The legal mistakes that can sink your startup before series A with Kristina Subbotina, Lexsy

0:00I want the founders to have control and I want them to build wealth. Control revolves around two things. It's the board and stockholders. You have to have leverage aka revenue money so you don't have to raise. And when you don't have to raise, everyone wants to invest. And then you can choose the terms. The number one reason early stage startups fail is because of co-founder conflict. Every lawyer has a different approach, but my approach, I don't negotiate with terrorists. If there is a co-founder who is not working, we're going to get rid of you.

0:36Isabelle Johannesen: That was Christina Sabatina, founder and CEO of Lexi AI. Christina has spent nearly a decade helping startups navigate the legal challenges that can make or break a company. And after working at Cooley and leading a tech-enabled law firm, she knows how small legal decisions in a company's earliest days can lead to founder disputes, failed fundraising, expensive litigation, or even the collapse of an otherwise promising business. Christina explains the legal mistakes that are nearly impossible to undo later, like founder vesting and messy cap tables. She also breaks down what investors actually look for during due diligence, how to avoid hidden pitfalls in a term sheet, and how even a first-time founder can make sure they have leverage from their initial fundraise.

1:19Isabelle Johannesen: I'm Isabel Johanesson, and you're listening to Build Mode. This season, we're taking a look inside the fundraise. Hi, Christina. How's it going? Hi, thank you so much for having me. Yeah, welcome to Build Mode. We're happy to have you today. So let's jump right in. You are both a founder and a lawyer, is that right? Yeah, that's correct. So I'd love it if you can tell us a little bit about Lexi AI and how you became a founder. Yeah, so I've been a startup corporate lawyer for almost a decade. Before starting Lexi, I ran a tech-enabled law firm. And before that, I worked at Cooley, two venture-backed startups.

1:54So almost a decade of this experience. And what I realized that founders, they have legal all over the place. There are multiple lawyers, that are room cap table, and there is no context and the history of the company. So now in the age of AI, it's really hard for AI agents to do the legal work, which they can do when the context is disbursed. That's how I started Lexi, to put all the things together into legal operating system. And I believe that legal should live inside of the company throughout the full life cycle. That way we can prevent expensive legal mistakes because this is your lawyer that is always on and tracks everything.

2:33Isabelle Johannesen: So is it meant to replace lawyers altogether or be a tool to help kind of navigate and help maybe lower the fees that you would have with your lawyer? Yeah, we definitely augment lawyers. But certain things, you don't need a lawyer to draft it, but you always need a lawyer to approve. And as we will be talking about term sheets today, there are wrinkles. And if you're not a lawyer with a lot of experience representing startups and investors, you wouldn't notice a wrinkle. So the way we work at Lexi, AI, it's AI native. AI takes a first stab at preparing everything, collecting the information. That's why it democratizes the fees.

3:12were approximately 50 % cheaper than Big Law. But Big Law lawyers are on the platform. So they're the approvers and the people who set the strategy and talk to founders. Because when you go through something really bad or really good, you don't want AI to be there for you. You want the person to be there for you with AI preparing and collecting everything for the lawyer to sign off and take the responsibility for the result.

3:39Isabelle Johannesen: Yeah, makes sense. and founders love a discounted or a cheaper option. So I'm sure there's probably a lot of interest in this. Especially from zero to Series B, it goes directly into a burn rate before you know that this is going to be a huge success. So you need to get the stuff right, but also without losing a leg and an arm. Yeah, yeah. So let's talk about, I mean, both your own experience as a founder, but also your experience working with two venture-backed startups. What are some of the first things that founders need to think about when they're starting a company from a legal perspective?

4:11Oh, that is a good question. When I joined the first startup as the Associate General Council, founders didn't know what company they have. Like, is it Delaware? Is it California? So I had to recreate that context from the beginning from multiple emails, different law firms. So it was really hard. It took me a couple of months to get a hold of everything. And I think for founders, it's important to be organized, have everything in one place, and establish a relationship with a lawyer they trust. It should be a lawyer who is or used to work at big law doing startup law. Everything else is useless.

