The other day, I met a guy who told me about a situation he was in where he was a consultant for a company who got in a legal dispute with another firm. Then he got tangled up in the lawsuit and got sued by the other firm and was forced to defend himself with his own funds because there was no clear indemnification in any contracting agreement.
At the moment, this guy is shelling out between $25K to $50K per month out of his own pocket to pay for legal fees. There is a soon to come happy ending though. It turns out that this guy was employed through another temp firm while working for the company. While indemnification was not explicit, it just so happens that employees are automatically indemnified via the California Labor Code (see section 2802) and is the same for pretty much every other state’s Labor Code.
However, had this guy worked directly for the company without an official statement of indemnification as a consultant, he would have been really screwed. There would be no clear path for indemnification and thus reimbursement for legal fees.
Very scary. How would you like to pay out of pocket legal fees of $25K to $50K per month, and for months on end?
As soon as I heard this story, I called my lawyer and thanked him for being so adamant about indemnification.
In my journey to implement indemnification, here are my thoughts and discoveries:
1. Ignorance of the state’s Corporation Code, especially with respect to indemnification, is common among the lawyers I’ve worked with. So they err on the side of company favorable tactics, which is to never give anything away, including indemnifying advisors.
2. Not knowing or understanding indemnification is also shared by investors and other entrepreneurs.
3. It’s very much a worst-case scenario discussion. It’s difficult to discuss sometimes.
4. Experienced entrepreneurs have no issue with it. They just assume they’ll protect anybody that does work for them. It’s natural for them to thank people who help them in that way.
5. By the way, all the Corporation Codes stipulate that in the case of an external person causing harm willfully to a company, the Code states that indemnification is invalid, even if a contracting/consulting/advisory agreement calls for indemnification. By the way, there is the case of unknowingly causing harm which is a huge grey area and would probably have to be explored on a case by case basis.
If you’re interested, you can read about indemnification in the California Corporation Code or in the Delaware Corporation Code.
6. No matter what, I do not want to put my personal assets at risk for another company. It doesn’t make sense at all.
7. I will definitely walk away from any deal that will not indemnify me as an advisor. It is a deal breaker.

Raising money is never fun. When the time draws near to a date at which you want to officially stop fund raising and collect the money, things tend to get pretty hectic.
So what happens exactly? And who is involved? What are things you should watch out for?
Let’s say you created a term sheet X weeks or months ago. You’ve met with a whole bunch of investors and some of them say they will invest (usually we say “we’ve soft circled them”). The term sheet has been negotiated and potentially changed, and you circulate that back to each investor and finally everyone says they’re on board and they’re ok with the final term sheet.
And then, time draws near and you realize it’s time to get serious and actually get the money. What happens?
1. In the financings I’ve done, the law firm project manages this process. They help circulate the documents, gather signatures, send reminders, etc.
2. The law firm has an escrow account where investors wire their money. As one entrepreneur I met put it, “The reason why you wire to an escrow account is to prevent us from absconding with your money (if wired into our own bank account directly) to the Cayman Islands before all the official paperwork was finished .”
3. The law firm takes the term sheet and expands that into official paperwork that spells out the terms in detail. The investors sign these documents and they make everything official. This paperwork is passed back to investors for review and signature.
4. Due diligence materials from the company are sent to each investor upon request (and I HIGHLY recommend that) to make sure everything is in order. Every company document is sent, every record, every contract – just about everything. Thankfully for early stage startups, there isn’t that much paperwork to review. But imagine if you were to do due diligence on buying a company like Yahoo! or IBM. The due diligence alone would be staggering as you reviewed every contract, every patent, every legal dealing, every lawsuit – everything that could introduce risk into the investment. You don’t want to miss something that could turn what appears to be a great investment into zilch.
5. The CEO devotes his/her entire life to the closing during the last 2-3 weeks before close of the financing. He calls every investor and double checks to make sure they are still on board. He fields any last minute questions. He assures investors that the close will happen and makes sure everyone knows to sign papers, wire money on time, etc.
6. Investors need to prepare the cash for wiring. This could take some time to prepare if the investor needs to sell stocks, or get out of other investments. They may need to give their money manager lead time to make sure cash is available. Even the wiring process takes time. I fax in requests the day before with wiring instructions just to make sure that they get in on time. If the money is being wired internationally, you have to be wary of the fact that it could take additional time, or the wiring may not even be accessible to that account from theirs. More warning is always better than less.
7. Signatures also take time to collect. The law firm project manages the collection of the signatures and makes sure that everybody has signed the right papers on the right lines.
8. After the money is collected and the paperwork signed, then the law firm gets copies of signed paperwork back to the investors and, if it is an equity deal, prepares stock certificates and sends those back to investors as well. Other paperwork that goes back to investors can include receipts for the money wired; one law firm prepared a huge notebook for me which had all the involved paperwork in it. Very nice!
9. Be prepared for high stress situations as the time draws near, the lack of sleep, distractions up the wazoo. You must remain focused and determined through the whole process.
So there are never problems, right? HA. What COULD happen:
1. At the last moment, one or more investors back out and you’re left with less cash than you expected, perhaps substantially less.
2. Other investors backing out could cause even more investors to back out. It might be interpreted as a vote of no-confidence for the investors.
3. Some strange investors could keep saying they’ll send you money, but it never shows up.
4. Unfortunately, I have also seen the law firm flake out which is REALLY BAD. All the more reason for the CEO to keep tabs on EVERYTHING and make sure it’s all moving along.
All sorts of things can happen which can spoil your day. As CEO of a startup and going through this process, you should make sure your full attention is on this and be ready to adapt to changing, chaotic conditions – but rejoice when you get every investor that you say you got and see that money arrive in your bank account.

