Fred Wilson Quoted $50K, Paid Under $5K - Now Lawyers Are Panicking

Sean Weisbrot: In a world where AI is providing all of the templates and advice that startups can need, how are you continuing to add value?

Omeed Tabiei: Yeah, I think, uh, this is a super. Relevant question. So Fred Wilson from USV, which is a pretty popular VC fund, he's a legendary investor, has been there, you know, since the beginning of, of tech. Um, as an investor. He just did a blog post yesterday that has, uh. Lawyers a a bit worried and scared. He essentially took all of his closing binders and uploaded them into Google Notebook, lm, and essentially had the AI advise on a series seed, um, without lawyers. Essentially what happened is he went and, you know, he would, he, uh, asked his lawyers to help him with this, this deal. The lawyers quoted him $50,000 and he was like, I think you should do it for less than five. And when they said no, he took his entire history of his closing binders, uploaded them into his, uh, you know, ai, um, knowledge base and had the AI essentially flag, uh, the deal issues. And this. Has made quite a storm in the, in, in, in the legal space. Um, a number of lawyers like Chris Harvey, pretty also legendary lawyer, mostly for emerging funds. He did a post on LinkedIn, um, you know, asking the legal community, Hey, what do you think about this? And lawyers across the board. Are worried in terms of, you know, the impact that AI will have. I think the current state of ai, um, isn't up to the up to par. It still advises, um, in misdirected ways. For example, we were just advising a client on a buyout yesterday. The AI is just like feeding him completely wrong information about qualified small business stock and how to structure the deal, which is actually like a huge pain as a lawyer when people, you know, bring AI responses. So I guess to answer your question, how am I, um, adding value to my clients? I think that the, the state of AI's responses isn't up to par and for me, actually. Uh, I, I put a lot of faith and trust in the human value, which I think that AI won't be able to replicate. Um, there, there's one area that I think that AI won't really be able to help with respect to. Um, I think another area, and I think lawyers across the board in this conversation. In this, uh, you know, in, in the conversation around the impact of AI on the legal industry is, listen, someone like Fred, he's been doing these deals since the nineties, so he's seen everything under the sun. He's worked with all the major law firms. You know, he's done hundreds and hundreds of these deals. So someone like Fred, he probably doesn't even need the AI to advise him as to what the issues are in the deal. And so. For him. He probably at this point could do the deal without the AI and without a lawyer, but for most founders, most founders only raise a handful of times in their lifetime, and so their experience with raising funds is going to be quite limited, and so those more novice. Founders are always going to need guidance and handholding and direction, even where AI can do the job of a lawyer. That's one area where lawyers I think will always add value is maybe with more inexperienced founders. The other area, as I mentioned, is the human element. So as fundraisers get more complex, uh, usually there might be more investors involved or more parties involved, and there are complex multi-party negotiations. And it's actually in those places that I think that lawyers like myself will continue to be able to add value is in the human kind of, uh. Contact, connection, negotiation, um, those areas where I think AI won't really be able to fill those gaps.

Sean Weisbrot: So it sounds to me like you feel, and lawyers are gonna be more useful as you get to series A, B, C, and beyond, but a lot of the work that lawyers typically do now for pre-seed and seed is gonna go away.

Omeed Tabiei: I think that lawyers have been removed from the Angels precede, uh, you know, since quite a, quite a long time now. Um, you know, for those $250,000, $500,000 rounds. Most founders, when I talk to 'em, they're like, I don't think I need a lawyer. I just use this Y Combinator. Template. All I need to do is plug in what the post money valuation is and the investment amount, and that's it. Um, now, you know, my advice and guidance to those founders is it's usually not that easy. You have to, you know, there are steps, there's a process. You have to make sure investors are accredited. You have to file Form D, but, um, with the SEC. But yeah, I mean, I think lawyers have for sure. For the most part, been removed from Angel pre-seed for, for quite some time.

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Omeed Tabiei: together.

Sean Weisbrot: I think what a lot of founders, especially first time founders don't realize is that there's a lot more than, than just the fundraise itself. Because when you're early on, you don't know what you don't know. And so there are legal things around partnerships and operating agreements and you know, those are things that are not just. In a bootstrap to profit type business, those are also in a startup. It's, you know, an incorporated entity. As an incorporated entity. It doesn't matter how you choose to fundraise. The, the law is still the law. And they're missing a lot of those things. And so they make a lot of mistakes around structuring their partnership or structuring their share option plan or not filing the Form D or uh, you know, how they set up the banking system or. Uh, just a, a number of things could go awry. Um, I've heard of instances of founders where one of the partners got divorced from their wife, and the wife is now claiming this person shares or some of the person shares, which would put them in a situation that that wife has now a lot of power to make decisions in the business, um, because there was nothing prepared. Uh, so what are some of the. Bad or ugly things you've seen from people not knowing or I guess trusting ai, uh, and, and not having a human to, to tell them the reality that got them in trouble.