4:51You hire M &A lawyer or, God forbid, personal injury lawyer. You'll still pay money, but you're not going to get good quality legal, and you will have to redo it. And investors will highlight that in the due diligence. in series A, you're going to get like 100, 300k legal bill. And some of the things that are really hard to fix, for example, one of the founders, Miss 83B election, was discovered in series A due diligence. She had to pay 700k out of her personal pocket.

5:22Isabelle Johannesen: Yeah, it was really expensive. And everyone knows examples with Zuckerberg, Facebook, right? There was one of the co-founders who didn't have a vest and schedule. The guy made a lot of money. But the difference between Facebook and other startups, like Facebook had money. It was a hot startup. Many startups, they die. They're not fundable. They have debt equity. So it's important when you start a company, keep everything organized, have a lawyer who's done it multiple times. And there are a couple of things that I want to highlight during due diligence that would be red flags. Delaware C Corp, that's a standard.

6:02Just have it done. Issue shares to the co-founders or founders subject to vesting. Vesting means you don't get the shares right away, but you have to earn them. Usually four years, one year cliff. And be very intentional about that cliff. So if relationship kind of doesn't work out, you have to separate before that cliff. And now the thing that is really important, IP assignment. make sure everyone on the team assigns the ip to the company at the time of incorporation or when you hire people as well had multiple examples and i'll give you a couple of them uh my friend actually not even a client um started the company hired a consultant from angelist didn't sign anything and that consultant asked for half of the funding round for 500k out of the first million And obviously, they didn't get the funding, end up in litigation.

6:57The company died. Another example, our client, he came to us, I would say, three months before the co-founder divorce. We converted the LLC to C-Corp. We set the best in schedule IP assignment right before the relationship started going south. So everyone signed. And now we're in litigation, but that co-founder who is suing the company is losing because everything is bulletproof. So the company is successful. Yes, they spend in approximately 200K on litigation, but it is not 2 million. So investors are investing in the company. Everything is fundable because you have a solid legal foundation.

7:42Isabelle Johannesen: Wow, so I mean, it sounds, I mean, not terribly surprising, but from every stage of the journey, there's different points in which it is absolutely critical to have a good lawyer and hopefully even the same lawyer that's known you through your journey and knows where to find all those documents that you came in and had to hunt for, right? All have a system of record. Lexi, at the core of it, is that system of record with intelligence underneath built by lawyers. I'm ex-Cooley. So it's all built by lawyers. Because sometimes you cannot have lawyer look in everything and you have multiple lawyers.

8:13So it's really hard for a human to keep track of 500 clients and everything that happened throughout their life cycle. Can't blame them. Yeah.

8:22Isabelle Johannesen: But let's take it back even a step further. So where should early stage founders go about finding a startup lawyer? And then how do they vet them? How do you know what to look for in a good or bad lawyer? That is really hard. And that's one of the reasons why I started Lexi. Because when I left Big Law, I actually didn't mean to start a startup. I wanted to be a venture investor. And when founders started coming to me, I was sending them back to Big Law. I was like, you have to go there, you know. And they're like, it's really expensive. I even helped some of my clients before starting Lexi to negotiate deferred fees.

8:58And this 15-20k goes like that. It's like one, two documents and you run out of money. And I realized that, okay, it's really hard for founders. Big law from zero to Series B, it's kind of expensive, especially until Series A. So I started taking them. And when they go to boutiques, quality varies, speed varies. That's why at Lexi, we actually onboarding top 10 big law firms so they can provide more affordable services, especially for early stage startups. And we have in-house lawyers that do that. But if we forget about Lexi, how would you choose a lawyer? Go to their LinkedIn, see where they worked.

9:43It has to be top 10, 11 big law firms famous for startup work and they have to be doing startup work. So Cooley, Wilson, Perkins, Gunderson, Fenwick, Silicon Legal Strategy.

9:58Isabelle Johannesen: Yeah. OK. And so should the founders have a lawyer before they start fundraising? Because I think a lot of founders maybe wait until they have investors who then maybe refer them to a lawyer. I mean, I've worked in accelerators for many years and oftentimes startups are asking accelerators, can you recommend a good startup lawyer? But, you know, already at that point, they may have already lost some equity by participating in the accelerator. Is that too late? You know, everything is fixable other than a couple of things. And I want to repeat those. Vest in schedule. You messed it up. You're not going to be fundable.