It’s so funny when I hear people being so protective of ideas. (People who want me to sign an nda to tell me the simplest idea.)

To me, ideas are worth nothing unless executed. They are just a multiplier. Execution is worth millions.

– Derek Sivers, president and programmer, CD Baby and HostBaby

I just found this quote in 37Signals’s book, “Getting Real”, which is an awesome book on super fast Web development.

It says it all.
So far I’ve had a few entrepreneurs ask me to sign an NDA before talking about their startups. Each time, I politely decline. My main reason for declining is just what Derek Sivers says in his quote. Ideas are just that – they are just ideas. No substance, no solidity yet, but just words. Execution is harder than you think. Just because you tell me your idea doesn’t mean I am going to go out and build it. In fact, I have no desire to build it. I recognize that it’s your idea and that you are the best person to execute it, not me. And I don’t have the time or desire to execute it, nor is it my business model to build stuff.
So in essence I am saying that there should be no fear about sharing ideas and that goes both ways. I don’t mind throwing ideas their way as much as I like hearing them. I toss out ideas all the time and I don’t look for monetary return because I know that 99% of the time, they won’t be able to or have time or desire to execute on them.
But occasionally, they may find value in my ideas and actually do something with them and make their product stronger. That’s a good thing. But most of the time, they’ll need the originator of the idea to fully explain the idea enough to the entrepreneur so that they can internalize it and be able to execute against it. In that, I build value for my services and it helps sell my value to a startup.
Here are my thoughts about NDAs:
1. If I sign an NDA, then I’ll be bound to not reveal any ideas from my interactions with them for the length of time designated in the NDA. While I have no problem signing one if I do work with them in official capacity, it is possible that I might end up not working with them. If I don’t work with them, I could be hampered from working with any other company in the same space because I might inadvertantly reveal some bit of knowledge that could be taken as confidential by the company I signed an NDA with.
2. If for some reason I were to sign lots of NDAs, I would have to manage the NDAs which is a nightmare. I’d have to remember when each NDA started and when they would end. They could all have variable expiration terms. The chance of slipping up would be incredibly high which could put me at legal risk.
3. Negotiation of NDAs would increase my legal fees. There are mutual NDAs and one-way NDAs. There are those that go in perpetuity and those that end in 1, 2, 5 or any number of years. There is no standard NDA; the conditions are written based on the situation. I’d have to go through negotiation on every one.
4. If there is something you don’t trust me enough to tell me, then don’t tell me.
5. Trust is an essential part of my business. You gotta know when to keep your mouth shut and no piece of paper is going to help with that.
6. I have and will walk away from companies who require NDAs to hear about what they are doing. It doesn’t matter how cool the company seems to be. It just isn’t worth the hassle. There will ALWAYS be other companies and opportunities.

Rejection sucks. You spend umpteen hours on your deck, you go through trial runs and field criticism and incorporate feedback, you redo it again and again, you spend hours driving around to meetings, you brush your hair for the first time in weeks and pretty yourself up for the pitch. When you get there and start, you look around the room and the body language is clear:
What is this guy talking about?
This’ll never work.
Where am I going to lunch?
This is a dumb idea.
I can’t believe my partner dragged me into this meeting.
When is this presentation over?
I need to pee.
Way too many competitors. Why even touch this market?
Yawn.
And the list goes on. All from subtle and not-so-subtle bodily cues. Or overt vocalizations.
You throw your heart into the pitch and you wonder how these guys could be so blind! Why don’t they get it?
At the end, they usher you out with a polite, “We’ll get back to you.”
Your heart drops. You walk out dejected. Nobody likes you. Everybody hates you. Self doubt creeps in. Life sucks. You grab a beer and drown your sorrows vegetating in front of Tivo.
You wish everyone could just see why your idea is so great. But it’s just not so. I wrote about resonance way back and think it also applies to investors. They need to be able to feel the idea, to get their brains and hearts around it. And unfortunately, not everybody can resonate with every idea. It’s just the way the world is.
So steel yourself for rejection. It will come and you’ll see it a lot. Build your resistance to letting rejection take you down emotionally and energetically. Practice blowing it off so it doesn’t wipe you out. Because it only takes ONE investor to resonate with you and your idea, and they will give you the cash to make it to the big time, and then you can say, “I told you so” to all the nonbelievers.