Omeed Tabiei: Yeah. I think, um. For example, one case that we're actively working on right now, um, super smart founder, you know, X Fang has worked at, you know, all the major tech companies, um, has, uh, profitable company. Um, it's not an AI company, but to, to, to the surprise of the times. But, um, he. Essentially, founders can really tie themselves in knots, even if it doesn't have necessarily legal implications. His fundraise has been held up and the investor is actually seriously considering not investing because as he was building his company. Um, you know, he thought, I don't need to use a lawyer. I often hear from people as well, like, oh, like my whole family are lawyers. As if like, you know, uh, you can download legal knowledge by like osmosis or something like, um, and so you know, that. That thinking, that mental model made him tie himself in Knot. So what he ended up doing was he had a company, there was some special licenses that he got for that company. He wanted to change the name of the company, but instead of, you know, shutting the company down, he realized that the licenses could transfer with the business. That there, you know, that he could potentially make some money off of selling that entity that had those licenses. And so he found a buyer for that entity, but he used some template off of Rocket Lawyer. That template was, he had started a corporation. The template that he used was for an LLC for membership units, which are a completely different ki type of, uh, equity. Stock, which is what a corporation has. So he ended up selling this entity, used the wrong, uh, the wrong agreement type that he found on, on, on, uh, rocket Lawyer. Didn't think about the potential IP issues in that. The name, the two names of the companies are incredibly similar and. Went ahead, sold the company and now wants to get investment. As I mentioned, his investment has been held up for the last few weeks, and even the investor's lawyer is like, this is probably one of the biggest messes. That I've ever seen. This is like beyond, uh, the typical standard mess that, you know, founders have where you go in and they haven't documented their IP assignments, for example, or their, you know, their cap table equity hasn't been properly issued, or, you know, those are the typical founder messes. But this, this guy has like really tied himself up. In, and it just so happened that it's going to work out for him because him and the buyer's relationship is really strong. But let's say the buyer and his relationship was not strong and he wasn't able to fix these issues, that would've been a big problem for him. So that's one example. Another example is founders. Uh, there, there was a, a really big case on Twitter actually, um, last year where. There were these founders that had been admitted to Y Combinator. It was like these two 18-year-old kids. Um, and essentially they had forked some technology, some AI wrapper essentially, and they didn't read the source licensing for the code, and essentially they commercialized. Source code that was supposed to be open source and they got absolutely destroyed on Twitter. And these two kids, um, were like so brash and bravado and I will never forget this line. This line will forever be burned into my memory there. Getting like totally flamed on Twitter. Like Twitter was a blaze with people being like, you guys have no idea what you're doing. You know this. This has like serious legal implications. And the founder had the audacity, which by the way, he deleted this tweet after the fact. But he had the audacity to say, to respond to all these people, tearing him to pieces by saying something like, we busy building right now. Can't be bothered with legal. And that was like. That response, just the internet completely tore him to shreds. So it's these sorts of things. I mean, you lose credibility, you lose credibility with the community, you lose credibility with your investors. Um, a lot of times legal can have implications quite far down the road that you aren't aware of until it becomes an issue. So I can give you two more kind of nightmare examples. There was a founder, um, ex Microsoft, um, and he was building this marketplace, and this is a super typical story. This happens time and time again, and the fix is easy. The fix is easy. It's like 2,500 bucks to a lawyer. You never have to deal with this issue. But again, you know, these tools like Stripe Atlas, so on and so forth, make it. Make it accessible and accessible. Feels safe. So, you know, false sense of safety. Anyway, two founders, um, he was the developer, the other guy was the business guy. He left his job at Microsoft. Other guy kept his full-time job. Um, and when they would talk, there was a lot of excitement around this company that they were building that was getting traction. But what the guy found was he was spending 40, 60, 80 hours a week, whereas the other guy would skip meetings. Would not do any of the things that he said that he would do in terms of, you know, generating the business and the sales and so on and so forth. But when they would have conversations, the g the guy who was doing nothing would be like, I'm fully invested, I'm putting in the work, blah, blah, blah. But as I mentioned, when the, the other guy would, would look, he would be like. He's not showing up to any meetings. He's not hitting any of the KPIs we said that he was gonna hit. I don't see literally any effort, but he, they both had split the equity 50 50 outright, no vesting. So what ended up happening was. He had to go get a valuation of the company because the founder wouldn't give up the equity. He's like, no, this, this equity is mine. I own 50% of this company. And when they would talk, he would actually, uh, get super angry. He'd be like, what do you mean I'm not doing anything? I'm like, super into this company. I'm like, giving it all I have. And it's like, where's the results? There's no results. Uh, anyway, what ended up happening was he had to go get a valuation of the company and he had to end up, he ended up paying him something like a hundred thousand dollars to buy this guy's equity for doing nothing. And that's a typical story. This happens frequently, and it's, the fix is super simple. When you start your entity, you get an IP assignment. You issue the founder's sock with a four year vest and a one year cliff. Super simple.