10:32And as a lawyer, I might not be able to help you. So vest in schedule. Ensure it's there. Then IP assignment. again, and 83B election and also Delaware C Corp. Please don't do other weird stuff. If you got this four, yeah, and you cannot afford a lawyer for the peace of mind, I think you're fine.

10:53Isabelle Johannesen: Well, let's double click on each of those four just for clarifying sake. So what is worst case scenario that can happen if you don't clarify those four up front, starting with vesting schedule? Yeah, vesting schedule, just multiple examples that I've had. One of my clients venture investor who is my client referred a startup to us they didn't have the vesting schedule and one of the co-founders who left the company owned 15 of the company the founder has been trying to raise money buy them out and for two years just wasting time the company would try doing things but for example you can issue more shares to everyone and you dilute that co-founder, but you get sued.

11:38Yeah, because you essentially dilute it intentionally the co-founder and, you know, that company could not afford litigation. And then an example that I shared that we put the best on schedule right before the co-founder divorce. Same outcome, the litigation, but different outcome in terms of the company. We just, we have a litigation, Delaware litigation counsel on the platform. Immediately, he looked at the data room, got the context from our startup AI lawyer. I'm like, OK, I got it. And now for a year, he's been just like responding to all of the correspondence that is very dumb, but you have to do it.

12:18And during investor due diligence, we just disclose that. And good lawyer on the investor side understands that we're going to win this. The exposure is not significant.

12:28Isabelle Johannesen: I mean, the number one reason early stage startups fail is because of co-founder conflict. And I haven't quite dug in before to the nitty gritty of the legal aspects behind the scenes, but it completely makes sense why that would be detrimental to the startup. OK, so let's go to the second non-negotiable on your list, which was IP protection. So what is an example of worst case scenario founders don't hammer out their IP protection from day one? Yeah, so it could be a co-founder or even a simple consultant or employee when you don't have the IP assignment. So, for example, recently a client didn't sign that consulting agreement.

13:06The person built the platform, have customers' data, and then that person started negotiating equity and asking double digits. And at that time, they have a lot of leverage because, again, you don't want to lose the customers. You want to get this done. And when you don't have leverage, then you kind of agree to shitty deals. So always sign and agree on equity cash before. Don't let people create valuable IP before you agreed on the terms. Because in this case, for example, we had to sign a ridiculous agreement that will come up during investor due diligence. But because we have customers, we needed to move forward.

13:55The founder was desperate. And we had to agree to something that I hope we will be able to unwind. Yeah. Yeah. Okay. What was the third thing on your list? Delaware C Corp. Delaware C Corp. Okay. Some people start coming up with fancy structures. You know, super voting shares, preferred stock options, Delaware LLC to convert to C Corp to maximize QSBS benefits. And the latter point, like I do see some founders do that, but I personally didn't do it because your accountants can mess it up and you would lose the biggest tax break in America that makes you wealthy. If your startup is successful, that's how you get rich for your lifetime.

14:41It's QSBS. And as a founder, personally, what I did, Delaware C-Corp, don't overcomplicate, I don't trust accountants. And I set up for trusts to maximize the QSBS benefits.

14:54Isabelle Johannesen: What is the QSBS? Qualified small business stock. It allows you to not pay federal capital gains tax once you have an exit. And in some states, you also might not pay them. In California, you do pay. So through trust structure, you can maximize that. And again, you can set it up from the beginning, for example, on Lexi platform for$1 ,500, you can set up for trusts. And that will give you QSBS benefits to the maximum. It could be like$100 million. So it's a lot of money. And for that, you need to be C-Corp, not LLC. And if you convert incorrectly or too late, you might lose the whole thing. So, yeah, that seems like a very important box to tick and a great reason to have a lawyer from day one.

