Whose Lawyer Is It Anyway? When Your Investor Tells You to Use Their Law Firm

You have a term sheet with an investor. The round is coming together. Your investor mentions that your current counsel is not on their approved vendor list, and that you must use one of their firms. Maybe they offer to introduce you. Maybe they tell you the deal will move faster. Maybe they say their firm will need to review your existing lawyer's work, and bill you for the privilege.

This happens constantly, and most founders treat it as a logistics question. It is not. It is a question about who is actually looking out for you.

Why investors push their own firms

Start with the charitable read, because it is partly true. Large venture funds work with a small set of firms over and over. The big names in startup and venture work, firms like Wilson Sonsini, Cooley, Gunderson Dettmer, Fenwick & West, and Orrick, have done thousands of these financings. They know the fund's preferences. A financing can close quickly when both sides already speak the same shorthand.

That efficiency is real, and for a fund deploying capital across dozens of companies a year, it is valuable. The fund is not being malicious when it steers you toward familiar counsel. It is optimizing for its own throughput.

The problem is that its throughput is not your interest. And the firm doing the work knows exactly whose repeat business pays the bills.

The conflict nobody names out loud

The VC will do many deals with that firm over many years. You will do one financing with them, maybe two if you survive to the next round. When the firm's lawyers sit down to paper your deal, one client is a career-long relationship and the other is a one-time engagement that arrived as a referral from the career-long relationship.

The rules of professional conduct take this seriously. ABA Model Rule 1.7, and its state analogs, govern concurrent conflicts of interest and require informed written consent when a lawyer's representation of one client is materially limited by responsibilities to another. A firm that represents both the fund and the company in related matters is operating in exactly that zone. Good firms paper the waiver and wall things off. But a signed waiver does not change where the gravity pulls.

I am not saying the marquee firms do bad work. I am saying that excellent work performed by someone whose loyalties are divided is not the same thing as having a lawyer whose only job is you.

The fee squeeze

The pressure often shows up dressed as cost savings: the fund tells you that because your chosen counsel is unfamiliar, the fund's firm will need to review your diligence and your documents, and that you will be billed for the review. Now you are paying two firms. Or the fund suggests you simply switch to its preferred firm, which bills at two to three times what a capable smaller firm charges.

Either way the message is the same. Use our lawyers, or pay a tax for using your own. Founders, eager to keep the round friendly, usually fold. That instinct is understandable and frequently wrong.

Where the divided loyalty actually shows up

Ideally, the relationship between the investor and the company should be mutually productive. But there are different incentives on certain key terms. Being a good advocate for the company is not about fighting the investor on standard terms. It is not about fighting the investor at all. Remember, at the end of the day, we want a healthy, productive, and positive working relationship.

Start with what is genuinely not worth fighting. Ten million authorized shares at founding for a Delaware C-corp is standard. If the fund's firm tells you that number is normal, they are right, and spending credibility there only makes you look like you do not know the market. A good independent lawyer tells you the same thing, which is the point. Independent counsel is not about reflexively opposing the investor. It is about having someone whose read of each term is made for you.

The option pool is where it gets real. Investors want the unallocated pool established before the round closes, because a pre-money pool dilutes the founders and not the new money. The size of that pool is negotiable, and it is one of the quietest places an investor improves its own returns. Now ask whose lawyer is drafting the language around it. The firm the fund sent you has the least incentive in the deal to push that number down, because a larger pool helps the client who brings them repeat business and costs the client who does not. This is the single clearest place where it matters that your lawyer answers to you.

The Delaware franchise tax election is the unglamorous version of the same problem. Delaware lets you calculate the tax two ways, the authorized shares method and the assumed par value capital method. For a typical startup with a high authorized share count and low par value, the assumed par value method is almost always dramatically cheaper, but you have to affirmatively elect it. This is exactly the kind of five-minute housekeeping that slips when the lawyer papering your deal is really the fund's lawyer clearing a financing at volume. The founders who miss it open a five or six figure bill that should have been a few hundred dollars.

None of this requires a thousand-dollar-an-hour lawyer. It requires a lawyer who is reading the documents for you, and not for the person who sent you the referral.

What a smaller firm actually offers

This is the part the fund will not volunteer. A smaller firm advising the company, and only the company, has no competing loyalty to manage. Your financing is not a rounding error in our book of business that we are rushing to clear so we can get back to the client who matters more. You are the client who matters.

We also tend to cost less, not because the work is lesser, but because the overhead is. And the speed gap is smaller than investors suggest. The documents in an early financing are not exotic. The National Venture Capital Association publishes model documents that everyone, including the marquee firms, starts from. A competent corporate lawyer works from the same templates and the same market terms. What you give up in raw deal volume you get back in undivided attention.

How to push back without blowing up the round

First, its important to understand that staking out a position, and advocating for your company is considered ordinary and professional. Real Investors do not expect you to blindly follow everything proposed. Ask directly who the proposed firm represents in the transaction, and ask for any conflict waiver in writing before you sign anything. The answer tells you a great deal.

Keep your own counsel reviewing the documents even if you let the fund's firm paper the deal. A second set of eyes loyal to you is cheap insurance.

Scrutinize the option pool size and where the dilution lands, elect the assumed par value method for franchise tax, and treat every "this is standard" with a polite request to see the math.

Be willing to say no to paying for the fund's firm to review your lawyer's work. That is the fund's preference, not your obligation.

A good investor is a partner, and most of the pressure here is reflex rather than malice. But the financing is one of the few moments where your interests and your investor's interests are not identical, and it is exactly the moment they will encourage you to use their lawyer. Have one of your own.

This post is general information about a common dynamic in venture finance. It is not legal advice and does not create an attorney-client relationship. Every deal turns on its own facts, so talk to a lawyer about yours.

Or better yet, set up a consultation with us to discuss: https://long.law/intake