Dear hustlers, founders, operators and visionaries,

Sometimes you have done everything right - only to find out that you haven’t. While many startups put their brain power into how to grow, build a scalable product or hire the best team - and rightly so - there is an area often overlooked which can kill your business or destroy your exit: legal.

We sat down with Karim Maizar, a seasoned startup lawyer, who has seen it all - from term sheet negotiations risking a Seed round to IP right issues putting an exit into jeopardy. What struck us most: many mistakes are done in the very first part of a startup’s lifetime, years before they come to haunt them in an exit event. Karim offers practical advice to help you avoid common pitfalls and set your venture up for success from Day One.

Exclusive to our newsletter subscribers, he shared additional insights below.

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Startup Legal Essentials with Karim Maizar: Protecting your company's future

What you will get out of this episode

In our interview, Karim Maizar shares:

• When and how to loop in a lawyer once you have founded a company

• What to pay attention to when negotiating term sheets

• The most important clauses in a shareholders agreement

• How to balance legal support with startup budget constraints

• Why intellectual property rights can kill an exit if not done properly from the start

• And much more!

Karim shared some real-life war stories - simply unbelievable stuff!

Our main take aways

1. Start with the basics: Don't overlook the importance of choosing the right legal structure and setting up a proper shareholders' agreement from the start. The agreement is the bedrock of governance between the Founders.

2. Founder's vesting is key: This clause in your shareholders' agreement can make or break your firm's future investability. Wisely aligning the interests of the company and its shareholders with the ones of the Founders is key to make your venture attractive.

3. Don't reinvent the wheel: Trust in established market practices, leveraging the experience of external advice which can give you an initial assessment of things like the quality of an investor term sheet very quickly.

4. Think long-term with investors: When dealing with strategic investors, be wary of terms that could limit your future options (like rights of first refusal on exits).

5. Prepare for due diligence early: Ensure all your IP rights are properly secured, especially when working with freelancers or external development teams. Work backwards from a due diligence at an exit event (remember the points from our previous guest Francine talking about being exit-ready all the time).

Exclusive from Karim

What are the most common legal pitfalls that startups often face but could easily avoid with the right awareness?

Typical examples include signing term sheets with investors before seeking legal advice, transferring shares without checking tax-related consequences or entering into IP-relevant agreements without proper contracts. More generally, as trivial as it may sound: Get an experienced legal partner early on, they will be best placed to tell you where to watch out for legal or tax-related traps and where you can be more pragmatic.

What's one legal trend in the startup ecosystem that founders should be aware of in 2024?

I’d pick a general trend: Investors place more scrutiny on startups before making an investment decision than in past years. This means that startups need to be venture-ready and, as such, be able to pass basic legal due diligence of investors. This will only be achieved if startups handled their legal matters properly.

Which are the 3-5 terms that founders should absolutely understand what they mean when it comes to the SHA?

• Reverse vesting on founder shares and, relatedly, good, bad and grey leaver provisions

• Liquidation preferences and their implication on future rounds and investor dynamics

• Drag-along clause and what makes such a clause “good” or “bad”

• Governance rules on board level (veto rights of investors) and on shareholder level (qualified majorities)

What's one common misconception about startup law and or startup lawyers that you'd like to debunk?

There are two main misconceptions I would mention: One is that it doesn’t pay off to hire experienced counsel early on in the process (and yes, they are usually not a neglectable budget item). The other one is the idea that less experienced law firms sometimes think you can put juniors or less experienced attorneys on startup cases – startup law is complex to navigate and requires experienced counsel.

How can people reach out to you?

• LinkedIn

• Kellerhals Carrard

Talk to you next week! Until then, connect with us on LinkedIn, X, Instagram and YouTube!

🫶 Melanie & Christian

Each week, a lot of work goes into the Follow the Gradient project to help you navigate this crazy jungle called entrepreneurship. Help us grow this community and we’ll make sure that you or your project gets a shoutout in the weekly newsletter!