15:44Isabelle Johannesen: Go completely get that. And so what was the fourth thing on your list? The fourth was AT3B election. And what is that? So essentially, it's a simple letter that you file with the IRS saying, I want to be taxed on the value of my shares at the time of the grant, meaning right now. And it incorporation is almost zero. So you pay zero. If you don't file it, you will be taxed throughout your vesting schedule. So imagine in four years you became a unicorn. So you're going to pay taxes as shares vest. So it's going to be very expensive and likely as a founder, you just simply don't have that money. So there is no perfect fix for that.

16:23There are certain fixes that we do remove, make shares transferable. But certain lawyers, they mess it up. For example, they remove restriction vesting schedule and they put it back immediately. IRS sees through that. It's going to come up during investor due diligence. We actually had a situation when we were reviewing the company's documents and the previous lawyer, like a boutique law firm lawyer who did not work at big law, he did that. I'm like, OK, this does not work. You have to fix it. And it's expensive. It slows down the fundraising. and it's good if we find it out early, but there is no perfect fix.

17:02If you miss the 30-day deadline, it's bad. It's bad.

17:07Isabelle Johannesen: Wow. I mean, yes, these are already four very interesting, non-negotiable, cannot-fix items to do when you're starting the company.

17:18Isabelle Johannesen: Let's move a little bit forward in the process too. So say now you're the founder talking to a VC firm and you've gotten to a due diligence point. What are some of the things that as a lawyer you often are helping founders to navigate in the due diligence phase? Yeah, and I can give my example because I raised pre-seed round in November last year. Now we're raising seed round. And yesterday we opened the round and investor immediately asked, we want to proceed to due diligence. Can you share your data room? So what it means that we share due diligence data room, we named it due diligence data room, because it has all the information about the company.

17:56It has the actual data room with all of the corporate documents. So these four things, these are the non-negotiables that investors counsel will be reviewing. They will be reviewing other things, but these are the four most important ones. And when I worked at Cooley, I had the whole due diligence checklist, like it's three pages, but these are the most important things. Your cap table that has to match the data room, meaning your board consents issue and shares should end also convertible, like saves or convertible notes should match the cap table. Investor council will check it. And probably in the diligence room, you will have maybe product demo, maybe memo, maybe deck.

18:39These are the things that also a startup would need. On Lexi, it's all in one place. You're able to share it. And most importantly, we review it before. We ensure your data room and your cap table are all clean, shares issued, IP assignment, vesting, everyone is hired, shares issued to whomever you promised it. And whenever you go into due diligence, it's going to be check, check, check, maybe one or two questions. So for example, one of the clients that we had, Lexi was a partner from zero to series B and all the due diligence was flawless. at series a we closed in 30 days right like new year's eve because everything is good so we focused only on negotiating certain consequential things relating to economics and control on the term sheet if your due diligence is messed up definitely going to delay and yeah and hopefully there are no red flags but if there are red flags actually sometimes investors pull a term sheet well let's

19:47Isabelle Johannesen: talk about exactly that then, economics versus control, because that was my next question. So now let's say due diligence goes well, and now we're in the negotiation phase. What are some of the main things that founders can actually negotiate for? What kind of things are generally on the table when negotiating with a VC? So first of all, I wanted to set the stage that you have two choices when raising capital. You can raise via saves, convertible notes, or price rounds. So the difference is that price round you sell shares preferred shares and it's more serious you set the valuation investors get uh get rights and safes uh usually post money safe is the norm in silicon valley on the east coast many people use convertible notes um it is faster cheaper for everyone and you don't have a set valuation uh usually although valuation cap kind of sets that valuation at which the safes will convert.

20:43So my rule of thumb, if you raise$2 million, you can look into price round. After$5 million, I definitely recommend to do a price round. And here is the danger. So many people treat safes as almost like credit card. Like you just swipe, swipe, swipe. And then when you come to a price round, like one time, like the guy sold more company than he had.

21:09Isabelle Johannesen: Oh my gosh. I don't know, Like it didn't like count, especially with pre-money saves. It's hard to calculate the dilution. So as a rule of thumb, before your price round, ideally don't sell less than 20 % of your company. So you preserve majority at Series A as founders and at Series B you lose majority. When we did a price round of this seed stage startup, we almost had to do a recap. because she sold too much. And investors see it as a red flag because founders will not be motivated if they own very little of the company, like 30, 40 % at seed stage. And they're going to be diluted more. So everyone sees that, okay, if we don't do the recap now, then it will happen later, but we will be diluted.

