I used to think negotiations were simple - just come in with a reasonable, middle of the way set of terms, treat the counter-party as a reasonable, benevolent entity, and everything will work out all right. I quickly discovered that while there are some people who work this way, for the most part if you adopt this approach people will eat you alive. You won't even know what hit you.
I'd use the "reasonable terms" principle with friends I worked with for some time, or with people who have an immensely strong reputation for being reasonable (YC, etc.) But if you met someone two weeks ago, and they bring up the concept of an emotional bond into what ought to be a commodity transaction, alarms would go off in my head. (Note that it's easier to talk about an emotional bond when you're on the better end of the deal).
Mark probably is one of the very few people who work in a reasonable manner, but unfortunately for every person who works this way there are dozens of impostors who'll pretend they're reasonable and then eat you alive the moment you let your guard down.
So my advice would be the opposite. Unless you've worked with the person for a while, or have really strong evidence that they put insanely strong ethics before profits (and believe me, gut feeling is not strong evidence), or you've already indicated commitment, take the better deal.
I don't know Mark Suster, and maybe I'm completely misreading this, but the whole story seems rather self-serving to me. His "ethical dilemma" was whether to agree to a deal changing in such a way that he would be paying 50% more... and when he said that no, he wasn't going to pay 50% more, we're supposed to accept this as a great triumph for ethics?
I'm a great believer in behaving ethically, but this is not the sort of example I'd give.
Fair comment. I could see why it might come across that way.
The impression I meant to leave was that I risked losing out on the deal all together because the CEO could have simply done the deal with the other investor.
I would rather that have happened than to screw over the VC who convinced me to look at the deal in the first place.
I agree with what you did and it's what I would have done no question. But I have to say that loyalty and that type of behavior has definitely hurt me business wise over the years.
I wonder how much of that is "doing the right thing" vs. protecting one's reputation so you can continue to do deals. (And you clearly referred to protecting reputation ..)
If you are just interested in "doing the right thing" then the issue of protecting one's reputation wouldn't even come up in the discussion, right? (And nothing wrong with sounding "pollyannish"?)
I wouldn't have done what your friend did at the dance. Not because I'd be worried about reputation but because it would make me feel bad to do it. I wouldn't want it to happen to me (empathy). I can tell you have empathy just by the way you wrote the post. I'm wondering if you feel a need to cloak it in "reputation" and are you sure that's as big a motive as you make it out to be? As if it won't be manly or something.
Right, despite the example being a bit off I can see what you were trying to say.
It seems to me that this situation started when the company had a signed term sheet but still went around to VCs trying to interest them in investing. Is this normal? (I'm a bootstrapper, so I have no experience with these games.)
Completely agree. A simple rule of thumb is to treat everyone as guilty till proven innocent.
Proven innocent: close friends you'd trust with your children or your money, colleagues you've been through the crucible with (you know the measure of each other), YC and other small companies with a strong rep built over years and a simple management structure that isn't likely to be co-opted, etc.
Gut feeling = wishful thinking + rose-tinted glasses. Ignore it.
I disagree. I always trust people unless (or until) they've proven themselves untrustworthy. This may sound naive, but it's what works for my style of doing business, which hinges on mutual trust and almost over-the-top openness.
Here's what "guilty until proven innocent" misunderstands: without trust, the relationship is doomed regardless of whether the mistrust is justified or not. If I don't trust someone, I don't do business with them, period. And if I subscribed to your "simple rule," there would be practically nobody I could do business with.
I understand that view. And I've certainly been burned. Still, if you're dealing with a VC there is much you can do to reference check them before signing a term sheet. This involves talking with portfolio companies that DID NOT succeed.
My term sheet wasn't signed so I would have understood if the entrepreneur chose the other partner.
In the case of the new vc / old vc example that wasn't me ... yes, there was a 'no shop' clause. but ...
1. those are mostly unenforceable (is a vc going to sue an entrepreneur over no shop? not likely)
2. if the team really wants to get around it they can just run out the clock. most no shops are 45-60 days.
In the end, a term sheet is really just an expression of honor and reputation.
This account is vague about the most critical point: was there a handshake deal? The phrase "the company agreed on a price" suggests there might have been. But not necessarily; they might have been talking about what the price would be if they did a deal.
If there was a handshake deal, the company should certainly have stuck with the original VC. Not because of any complicated rules about who introed whom to whom, but simply because you have to honor handshake deals.
If there was not a handshake deal, it's less clear. The company seems to have been fairly eager to raise money. Which implies they'd have taken a sufficiently good deal if one was offered. Which implies it had been in the investors' power to get a handshake deal if they wanted one, and if they didn't have one, they essentially blew it by negotiating too hard. If so then I don't think the company would be obliged to stick with the original investor.
But I'm just speculating; it's impossible to say for sure without knowing more.
No way. A VC will not honor a handshake deal. They probably won't renege simply because they can get a better deal elsewhere (that's not how they operate - if a deal is good they take it, as they have the luxury of being able to participate in lots of deals), but if your market segment starts looking less favorable then they'll probably dump you.
Well put but it raises a (possibly naive) question. At what point can one assume that a 'handshake deal' has taken place, and is that point really the same for both parties? e.g Is it literally a handshake and the words "We're going ahead with this!" Or could it be more vague where one party thinks there's a deal but the other's not so sure.
