“Why are law firms involved in private funding?”
It’s a common question that should have a simple answer. As with most things in business, you hear that a lawyer needs to come on board and eyebrows start to raise. Companies trying to get funding should be able to go out and secure it, right? Well, yes and no.
It is fine for a small company to get private funding informally, but when you’re dealing with anywhere from $1million to $1billion, you need to have every little detail in order to make sure that funding is secured in an above-board manner. When private funding gets to a big enough level, law firms have to come on board, not only as a means for checks and balances but to ensure funding is provided in the best way possible.
To help paint the picture of why law firms are involved, we gleaned on advice provided by Goodwin Proctors (from their guide here) on the nature of work firms need to provide and how vital a role they play in smooth fund processing. It’s all starts with finding the right canvas.
Developing the right structure
We’ve all watched Shark Tank or Dragon’s Den and seen investors sit with a laser focus on knowing where a business should be one, five or ten years from now. When any business is securing a large level of funding, investors need to know that the correct structures are in place so a business can “level up”.
For tech companies in Silicon Valley, rounds of funding are routinely made to help businesses scale up in size while simultaneously keeping the lights on before a product or service is ready for the public. Fail-safes have to be put in place to ensure funding is correctly vetted through a company, and the only people who can do that are lawyers.
A law firm can create a clean structure to help investors and a business to operate funding that can achieve business goals.
Just because an entrepreneur has created the next revolutionary product doesn’t mean investors can throw money at it to fund and get a quick return. Private funding has to be compliant with the laws and practices of the industry and the country it is located.
In an example scenario, funding the same healthcare company located in America and Ireland might seem the same, but the two countries would have vastly different regulations in place for private funding, regulations and tax; all matters which would fall to a lawyer to distinguish and appropriately advise on.
A prime example of this in action happened recently in the UK when adopting the contactless payment system. The system had to be created by The UK Cards Association which several card companies had to be a part of. They all had to legally ensure that they could not set up this new system in a manner where they could not coordinate competition while still ensuring compliance for all business.
In this instance, it was the lawyers who had to show that competition couldn’t be rigged externally, and the new system was legally compliant before private funding to continue development was given the go ahead.
Develop longevity and protection
From the recession and instances of large companies (especially in the retail vertical) having collapsed in the last decade, longevity and protection are also vital for companies receiving private funding. Instead of having rainy day siloed pockets of money for development or to defer cashflow problems, private funding can be set up in such a way to ensure profit shares and compensation plans are laid out clearly.
Lawyers can help protect interests at every stage of an investment fund cycle, even when there are changes in the market.
So…. why are law firms involved in private funding?
Whatever your stance on lawyers, there’s no denying they help private funding navigate the murky waters that lack of foresight can bring unwelcomingly. A dedicated firm looking at private funds can bolster and protect a company and investors through compliance, fund structuring and any unique tax areas that may be beneficial.