22:00So we have to fix it now in order for us to invest the money.

22:04Isabelle Johannesen: But so going back to this idea of economics versus control. So what, I mean, let's take seed stage for, you know, sake of discussion. What kinds of things are they actually negotiating in terms of economics versus control at that early stage? Yeah, economics, it's money. So money is valuation cap and valuation of the company and maybe option pool. So, for example, you can negotiate 10 or 20 percent option pool. It dilutes founders directly and all the previous investors. So founders usually want like a smaller option pool. Investors want it bigger because they want to plan for all of the hiring.

22:43So they're not going to get diluted. And the valuation, I also wanted to say, don't optimize for the highest valuation. Because I don't know if you like watch Silicon Valley show when.

22:55Isabelle Johannesen: Of course, they featured startup Battlefield and TechCrunch. We're a fan of that show. It's great marketing for us. Yes, because at that show, whoever gives you the highest valuation, yeah, it is sexy and everything, but then you have to be at that level. You don't want a down round. So there's a story, one of the investors, he told me that when he started a company, they raised, I think,$20 million without a pitch deck from A16Z. and the valuation was like$100 million. And like they didn't have an pitch deck. It was like, okay, we have this. It was during COVID when money was like this. And they hired a bunch of people.

23:40They didn't have like product or product market feed. So it was a shit show. And they couldn't raise the next round because, you know,$100 million is really hard to justify that valuation. And I think especially now it's AI boom. Valuations are skyrocketing. I would still obviously plan for dilution, but don't take the highest valuation because economy goes like that and you being able to raise the next round is important. That's the rule. But I've seen examples, especially in volatile industry like Crypto Web 3 companies would raise as much as they can because they know the next five years is going to be shit.

24:20So they're like, OK, let's just get that money. But it's very risky. If you got that money, what is the next round? Which valuation? And having a lot of money might affect your discipline and might attract the wrong people for the wrong reasons. And as Naval was advising me on Lexi first two years when I was running tech-enabled law firm, I didn't raise any venture money. is like don't raise the money until you fill the pool and only then you raise on good terms knowing that you're going for hockey stick if you just raise that it might be the end honestly of the company and then you're like a zombie startup i cannot raise i'm not really scaling and then your founder salary is not significant there will be no exit so you just have a purgatory

25:14Isabelle Johannesen: basically yeah yeah and so what about the control element of the negotiation how how do founders sort of navigate investors wanting to come on and pull all the strings yeah i am very intentional about it with our founders and the way we design like c fundraising workflow is that i want the founders to have control and i want them to build wealth and control revolves around two things is the board and stockholders. So board, for example, ideally there is maybe at seat stage, maybe there is no board yet. Maybe it comes at series A and I try for the founders to control the board, to have seats, majority of common stockholders or the person who is the current CEO.

26:08And at some point, they're going to lose probably, they might lose majority on the board, but early stage founders should control the board, I believe. The pitfall, many founders agree to a bunch of investors sitting on the board as board members or observers. No, early stage, maximum three people on the board. You don't need five, six people. It's just ridiculous.

26:33Isabelle Johannesen: Are there clauses where an early stage investor might have a seat on the board at a later round and they implement that at an early round as a clause? They could have a seat that is weakened. So they will exercise that right whenever they fill out the seat. Are there any other things like that that an early stage investor might have kind of hidden in the term sheets that would affect a later round that founders at the early stage, say it's their first check, they might sign it because they don't really realize what it will actually mean five years from now? Yeah. So one of the things is, you know, like investors hold preferred stock, even if they raise their safes, it converts into preferred stock.

27:12And every round of financing, it will be a certain series of preferred seed. So some investors insist that they're serious of preferred stock. You cannot make the changes in the charter, in the documents without consent of that series. I always push back. It's bad corporate governance because you have certain investor blocking the vote and they might ask for certain things to renegotiate. We just don't want that. It should be majority of preferred stock. And sometimes we negotiate, maybe it's not majority, like 66%. So their consent will be important for the next round, but not for the whole duration of the company.

