Gust

David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.

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