Demystify the Legalese

Leverage the intelligence of AI to enhance your understanding of VC deal documents.

The codification of a venture capital deal involves intricate legal documentation that can seem daunting for those without a legal background.

I vividly recall an empowering moment early in my career as a non-partner VC when my then boss and still mentor trusted me to take the driver's seat lead on a potential new investment for the firm. "If this is your deal," he said, asking our general counsel to cc me on the first draft of the legal documents, "you have to read and understand everything in them."

The thud of that thick (virtual) legal binder felt heavy. Faced with hundreds of pages of dense legal jargon in multiple files, I suffered from a dreadful feeling of being completely overwhelmed. Unlike a gripping novel, these documents were dry and packed with legalese—daunting to anyone not versed in law. I literally didn’t know where to even start.

Learning to Navigate Legal Terrain

Venture capital agreements don’t aim to entertain; they protect and define terms, often with crucial business implications buried within repetitive legal phrases. Your task is not to memorize these documents or recreate them, but to identify key clauses, understand standard provisions and boilerplate paragraphs, and recognize when to consult your legal counsel. Over time, you’ll learn which parts are negotiated and what falls within the acceptable range for your firm. The final business decisions rest with you, guided by your lawyers.

ChatGPT: Your Learning Partner in Legal Analysis

It’s amazing. Now, rising (and even veteran) VCs have access to an invaluable resource in this educational journey: ChatGPT. It’s a powerful aid in transforming how you interact with legal documents by providing detailed analyses, summaries, and navigation.

Here’s how to use ChatGPT to enhance your understanding:

• Summarizing Documents: Upload your legal documents (Stock Purchase Agreement, Investor Rights Agreement, Voting Agreement, ROFR Co-Sale Agreement) and ask ChatGPT to summarize the main points for your review. (Example prompt: "Please summarize the main points of this IRA to help me understand the structure and key clauses regarding our rights as investors and co-investors.")

• Language Simplification: Have ChatGPT rephrase legal jargon in simpler terms to aid comprehension and make the documents more accessible. ("Section 4.4.1 in the IRA uses technical legal language that's hard to understand. Can you rewrite it in plain English for clarity?") Using this tool has been incredibly helpful to quickly and better comprehend these documents.

• Identifying Non-standard Terms: Request ChatGPT to highlight any terms that deviate from standard NVCA model documents, helping you spot potential red flags early. (Example prompt: "Highlight any terms in these documents that deviate from standard NVCA form documents.")

• Comparative Analysis: Compare terms in newly drafted documents against the original term sheet to ensure consistency and alignment with initial agreements. (Example prompt: "Compare the terms in these newly drafted documents with the original term sheet attached and highlight any inconsistencies or major changes.")

• Clause Explanation: Request detailed explanations of complex clauses to ensure you understand their implications and effects on your investment. (Example prompt: “Can you explain the indemnification clauses in this agreement to ensure I understand their implications?”)

• Scenario Analysis: Instruct ChatGPT to provide outcomes of hypothetical scenarios based on specific clauses, helping you foresee issues and outcomes. (Example prompt: “If the company receives a buyout offer at $200 million, how would the anti-dilution provisions in this agreement affect our outcome? Outline potential scenarios.”)

• Comprehensive Review: After a thorough review, ask ChatGPT if there are any additional considerations based on the firm’s investment stance. (Example prompt: “Having reviewed all the documents, are there any additional considerations or risks I should be aware of since we’re not the lead investor in this investment?”)

• Negotiation Preparation: Identify sections likely to require negotiation based on current drafting, equipping you with knowledge before discussions begin. (Example prompt: "Which sections of this agreement are most likely to be negotiated further, based on their current drafting? I need to prepare for upcoming discussions.")

• Pre-counsel Review: Before consulting your legal team, find out which sections and points to familiarize yourself with, making your interactions with counsel more focused and productive. (Example prompt: "Before a conversation with our legal team, could you point out which sections and clauses I should focus on and understand more deeply?")

Disclaimer

While ChatGPT is a powerful tool for learning and preliminary analysis, it is not a substitute for professional legal advice. Always consult with qualified legal counsel to make informed decisions. This tool enhances your understanding and prepares you for effective discussions with your legal team and colleagues.

Additionally, it’s imperative that you toggle ChatGPT’s settings to exclude data submitted from model training. Some argue that’s not enough for reliable security and confidentiality, and I’m aware of some investment organizations with official guidelines prohibiting such use that should be adhered to.

Understanding and Appreciating Legal

Venture capital requires not just financial acumen but also a solid understanding of legal frameworks governing investments on a go-forward basis. By using a tool like ChatGPT, you can hack the experience curve to become more informed more quickly. Your job is to learn to recognize what’s important and when to lean on your counsel, but you don’t need to recreate their magic legal phrases.

With experience, you can learn standard practices, negotiable aspects, acceptable ranges, and your negotiation priorities. The business decisions are yours, with input from your lawyers. The ultimate benefit of AI is better leveraging your relationship with legal counsel for real strategic advice, not just tactical responses.