27:51And sometimes when I represent investors, I see investors push for it. And I'm like, OK, I don't think it's good for the company, but I'm on the other side. I hope the company counsel will push back. And also, which decisions require investor consent? So, for example, decisions involving hiring and setting the salary for the team, I always push for the founder to make that decision. My team, and if you bet on me, then let me decide how much the team should be making. I would also warn about observers. Don't give out that right and left. These people in the room, they can talk, they cannot vote, but they can sway the opinion of the board.

28:35And you just want to have a very tight board because some investors, they might be on the board of a competitor, which sometimes happens. and especially certain industries are super hot legal tech right now. And you invest in an early stage startup, you think they're not competitors, but it's super hot. This morning I had a call with Antropic. They're going into legal space. I'm like, wow. There are so many competitors and you are going in there, right? And I would never guess that they would go into vertical. And you can imagine how many conflicts of interest that would cause. So it's important to have a tight board.

29:17Isabelle Johannesen: I mean, I can see why Anthropic might be going into the legal space because a lot of founders I hear are using Claude and Chachipiti to navigate some of these term sheets. I'm curious if you have any cautionary tales against using AI as your lawyer. So AI, when they use AI, it doesn't have attorney-client privilege. So they're like, I did this. How do I do this? This is discovered in court. And there was a case when a person used Claude. It was discovered. So that's the thing. If you know that it's a sensitive issue, you as a lawyer who uses AI, don't put that sensitive information in your Claude or ChatGPT because it will be discovered.

30:04Okay.

30:05Isabelle Johannesen: What about Lexi, AI? Because there's human law in the loop. Actually, we had exactly that situation. So in that litigation that is happening with one of our clients, the co-founder wanted to discover everything that the client used on the platform. He was like, no way. No effing way you will do it. And yeah, no one argued with us about it. Because if you think about it, lawyer using AI is lawyer using internet or phone. It's a tool for us. Or using a paralegal or using an assistant. It's the same thing. Yeah. Good to know. I ask ChatGPT legal questions all the time, but I'm not a founder. So alas.

30:57Isabelle Johannesen: And so how much leverage does a first-time founder raising their first round actually have? Okay, this is such a mind game. Leverage comes from choices when you have results and some confidence. So, for example, when I raised my first round, my first check, investor was like courting me for half a year before I was raising. But once I said yes, he presented all of these terms. I'm like, what the fuck? I am not signing this. He's like, prorata. What is that? prorata that he can invest in uh the company to maintain his ownership uh percentage in each round i'm like no uh you invest in a small check and this is not going to happen because even if i give it to him because he's a first check all the other investors will be asking for the same and i want to have that conversation yeah and i actually recently had a situation um so one of my major investors she also asked for it and i'm like no um i like you and i want you to invest and be present and make decisions but i don't want to negotiate that with other investors so i try to keep my corporate uh structure super lean that depending on your round so for example for my five million dollar round, my major investor would be to 2.5 million.

32:24And everything lower, I want to respond with one line, this is our threshold. If you invest in less, I don't want to negotiate that.

32:33Isabelle Johannesen: And if you don't want it, then it's not a good fit. So what else kind of differentiates between, you know, a major investor, a lead investor versus kind of one of many checks and around? What sort of rights or, you know, control situations would you give them? So if it's a safe round, they usually get a side letter with information rights, prorata rights, observer seat maybe. And maybe you would get away not having a side letter. So it's a standard safe. Or you would get, you would give some of the rights. So for prorata, for example, I would recommend limiting only to the next round. The reason why it is so important, many founders don't understand why it's important.

33:16Of course, I want them to invest in the company. But once you become a really hot company, rounds become very competitive. Everyone is trying to get in. And you want the new investors to come in to help you unlock more opportunities, right? The investors who have parroto rights and a hot startup, they don't waive it.

