Letters of Intent

Pankaj Raval (00:04)
Welcome back to the Letters of Intent podcast. I'm your host, Pankaj Raval founder of Carbon Law Group, and we are the law firm for risk takers and deal makers. Our mission here is to help entrepreneurs and investors who are building the future, giving them the legal foundation to move fast and take bold risks with confidence. Today, I'm excited to have our corporate attorney here, Carbon Law Group, Sahil Chaudry joining us to talk a little bit about an event he went to recently in LA that brought together founders, investors, and innovators. Sahil, how are you doing? And I'm excited to hear more about what this event was all about.

Sahil (00:37)
I am very excited to share Pankaj as your ambassador to the Andreessen Horowitz Summer Speaker Series here in LA. I have great news to share, which is the capital markets are alive and well. And I am seeing big changes in how people are thinking about capital.

Pankaj Raval (00:45)
You are.

Sahil (00:57)
founders and startups in general and we have a thriving startup practice here at Carbon Law Group and so we like to stay informed with what's going on and there was plenty to learn at this last event.

Pankaj Raval (01:08)
Absolutely.

tell us about this event, Sahil, that you went to. I guess it was hosted by this little-known firm that I think is fledgling that probably doesn't have too much money under management right now. The name, I believe, is Andreessen Horowitz, is that correct?

Sahil (01:21)
Pankaj, you're right. This is a very little known fledgling firm, just kind of a startup practice of venture capital cowboys here. Andreessen Horowitz, and of course, all jokes aside, Andreessen Horowitz is a very well-known venture capital firm. They're hosting a speaker series here in LA.

The conversation featured Adam Struck from Struck Capital and Brent Grimes, the founder of Reef.ai. What I loved about this conversation was it wasn't just about big fundraising rounds. It was really about the fundamentals when it comes to building enduring companies. There was something that Adam Struck said about Brent and why he invested. He said that he wanted to invest in founders who could fly the plane while building it.

And I really love that metaphor. I think the image sums up the startup journey for all of our clients, even with carbon. They're moving speed. They're still figuring how to keep things in the air. And that's just a part of being an early stage company. Founders are raising capital. They're hiring. They're finding product market fit. And so I really like that investment philosophy from Adam. And I think that's

Pankaj Raval (02:07)
Yes.

Sahil (02:30)
totally applicable to any founder in today's market, especially with AI changing things so quickly.

Pankaj Raval (02:35)
Absolutely. Sounds fascinating, know we had a chance to go to their office together last time in Santa Monica. It's a beautiful office. Andreessen Horowitz, of course, is one of the most successful venture capital firms out there. Mark Andreessen was the founder of Netflix. Ben Horowitz has sold many companies and has many, many successes his belt. some of the insights that stood out for you from this event?

Sahil (02:56)
So this was the first founder I've heard speak so much about net retention. So most startups chase new customers. And of course, that's very important. But Brent explained that the real growth lever is actually how well you keep and grow your existing customers. So he talked about his experience at MuleSoft where they scaled net retention so effectively that Salesforce acquired the company for six and a half billion dollars. I mean, these are huge numbers. point was clear.

When your customers not only stick around, but you also expand their usage, you get sustainable growth. so I think where most founders are looking to increase new customers, he was the first one I heard talk about how to improve the usage and the income you can earn from your existing customers by improving their experience.

Pankaj Raval (03:46)
Interesting, interesting. So what exactly is Reef AI even building?

Sahil (03:49)
so Reef.ai is building what they call an intelligence layer for your revenue engine. In simple terms, it gives sales and customer success teams smarter insights into customer behavior. imagine basically it's kind of like when we're doing diligence on a company. In this case, you have a software that's continuously diligencing the customer experience and recommending improvements. that helps with predicting

What could improve retention and expansion of usage? So if you're a SaaS company, Reef.ai can show you which customers are likely to renew, who might be at risk, and when there's an opportunity to upsell. It's like giving your revenue team a co-pilot. It's like having someone, a consultant just right there with you observing and improving the customer experience right alongside. So they're constantly providing recommendations to you.

And leveraging AI for that. You know, I think in one sense, it helps you anticipate risks before they become real problems. And it also gives investors confidence that your revenue is note that I took from the event is defensible revenue is exactly what venture capitalists want to see when they're writing big checks. not in the era of, at least my impression is we're not in the era of VCs writing big checks for pre-revenue companies.

VCs want to see revenue than revenue today. They want to see profit. So harvesting intelligence from your existing customer base has become really important.

Pankaj Raval (05:17)
Absolutely. So, important, I think, founders out there to understand that, you we live in, we're living in slightly different times. The capital markets are somewhat contracted, but, you know, they're still alive. There's still definitely money to be found. People need to still place money. know, might be some money sitting on the sidelines, but if you have an interesting company, especially in the AI space nowadays, which seems, you know, extremely hot, there's still opportunity for you. You know, based on

your experience at this event and learning about what Reef does and the conversation the investors, what does that mean in the context of legal? What does that mean for needing to sure that they investment ready?

