Founders Lounge

Hello - checking w the collective on self-angeling.( I do not know the right term). I did well on the previous biotech I cofounded and am working  on proof of concept on a new company. How to best think about being an investor in the first priced (seed) round? (We have a number of SAFEs currently). Love the idea of writing our own seed term sheet to set precedence for the A round perhaps..:) Have no interest in investing in other biotech startups besides our own. Getting legal advice; appreciate perspectives if possible. Is it as simple as forming an LLC ? Seems great opportunity to also learn how investors think about the term nuances.? Thank you

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Deborah
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Hi @Deborah Charych

Am I interpreting this correctly in that you will personally lead the priced round and act as the largest investor, or are you saying you'll put in some money, but more importantly, you hope to set the terms by sourcing non-VC investors?

@Deborah Charych

As an upfront disclaimer, what I write below is not legal or tax advice. You are strongly encouraged to seek the input of an attorney and tax professional you've hired to guide the process.

You don't often see founders in a position to lead their first-priced rounds, so there isn't necessarily a set playbook for how this should be done. That said, there are a lot of moving parts here, and I would encourage you to have a deeper analysis and discussion of these topics, which is not an exhaustive list:

(i) Conflict of Interest/Fiduciary Duties: I imagine you sit on the board of directors of this startup, and it's possible you're the only director. If you're then also the lead investor, there is a natural (or at least a potential) conflict of interest as to what is good for the corporation as a whole, and what is good for you, the investor. This conflict of interest needs to be carefully managed.

(ii) Custom Terms: There is a reason so many early-stage priced rounds follow the open source series seed and the NVCA model documents and that is to increase the likelihood of casting a wide net when attracting investors. Investors are familiar with these terms, so creating custom terms distinct from what they expect to see could be a turn-off and almost certainly increases your transaction costs to close the round.

(iii) Vehicle for Investing: You frequently see LLCs or LPs as the investment vehicles of professional investors (e.g., VCs), but that is usually not driven by taxes but because they have multiple partners who own a piece of the fund. If you're the sole investor, while you're encouraged to speak with a CPA to strategize on your taxes, there is a decent chance you're not moving the needle to form an LLC if the purpose is to save on taxes. If you won't be the sole owner, now you have other complications around things like operating documents for other partners of your LLC and potentially undermining the LLC's accredited investor status.

Once again, these are just upfront thoughts, and there could be many other considerations you'll need to analyze. I would encourage you to hire an attorney and seek the counsel of a tax professional to ensure you're doing everything correctly. On the legal side, if you'd like to carry the conversation forward, you can reach me at alex@archetypelegal.com.

Alex King

alex@archetypelegal.com