33:39Isabelle Johannesen: But so you built Lexi AI to make this process more transparent for founders. But what is maybe one or two things that you think the VC industry would rather be not so transparent in this process? Are there some sneaky things that investors pull? No, I wouldn't say so. Because it depends which investors you deal with. I've dealt with some shady investors, even some famous person. But I just know the way he treats founders. He would try any opportunity to get something out of everything. But top tier investors, even if they have leverage, they wouldn't do it to a founder because they know they don't want to harm the founder that will harm the outcome, at least at early stages.

34:25Because at early stages, actually, you're more aligned with investors. There is no pie yet. You are making a pie together. At M &A, like exits, yeah, it's like it's a fair game. Everyone is trying to get their piece.

34:39Isabelle Johannesen: Yeah, we'll have that conversation a little later in the season. But early stage, we are aligned. And if an investor has a reputation, they would not be doing those things. But word of caution, not in this market, but sometimes when it's an investor market, multiple liquidation preferences and participate in preferred stock. Investors put in a term sheet. One of my venture investor friends, he agreed, I think, to two or three X liquidation preference and participating preferred, which results in an exit that you worked for for free for a couple of years. One of my reels got viral and Mark Cuban reposted it that in a$60 million exit, the founders got$2 million each after six years.

35:25If you think about people leaving their$500 ,000,$750 ,000 a year job to work for this and getting this outcome, it's because they had 2x liquidation preferences. Participating. So investors took everything before founders got any money. So it sounded like a good exit, but in reality, no. And what could the founders have done in that situation to protect themselves? you have to have leverage aka revenue money so you don't have to raise and when you don't have to raise everyone wants to invest and then you can choose the terms and investors so for example with that major investor I was okay walking away and I said it like these are my terms and we talked about it and she still agreed because there is a good product good team and these are also a first principle.

36:22So guys, remember those four things. But the most important part is build the company, build something people want, and the rest will follow. Have that legal foundation so you protect that, so you don't lose it on the way. But don't make legal too complex. Founders who get too carried away with complex legal structures, they get creative about it. it's the wrong focus. Yeah.

36:51Isabelle Johannesen: To kind of wrap this up, I would love to hear if you have a crazy story of, you know, some kind of worst case scenario that you've seen play out in Silicon Valley. Yeah, actually the funniest and the most dramatic story that I've heard that I think could be on Silicon Valley. So the founders used at that time ChatGPT to prepare their merger agreement. They sold the company. They took a template, I think, from OREC and they modified it with ChatGPT. They sold their company, but it was AquaHire, which essentially they sold themselves to this investor. And investor turned out to be crazy, like batshit crazy.

37:35And they were asking ChatGPT, like, is this two-year non-compete normal? And ChatGPT, yes, it is normal. so they signed it without a lawyer um this investor rented an apartment for them and he started like locking them down behaving crazy and there is nothing that they can do so they escaped from that apartment they like were hiding somewhere that investor was looking for them they came to me i like i did my best to not love but i still i was laughing i was like this is like insane story he's like calling me from this apartment and he's like yeah i don't know what to do like he's threatening us to get us out of the country our immigration and there's non-compete how we're gonna work for anyone and um actually one of my clients wanted to hire them so we had to analyze all of this non-compete and whether that's going to be enforceable which state they reside so it resulted in a whole thing um yeah don't sell your company i don't know if that

38:43Isabelle Johannesen: sounds like an episode of silicon valley or csi i don't know that sounds terrifying my gosh yeah now it's all good um the yeah they they're all good but it was i think it was really scary the guys were like basically scared yeah oh my gosh okay well that is that is the worst case scenario beyond my imagination. So I'm glad you shared that. Get a lawyer, kids. But Christina, thank you so much for coming in today and sharing all of this really valuable advice. Appreciate it. I appreciate it. I love founders. Build Mode is a TechCrunch podcast. Each episode is produced and edited by Maggie Nye and hosted by me, Isabel Johanesson.

39:21Isabelle Johannesen: Our art and design is also by Maggie Nye. A big thanks to Morgan Little, who leads our audience development, the Foundry and Cheddar video teams, and most of all to you, the builders, and everyone else in the wider startup community. We'll see you back here next time.