Sahil (05:54)
You know, we see this a lot, Pankaj, with our own clients where before an acquisition or before a financing, they need corporate cleanup because most founders when they're starting a company are thinking about their product or their service or their team, but they're not thinking about equity. They're not thinking about the commercial agreements. They're not thinking about their IP. So their rights be a mess. And when someone's investing capital into your company, investing to purchase rights.

in your business. And so it's kind of like having messy title if you wanted to sell your house. If you don't know what kind of rights you own in your own home or you don't have a clean chain of title, it's going to be really hard for someone to buy your home and it could scare some people away. what I find really important, a really important lesson that I pulled from just going to this event and the other events that are related to capital markets these days is you don't need to give your

venture capital firm or someone who wants to invest in you, a reason to get scared. You want to have a clean cap table. You want to have clean corporate governance, clean commercial agreements. You want to know who owns your IP because ultimately venture capital firm that wants to come in is going to need to know what they're buying. And in today's market where things are moving very quickly and you need capital to compete, that's very critical. I would say

in this market, especially if you're going to compete in there are still major multiples in terms of the acquisitions and in terms of the sale prices and investment that can happen, you're going to need to have your documents in order to attract that kind of capital.

Pankaj Raval (07:27)
Yeah, that's so true. And what does it mean in terms of having these documents to order? Does that mean putting it on a drive? What does that look like when approaching investors?

Sahil (07:37)
Yeah, that's a great question. So when we say you want to have your documents in order, what we really mean is starting from your foundational incorporation documents to any of your share purchase transactions, to any of your trademarks and your intellectual property, all of those documents do need to be in a single folder, in a single database for someone to come in and diligence eventually.

And the problem is it's not just keeping those documents in one place that's required. What's really required is going through those documents to make sure that they make the statements that you want to make. Because ultimately when you have a sale, you're going to be representing and providing warranties on the rights that you're selling to a venture capital firm. And so when we talk about corporate cleanup, it's not just dragging and dropping your documents into a folder. We're talking about going through and making sure that

The founders that you started this company with all have the rights that you understand you each do, that your intellectual property is in order, that any trademarks are registered, that any copyrights that are necessary are registered. If you're running a software company, I mean, you need to make sure that running that on open source or if you've got actually copyrightable code that's in there, you want to make sure that's all in order.

There's a lot to diligence before you get to that space of working with a VC firm. And in today's market where things are changing so quickly, you don't want to be under capitalized. mean, think what we've seen with our clients is the clients that fail are the ones that are under capitalized and have poor management and capital helps with management too. So you need to be eligible for capital markets in a way that perhaps you didn't before because things weren't changing so fast.

your product or service can be obsolete tomorrow. And if you're not able to compete and change and use the intelligence that's being created through, through tech, like AI, you're going to lose this battle. so capital markets have become important to startups in a way that even more important than they ever were before.

Pankaj Raval (09:30)
Mm-hmm.

Yeah, absolutely. So important, you're right, Sahil, I mean, and the money, you're right. A startups fail because don't address their capital on. What are mistakes you see from founders early on that could be detrimental to their success?

Sahil (09:56)
Some of mistakes we see is not having a clear conversation and written documents related to founder splits. Sometimes people think that they own equity when they don't they actually were intended to be officers. Sometimes people will be operating with a logo they've never trademarked and there are competing marks out there and so that dilutes the value of their brand. Sometimes people have

purchased software or they're working through with an open source model or of open source software as well as as proprietary software and they don't have clean IP chain of title that could be sold We also see a lack of understanding of assignments and contracts. So let's say there's a change of control provision in your contract So if you were to sell the majority of your company it could

result in the termination of a contract and you could lose out on maybe rates that were very valuable to your investor. Those are some of the things that we diligence and we make sure that you're aware of what you're selling and what you're getting when it comes time to open yourself up to the capital markets.

Pankaj Raval (11:03)
Absolutely, So, this has been really interesting, really fantastic advice. one kind of main takeaway you would have for founders, for clients, know, who've maybe raised a little bit of money, looking to raise more money, be attractive to investors? takeaway you got from this event?

Sahil (11:20)
I'll give two. I'll give a business takeaway and a legal takeaway. The business takeaway, I think, is you need to be surrounded by the brightest minds you can be surrounded by. So there are a number of these kinds of events that VC funds are now hosting. Speaker Series, where you can get to know how people are thinking. It's one thing to think you have the greatest product in the world in your own mind and sitting in front of your own laptop, but you need to get out there.

and to people and understand what people are looking for. Money talks and BS takes the bus. Money talks in the sense that people could think you have a great idea, to get into the mind of who's writing your check, who's writing the big check and understand what they want. You don't want to argue with reality. You want to know what reality is and the best way to do it is

Pankaj Raval (11:52)
I love it.

Sahil (12:10)
by knowing who the players are and getting yourself in front of them. From a legal point of view, I think that you need to be aware that your formation documents are not just for you and your partner or your founders or for you and your employees or independent contractors. Your documents are truly being prepared for a future event. That's the value of what you're building. You're building a business that's gonna generate revenue.

and you're going to be able to sell your shares based on a revenue multiple in order to be able to access the capital markets and truly have that big outcome that you're looking for, you need to make sure your documents are cleaned up and you don't want to deal with that legal architecture. It is complex. And there are a number of traps and pitfalls that you could fall in. And you don't want that to be the reason that you lose out on a major partner, a major capital company that could take you to the next level.

Pankaj Raval (13:04)
Absolutely. Well said, Sahil. Well said. And I appreciate you going to this event, reporting back is inside baseball. This is inside be hugely valuable to startup founders and people building businesses in the future because A16Z, I mean, these guys are some of the best of the best who are talking about their experiences building companies, building very successful you said, it's best to learn from the best, surround yourself with people who are the best and we're lucky to be invited to some of these great events where we get to be in the same room with these people really leading the way in venture capital. So thank you again Sahil for sharing your insights, for sharing learnings this event and being so our let them know what they need to do. To make sure that they're ducks in a when they are funding and positioning themselves the best to access those capital markets.

Sahil (13:55)
Thank you for having me.

Pankaj Raval (13:56)
Thanks, Sahil.