What is legal advice and why are my investors asking me for one? | Cooley LLP

Legal advice is often one of the conditions for closing a venture capital financing of a US company, especially Delaware. The founders of these companies often ask us “what is legal advice?” “And” why do investors need it? Below are brief answers to these and other frequently asked questions about legal opinions.

What is legal advice?

A legal opinion is a formal letter from your company’s legal adviser to investors containing legal adviser’s conclusions on various legal matters relevant to the company and the transaction, based on legal adviser’s review of a defined set of documents and information.

Legal opinions may include, for example, the valid existence of the company, the valid issuance of shares to investors under applicable company law, compliance with certain laws relating to the transaction, enforceability of agreements transaction and, in some cases, capitalization. Legal opinions do not not give an opinion on all aspects of the business and its activities, but rather focus on a specific set of business and securities elements.

Why do some investors seek legal advice?

A company board opinion is intended to give investors additional comfort as to the legal matters covered by the advice, but it is not a substitute for the “due diligence” to be performed by investors and their advisers.

Are legal opinions given in every transaction? Are they the same every time?

No to every question. Legal advice is not given in all venture capital funding in the United States, and it is much less common in major non-US venture capital jurisdictions. Even in transactions where they are given, the content is negotiated between the investor lawyer and the company lawyer and varies somewhat from transaction to transaction. The fact that an opinion is delivered or not, and the content of the opinion, must take into account the particularities of the company, the transaction and sometimes the investor.

Advantages and disadvantages of your advice giving legal advice to your investors

Are Legal Advice Worth It? Although the cost-benefit analysis varies from transaction to transaction, here are some basic principles to keep in mind.

Costs

Most sophisticated law firms have a detailed process for back-up research and internal approval to provide legal opinions, which will increase the company’s transaction expenses. Businesses may not want to incur fees for legal opinions, as these funds could otherwise be used to grow the business. Generally speaking, the smaller the amount raised in a fundraising, the less likely an opinion is appropriate.

Another cost to the business is time – not just in the sense of lawyers’ hourly rates, but the fact that the drafting, diligence, and (in some cases) negotiation associated with the legal opinion adds to the cost. process of closing the case. . This can be a challenge for companies that need to close a deal on a very tight deadline.

Advantages

While the notice is given in the best interests of the investors, there may also be benefits to the business. The notification process can reveal historical gaps in important business formalities that it is in the best interests of the business to fill. In addition, the fact that the company has provided legal advice in past transactions may not only reassure current investors, but may also facilitate the process in future financings; This is because if a company is asked to provide legal advice in a subsequent fundraising round, the back-up work that the lawyer needs to do should generally only cover the period that has elapsed since the last legal opinion was given by the same law firm.

Last revised: December 2021

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