Geoff Dittrich | On legal advice, service agreements and accreditation for new investors.

Meet Geoff Dittrich — the Founder & Managing Partner of Ink LLP. In their own words, Ink LLP provides strategic counsel to high-growth startups and angel investors.

In our latest virtual ‘Ask-Me-Anything’ session, Geoff shares some of the insights he’s gained after spending over a decade working with and building technology companies, and has advised hundreds of businesses from inception to exit.

Top takeaways from our conversation with Geoff:

Legal support changes as an investor gets more experienced.

• The more you know, the less you need.
• A lawyer supporting a less experienced investor will have a more involved role as the lawyer often also fills the role of educator in the process.
• In addition to reviewing legal documents, investors often require help understanding the landscape, process and structures involved in an individual venture deal. You might also need help preparing for a due diligence review depending on the stage of the company.
• Getting good counsel in the beginning will put you in a stronger position when you’re securing and negotiating investment opportunities.
• More established investors who have multiple deals under their belt, will engage lawyers on a more transactional basis. You might seek counsel when you’re ready to prepare a term sheet or to negotiate financing or due diligence.

Footnote: The more complexity around a deal, the more likely you’ll be to require legal counsel.

Venture deals & service agreements.

• Your time might be as valuable as your money.
• Many investors invest in companies where they can add value beyond cutting checks.
• Adding a service agreement into your SAFE, can provide multiple benefits to both parties in the deal. For starters, a service agreement creates clarity around the amount of time you are (or are not) spending on the business.
• A service agreement can also help to clarify how your time is being compensated.
• These types of agreements give investors purchasing power and help set boundaries that will support the working relationship between investors and other startup leaders.

Footnote: the Founder Institute has developed a Founder / Advisor Standard Template (also known as a FAST Agreement) that has been used by tens of thousands of entrepreneurs and advisors to remove some of the headache from negotiating, drafting and reviewing these types of agreements.

Accreditation explained.

Accreditation is a classification that determines whether or not you have enough wealth to invest in high-risk opportunities.

• There is a no formal process for becoming an accredited investor, but anytime you make an investment into a startup, securities law is engaged.
• Accreditation is there to protect individuals investing in early-stage companies.
• According to securities law, you cannot make an investment into a company unless there’s a prospectus [a prospectus, in finance, is a disclosure document that describes a financial security for potential buyers] or they are going public. Since a large majority of startups do not fall into these categories, more startup investors will rely on a prospectus exemption to get involved in early-stage deals.

What are regulators trying to ensure through accreditation?

1. That investors understand and can handle the risk of this type of investment.
2. That investors have enough to lose if they are to lose their entire investment.
3. That investors have a level of sophistication or have access to a level of sophistication that makes them less of a risk in eyes of the regulators.

How are accredited investors categorized?

• In order to be accredited, you have hit one of the 25+ categories outlined by the securities commission.
• If you fall under one of the categories that make you an accredited investor then you can invest in any private company in Canada.
• There’s a small number of categories that apply to most individual investors because a majority of the categories are institutional in nature.
• Applicable categories typically relate to your net worth, net assets and/or income level.

Exemptions simplified.

If you do not fall into any of the categories mentioned above, exemptions have been setup for non-accredited investors that you can use.

In a nutshell:

• These exemptions are limited in scope
• Most exemptions are in place to ensure the investor has some meaningful relationship with director(s) of the company that make the individual less of a risk.
• Some of exemptions include family, close personal friends and business associates.
• There’s a stark difference between US and Canadian accreditation. On the whole the scope for accreditation in the US is much more limited.

Footnote: It’s the obligation of the company you are investing in to prove you are accredited. So, don’t be surprised if you’re asked to sign or acknowledge additional documents that confirm your status.

Go deeper: get tips the scoop on accreditation directly from the source. Read this article on accreditation published by Ink LLP in December of 2020.

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