Sean Weisbrot: Yeah.

Omeed Tabiei: 2,500 bucks. That's what it costs to get it from a lawyer. Or you could go to Clerky and get it for like 800.

Sean Weisbrot: I remember talking about these things. Internally in my startup, I was the only person who started the company and put money into it. And so I was naturally a hundred percent owner. And then it was up to me to decide, you know, who would get equity and how that would work. And I was aware of this vesting schedule, so I didn't have those issues. Um, I also was aware of the licensing issues because my CTO was like. He constantly had this spreadsheet updated and my COL also insisted on having it. Um, because we had, you know, when we were fundraising, we had investors asking us, you know, for everything. And so we were able to present all of the third party libraries we were using. And what their licenses were. So we knew if there was anything that was gonna prevent us from commercialization or, or things like that. And we had to decide, you know, do we wanna outsource, uh, um, open source anything or keep it all closed source? And, uh, you know, we had different discussions around that because like my CTO wanted us to open source some things and I was like, no, why the hell would I do that? That doesn't make any sense. Um, so definitely had those discussions. Thankfully, none of them impacted us. The only, uh, annoying thing that impacted us that ended up killing us was that one of our investors signed an agreement and then didn't pay us all of the money he promised.

Omeed Tabiei: Yep. That happened.

Sean Weisbrot: And so we had planned for, you know, 18 months with a month by month breakdown of how we were gonna spend that money. We started to hire people and implement that plan with the promise that the rest of the money was coming any minute, only to have drips and drabs over the next year, but never even close to the full amount. And we couldn't get new investors to come on board because we hadn't launched and we didn't have customers or revenue, even though we had a waiting list of 5,000 of two, 200 companies with about 5,000 employees. So we had 5,000 seats waiting to do trials. We could have easily gotten to a, you know, seven or eight figure a RR status through those seats had, you know, assuming they all converted and yet we weren't able to serve them. And we weren't able to, you know, stay alive because of that. And that was really, really frustrating because even today, years later, I talk to people, they're like, what? You know, what were you doing? And I told them, and they're like, that's awesome. Like, that's still extremely relevant right now. Um, we just didn't have the money to do it. And to start over now would be insane. Um, so. That's why I don't, uh, I don't, I don't, uh, run companies anymore. I just, I just advise and consult. It's way easier than being a founder. I think whoever does it has to be insane to do it. Um, you know, in a good way, kind of. Uh, so, so what are some good examples you've seen?

