How do you find the right lawyer to vet your agreements, as a founder, to make sure something like this doesn't happen to you? Is a lawyer even the right person to look for?
If you find a lawyer that sees many deals, then he/she likely knows many VCs and knows who butters his bread.
If you find a lawyer that doesn't know many VCs, then they likely don't know as well the in's and out's of term sheet tricks.
More fundamentally, the problem is that founders are technical (by and large), and they are up against people who do term sheets for a living. It is a very asymmetrical-knowledge situation.
I would expect a banker / financial advisor to pick up on value and risk points. A really good, experienced lawyer should, but it isn't entirely in their expertise.
(BTW, if the lawyer does see a lot of deals, I would wonder how much of their business is representing investors, and how that colors their thinking. Their duty is to their client, but it's just human nature to see things in the same terms as your client base.)
These negotiate for a living, but investors shouldn't be intimidated. Take your time, think the thing through. DO NOT BE AFRAID TO SAY NO. Always have a plan to walk away, and never get committed beyond your comfort with the terms of the deal. Always have some plan to bootstrap, if only to prevent psychological commitment to _this_ funding deal.
I'm sure the fundraising process is a pain, but a lot of the preparation and strategizing is stuff that management should be doing anyway.
We had pretty good lawyers, but we got the best advice from a couple of guys who had founded and sold their own companies years before and who still had the scars. In my experience, I thought the lawyers sometimes played the whole exercise like an intellectual tennis match - whereas the guys who had been the same process with their own skin in the game could give much more directly useful advice.
For example, a couple of days before our first round of investment one of these guys told us "you do know you'll be expected to sign personal warranties to the investors" - something our own lawyers had managed to forget to mention (and strictly speaking they might have been right as they were, of course, the company lawyers). NB Personal warranties seem to be (were) a common thing required in the UK - I believe they aren't used in the US.
[Edit: I suspect we were made to do quite a few things that would look crazy to folks from the US - our first round of investment was in '97, hopefully things have got a lot easier in the UK for startups.]
* Spend an entire night reading the term sheet yourself. Your interests in a good outcome (as founder) may uncover details others have missed.
* Ask other founders (who've previously taken investment) to look at the agreement too. A fresh set of (experienced) eyes can't hurt.
* Make the most of lawyers. They've certainly been around the block too, but the trick is to tap their knowledge and not incite a fee-charging frenzy.
* Lastly, search for terms you don't know and try to understand everything. After all, for most of us, it would be one of the most significant moments of our lives.
This would be one of the situations where a BigLaw lawyer is a benefit and not just a horrible waste of money. (BigLaw = 500+ lawyer law firms, like Skadden, Cravath, Wilson Sonsini, etc). Those lawyers will personally have the experience handling these situations, or at least they'll have access to someone in the firm who has had that sort of experience.
Wilson Sonsini is pretty popular up in the SF Bay Area. Goodwin Proctor for NY-area startups.
