Term Sheet Negotiation Tells(permanentrecord.firstround.com)
permanentrecord.firstround.com
Term Sheet Negotiation Tells
http://permanentrecord.firstround.com/2011/10/31/term-sheet-negotiation-tells/
15 comments
Funny how "convention", "tradition", "standard terms", and "the way things have always been done" invariably break in VCs' favor. $10k of legal fees is small potatoes but I hate the unbridled arrogance that says taking note of that is somehow being greedy but insisting on its presence is simply being a gentleman.
Good post, its important to know what you want and what is important. When I first started talking to VC partners I discovered that they were like any sort of relationship, and like those relationships if they have something that annoys you now, its only going to get worse. So ask yourself early on if you can deal with that.
Chris is a good guy - we worked together at Delicious.
I've said it before: entrepreneurs will signal, often loudly and clearly, why not to invest in them.
I've said it before: entrepreneurs will signal, often loudly and clearly, why not to invest in them.
All contracts (including Term Sheets for early financing) are simply a manifestation of the parties' expectations. At the end of the day, relationships are more important. How often are these term sheets enforced anyway?
>> How often are these term sheets enforced anyway?
The term sheet is handed to the lawyers as a template for the contract. The odds of the contract being more beneficial to the founder than the term sheet is infinitesimal. The odds of there being clauses in the contract making it less beneficial to the founder than the term sheet is significant.
OK, but by "enforce", I meant "is the basis of a valid, colorable claim in court that ultimately prevails". IMO, that's the best measure of the paper's value/importance.
The Golden Rule - if you wouldn't trust the other party on a handshake, all the paper in the world isn't going to be enough to put the deal in writing.
It seems that for many people, getting a VC term sheet is considered a measure of success. Sometimes it seems like that's the goal they are working for.
Often, however, when I see one of these articles of advice from a VC, I become glad that our business is so capital efficient that we shouldn't need outside investment until we're very profitable.
And even then, I'd seek out a good angel, rather than conventional venture capital. (In my career, I've seen enough bad decisions forced onto founders by venture capitalists first hand.)
The one phrase that will never hold sway on me is "that's the way it's always been done." And, frankly, I think it tells you a lot about someone's motivations when they want to put expenses that they control on your balance sheet.
Often, however, when I see one of these articles of advice from a VC, I become glad that our business is so capital efficient that we shouldn't need outside investment until we're very profitable.
And even then, I'd seek out a good angel, rather than conventional venture capital. (In my career, I've seen enough bad decisions forced onto founders by venture capitalists first hand.)
The one phrase that will never hold sway on me is "that's the way it's always been done." And, frankly, I think it tells you a lot about someone's motivations when they want to put expenses that they control on your balance sheet.
I think that VCs seem to look heavily for patterns. Partially because they can't take the time to evaluate too much of the deal (it's already possibly a product or business model that's never existed before) so they tend to read unusual, out-of-pattern stuff as higher, non-understandable risk.
Often "that's the way it's always been done" ends up like that because someone, somewhere got burned. Not an excuse but often the reason.
Often "that's the way it's always been done" ends up like that because someone, somewhere got burned. Not an excuse but often the reason.
> One founder wanted to negotiate out of having to pay $10K in lawyer fees.
Are these fees for the VC's due diligence investigation, or are they for putting together good paperwork for the company? For the former, the company has just bartered legal services and needs to issue an IRS form 1099 to the VC who has to pay taxes, and may be committing securities fraud by colluding to book the fees as basis cost rather than operating expense.
Anybody know?
Are these fees for the VC's due diligence investigation, or are they for putting together good paperwork for the company? For the former, the company has just bartered legal services and needs to issue an IRS form 1099 to the VC who has to pay taxes, and may be committing securities fraud by colluding to book the fees as basis cost rather than operating expense.
Anybody know?
Neither. The proper way to book merger-and-acquisition-related legal fees (along with other non-recurring professional fees related to the transaction) is as part of the basis cost of aquiring the stock. This increased basis cost is not reflected on the seller's side as increased purchase price.
Indeed, this is how legal fees related to the acquisition of any capital asset would be booked by a company. It's all part of the wonder and horror that is the modern tax code.
Indeed, this is how legal fees related to the acquisition of any capital asset would be booked by a company. It's all part of the wonder and horror that is the modern tax code.
Indeed. So why do VCs want to stuff the expenses inside the corporation?
Because recording an increased basis price means that they need to sell the stock for a higher amount to realize a gain (i.e., a profit).
Individual VCs (i.e., angels) would prefer that, b/c it means lower taxable income. However, VC firms prefer the appearance of profitability, so every cost they don't have to take on themselves makes their fund look better.
> Another person didn’t want preferred shareholders to have any preferred rights.
I'm just fine with the idea of VCs getting common stock like everybody else, but I'm not so much in favor of random redefinitions of words. I'd be afraid of the liability to the company when that person started making up his own definitions of things like employment law...
I'm just fine with the idea of VCs getting common stock like everybody else, but I'm not so much in favor of random redefinitions of words. I'd be afraid of the liability to the company when that person started making up his own definitions of things like employment law...