Omeed Tabiei: I mean the, uh, good examples are, um, okay, so we had, we had a, a founder, um, actually this is a super interesting case in that like they, I always say that they're one of my favorite clients. Um, very rare, but. Incredibly profitable. They do almost, uh, 3 million a year in a RR. And at the time they went to go fundraise, they were already doing a million a RR. Um, they had worked with us from the very beginning. Originally they came to us as an LLC, but we had to convert them over into a corporation. But then they realized that a lot of their customers were high net worth individuals because they operate in the agency, you know, marketing agencies and that sort of thing, digital agencies. And uh, they essentially, you know, did a fundraise where they went out to their customer base and they were like, Hey, we're opening our fundraising round. And they were able to raise over $600,000 in like 30 days. Um. Super fast. Their customers already loved the product so much, so they were like happy to invest and uh, we had set them up properly. As I mentioned, they had originally incorporated as an LLC. This is another thing that I think a lot of startup founders do is. They listen to, you know, maybe some accountant or something like that, and the accountant is like, oh, you know, avoid double taxation. Just start as an LLC. But LLCs are not investible entities in the startup space. VCs will not invest in LLCs. They will only invest in Delaware C corporations, and there are reasons for that. The two primary reasons are most VC funds have pension funds, and those pension funds have tax liabilities that LLCs impact. And so VC funds cannot, uh, risk impacting their VC fund LPs. So that's one reason. Another reason is LLCs don't issue stock. They have equity. Which are in the form of units, but LLCs are not equipped to issue stock or different classes of stock. So that's another reason why VCs will not invest in LLCs. LLCs are not equipped to issue equity the same way that, uh, C corps are. So that's why founders, um, startup founders specifically should always incorporate as Delaware C Corp. But anyway, so we had this client. They were, I call them as close to a perfect client as possible. They understood what they had to do. They had to convert from an LLC to a C corp. I think oftentimes a lot of founders feel a certain way about that. For them, it was a simple conversation like, Hey, this isn't gonna work. So we converted them over, which is a fairly standard process. There's a con, there's a, uh, a state side conversion process. Essentially, you file a document with the, with the state of Delaware, you file a document with the incorporation state, and then essentially the LLC ceases to exist and it. Transforms into a Delaware C Corp. From there, they post it on social media. Hey, um, we're opening up our fundraising round, which, and for the SEC, this is a 5 0 6 C fundraise, which is a, a general solicitation. They got a huge amount of interest. They filled up their pipeline. Um, and then the founder went through systematically, um, had pitches with each of those, uh, people that indicated that they were interested in investing. Then they were handed off to us. We provided them with the accredited investor questionnaire. We verified that they're accredited investors. You can also use a platform like Invest Ready, which is an online platform that verifies accreditation. And then we sent them the safe. Once they raise the total 600 K, we filed the Form D. Actually we filed the Form D within 15 days of the first safe being signed for the total of fundraise amount. But um, but yeah, that was last year. As I mentioned, they were doing about, uh, a million in a RR. They're now doing 3 million in a RR and they're actually going to raise their, they're going on to raise their 2 million seed. They're in the process of that right now. So that's an example of, you know, a near perfect fundraise. Um, and I can give you, you know, some more examples.

Sean Weisbrot: I've never heard of anyone going to social media to do that. Normally startups don't have a network and so they have to build it from scratch or, uh, find people that have it and, and have them be part of the process. Um, so it's. It's kind of like a crowdfunding, except crowdfunding is, doesn't have to be accredited investors. So it's, it's interesting. What, what service were they providing?

Omeed Tabiei: They build an AI agent, it's a qualification tool.

Sean Weisbrot: Okay. So they made their clients, their investors. It's, it's interesting because for a business like that, like you just use money from, you just use revenue to generate more revenue. You don't. Typically need to raise money and sell equity. So it's a bit weird for me that they would go and do that. I mean, I, I know a number of companies that are like, yeah, we're gonna raise money. And I'm like, why? You're profitable and like you're growing fast. Why do you need, like, why can't you just go and get, you know, a, a small business association loan? Or like, why don't you get, uh, you know, venture debt or working capital? Like, why do you need to sell equity? And they do. I don't know why.

Omeed Tabiei: I think, um, venture debt or any sort of debt works really well when you figured out your unit economics around customer acquisition. Um, if you haven't necessarily figured out your unit economics around customer acquisition, I think it can be a bit daunting for a startup founder to go and essentially have to be responsible for repayment of the loan. Um, whereas like if, you know for every dollar that you put towards acquiring a customer, you're gonna get 10 back. Like, yeah. Why, why would you go raise equity? But I think equity makes more sense when you still have a lack of clarity around your growth metrics. Hmm.

Sean Weisbrot: What's the most important thing you've learned in your career?

Omeed Tabiei: Uh, most important thing I've learned in my career. That's quite a broad question. Let me see. Interesting. Um, I think, oh. I think it's so important, and this is kind of cliche and it's gonna make me cringe a little bit to say it, but um, I think like being open to learning from as many different sources and places and, uh, and, and, and uh, areas of knowledge is incredibly important because you never know how you're going to utilize all the different. Um, yeah, different types of, of knowledge. So I, you know, I study psychology, I study marketing, I study business. I study economics. I study, um, you know, design, I study fashion. I look at pop culture. I'm always looking to, you know, every area because. Somehow it's all going to interconnect for me, and that like voracious desire for learning is where my continual growth and expansion comes from. So I think that is probably the most important lesson that I've learned in my career.

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