5 ms·

The complaint says that the founders told investors that their model had been cleared by legal counsel, when in fact their counsel had warned them that it was "

The complaint says that the founders told investors that their model had been cleared by legal counsel, when in fact their counsel had warned them that it was "risky" and potentially fraudulent. This might be a naive question, but... Shouldn't the lawyers have been involved in the investment rounds somehow? I get that there's attorney-client confidentiality and all, but wouldn't you expect them to at least be able to say "yes, we've looked at the pitch deck and confirmed that there's nothing materially false that we know of"? And shouldn't the lack of such assurance be an immediate red flag?

cj 6y ago
Lawyers (of the company) typically don't get involved in reviewing pitch decks for accuracy at least in the early stages. And even if they did, the lawyers only know what the founders tell them. Additionally, lawyers typically avoid asking probing questions of founders. especially if there is risk that the answer they get may be troubling - it's much easier to defend and advise a client when you're not explicitly aware of every dirty secret. But you're not totally off base. It's absolutely the responsibility of VCs to do their own due diligence. VCs usually are investing other people's money. It's not a good look for VCs to invest in scams, so VCs typically do some degree of due diligence (which could be virtually zero diligence at seed stage / Series A, to quite a lot of diligence at later stages as the amount of money involved increases).
theptip 6y ago
Typically an investment round will involve a rigorous due-diligence process. There will be a data room, and technical, legal, financial, and strategic documentation will be shared with the investor(s). I’d expect regulatory concerns to be top of mind with a biotech startup like this. I’m not sure what level of coverage is normal, but it’s not unheard of to ask for a written opinion from a legal firm saying “this business model is legally sound”. In this case it sounds like this was not asked for, and they just took the founders’ word for it. On the other hand worth noting that “taking their word for it” happens to some degree in almost business deals; after all, past a certain point, outright lies will probably land you in jail (or at least with a massive fine). It could be a sloppy DD process was run here, or it could be that this sort of thing happens infrequently enough that it’s not worth applying a fine-toothed comb to every single claim.
- tpmx 6y ago
  I'm sure e.g. A16Z did a very thorough DD before investing. But, how much time did they invest in following up this company after every year since? Meanwhile, the VC brands were on proud display on the company's website as a mark of trust.
  - ybiomepoopthrow 6y ago
    The founders and employees had a lot of meetings with A16Z during the life of the company. They were active on YC communication channels as well
- foobiekr 6y ago
  I have personally done a lot of DD and I will tell you that, while I am aggressive because I assume people are lying to me and maybe themselves, 99% of the time when I’ve done a tandem DD the other technilogists onvolved basically just feign interest and give a gut feel. I’ve also been on the receiving end of DD and witnessed this. I think you are dramatically overestimating the quality, depth and especially the diligence of that process.
  - wjnc 6y ago
    This. One of the more fun things I've done professionally is trying to prepare an after-action report on a deal gone south. Reasonably small deal but 95%+ loss of value. I couldn't even get people to come to a shared baseline factsheet. We've done 10s of deals together, the firm prides itself on openness and is generally relaxed. Even with all the internal memos and external red flag reports in hand, we couldn't get to a shared sense of what happened, let alone if we dropped a ball. Point being: DD is hard even for well-established teams and hindsight is 20/20.
    - pas 6y ago
      Wow, this sounds very interesting, but I simply lack the context to understand this. Could you perhaps explain it a bit? What's and after-action report? How many people you would have needed to agree on said facts? How should one imagine this "couldn't get to a shared sense of what happened"? This means that everyone had their own very detailed theory that then seemed off for the others (because some facts were excluded, interpreted differently, weighted differently by others)?
ybiomepoopthrow 6y ago
Zac and Jessica would swiftly fire anybody who didn’t validate them. Any counsel they’d hire would have to tell them what they want to hear. They were also comfortable lying, so there’s that too

cj 6y ago

Lawyers (of the company) typically don't get involved in reviewing pitch decks for accuracy at least in the early stages. And even if they did, the lawyers only know what the founders tell them. Additionally, lawyers typically avoid asking probing questions of founders. especially if there is risk that the answer they get may be troubling - it's much easier to defend and advise a client when you're not explicitly aware of every dirty secret. But you're not totally off base. It's absolutely the responsibility of VCs to do their own due diligence. VCs usually are investing other people's money. It's not a good look for VCs to invest in scams, so VCs typically do some degree of due diligence (which could be virtually zero diligence at seed stage / Series A, to quite a lot of diligence at later stages as the amount of money involved increases).

theptip 6y ago

Typically an investment round will involve a rigorous due-diligence process. There will be a data room, and technical, legal, financial, and strategic documentation will be shared with the investor(s). I’d expect regulatory concerns to be top of mind with a biotech startup like this. I’m not sure what level of coverage is normal, but it’s not unheard of to ask for a written opinion from a legal firm saying “this business model is legally sound”. In this case it sounds like this was not asked for, and they just took the founders’ word for it. On the other hand worth noting that “taking their word for it” happens to some degree in almost business deals; after all, past a certain point, outright lies will probably land you in jail (or at least with a massive fine). It could be a sloppy DD process was run here, or it could be that this sort of thing happens infrequently enough that it’s not worth applying a fine-toothed comb to every single claim.

tpmx 6y ago
I'm sure e.g. A16Z did a very thorough DD before investing. But, how much time did they invest in following up this company after every year since? Meanwhile, the VC brands were on proud display on the company's website as a mark of trust.
- ybiomepoopthrow 6y ago
  The founders and employees had a lot of meetings with A16Z during the life of the company. They were active on YC communication channels as well
foobiekr 6y ago
I have personally done a lot of DD and I will tell you that, while I am aggressive because I assume people are lying to me and maybe themselves, 99% of the time when I’ve done a tandem DD the other technilogists onvolved basically just feign interest and give a gut feel. I’ve also been on the receiving end of DD and witnessed this. I think you are dramatically overestimating the quality, depth and especially the diligence of that process.
- wjnc 6y ago
  This. One of the more fun things I've done professionally is trying to prepare an after-action report on a deal gone south. Reasonably small deal but 95%+ loss of value. I couldn't even get people to come to a shared baseline factsheet. We've done 10s of deals together, the firm prides itself on openness and is generally relaxed. Even with all the internal memos and external red flag reports in hand, we couldn't get to a shared sense of what happened, let alone if we dropped a ball. Point being: DD is hard even for well-established teams and hindsight is 20/20.
  - pas 6y ago
    Wow, this sounds very interesting, but I simply lack the context to understand this. Could you perhaps explain it a bit? What's and after-action report? How many people you would have needed to agree on said facts? How should one imagine this "couldn't get to a shared sense of what happened"? This means that everyone had their own very detailed theory that then seemed off for the others (because some facts were excluded, interpreted differently, weighted differently by others)?

ybiomepoopthrow 6y ago

Zac and Jessica would swiftly fire anybody who didn’t validate them. Any counsel they’d hire would have to tell them what they want to hear. They were also comfortable lying, so there’s that too