You've said that deals exist to fall through and that "The key to closing deals is never to stop pursuing alternatives ... don't believe it till you get the check." [1] From my point of view, I'd want to spend as little time as possible in 'handshake-limbo' and get something signed. The deal might still fall through but the intent to close is more explicit.
Aside: Mark says "... so I thought they should take the deal", which implied to me that not taking the deal was still a valid option. i.e. no handshake.
The Zuckerberg Washington Post(Graham) and Accel situation is one counter example - Zuckerberg walked away from a handshake deal and I suspect it didn't exactly hurt his reputation.
I dunno, everyone considers him sleazy, underhanded, and not trustworthy. If I had a startup and he came to me and wanted to invest unlimited money into my venture, I would tell him to get the hell out. If the opposite was true, and he had a venture that needed investors, I'd pass and go invest in a company ran by people who actually give a damn.
The fact of the matter we are all professionals and everyone's job is to protect their interests.
The CEO's job is to get the best deal for existing shareholders and optimize the growth. The investor's job is to buy in at the lowest price / strictest terms they can get away with. When a better deal comes along for the company and the investors cannot match it they start coming up with all sorts of phony excuses to buy in at the original lowball offer. If you feel strongly enough about the company don't be a cheapo and match the new offer. If "it does not fit the structure of your fund" then move on to the next deal.
Jeff Bezos walked away on the offer by Olympic Venture Partners (OVP) when Kleiner jumped in and outbid them big. I heard this in a talk by OVP partner who complained that John Doerr could make what he believed to be an "outrageous" offer because the fund already had Netscape IPO exit and could take much greater risk. Guess what, Jeff Bezos did the right thing for himself and his existing investors and employees.
VCs walk away on term sheets all the time and typical deal structures favor them anyways. The deal is done when the legal papers are signed and the check clears. Nobody should act as though they are entitled to anything, whether they are VCs or CEOs.
Thank you. I wish more people saw it that way. I always believe in negotiating / seeking competitive deals. But once you agree a deal with people you honor it.
To be more clear (and I came back to edit for more clarity and saw your reply that paralleled my ambiguous construction) it's about the VC (you) not backstabbing your coinvestor.
IF (and it isn't clear from my reading) the company didn't have signed papers with your first coinvestor, they are well within rights to drop the investor. But you have a responsibility to not abuse the trust the coinvestor gave you.
If the company, gets a better whole offer, good on them. But they can't chisel apart the first offer.
1. You negotiate and have a handshake deal with a company for a round of funding.
2. The company gets an offer for a higher valuation from someone who wants in on the round.
3. The CEO asks you whether to take them or not, but basically leaves it up to you?
In other words, assuming the CEO didn't "backstab" you but rather sought your advice, would you be upset that he's even considering a different deal? Would you tell him he should take it, assuming the deal is still worthwhile for you? How would you react?
that is EXACTLY what happened in the situation I described. We hadn't yet signed the term sheet. So I told the CEO that I would understand if he went with the other firm. But that I personally couldn't be involved with the deal for reasons I described. Until a CEO has signed the term sheet (or gives you an email saying they will) I assume they are still negotiating with others.
I'm mostly interested in whether you would hold it against the CEO for asking your opinion on the matter. It sounds like you might be implying that the CEO shouldn't even be considering the decision, whereas I would assume a CEO working with you would want to feel like he can be open with you about his/her dilemmas.
To be even more clear, its' not about the CEO in the story its about Mark not betraying his friend (e.g. going home with the girl who brought him to the dance) and instead going with another new VC.
The CEOs weren't brought to the dance, they could pick whichever VC they wanted to. It's just that he would have left the deal if they hadn't picked his VC.
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He also throws in a story at the end about another company who signed a term sheet, then reneged on it and considers that as a black mark on their reputation. Maybe it is, maybe it isn't but its a separate story.
I have been self employed for 22 years. I have always worked this way, and it has always paid far more in benefits than I ever could expect. People will talk about the type of business person you are and the word always gets around. It is amazing how fast and far your reputation can spread (for better or worse).
"Brand of ethics"? You either stick to your word after you give it, or you don't. I don't think it has anything to do with which party is telling the story.
Business negotiations (in which VCs benefit from founders not shopping around, negotiating for better deals, or building interest) are not at all comparable to a social situation involving actual humans. The goal is to get readers thinking morally instead of in the cold business terms that the VC is.
This applies to a business negotiation. Not a series of them and much less to a career made out of busines negotiations. Business is life as usual: sometimes you must decline of something but generally you have to play the bigger game where it matters how you treat other people, even at the expense of optimal business or a short-term gain.
I would say that playing these social games IS what constitutes business and while it's important to bond to allow for future business sometimes, actually, the right thing is rather to not to play along if your gut says no, even if it was good for business.
Remember that VCs are motivated by returning a big return to their LPs first.
It's nice to say that they'll stick with you but that could change in an instant. Plenty of stories out there where people have gotten screwed over by unscrupulous VCs.
PS. obviously, there are exceptions to the norm but I'm a big believer in understanding people's primary motivations.
This is an analog situation. Things like this are a matter of degree not absolute. Just like speeding, insurance claims and taxes. Some people can definitely be trusted less than others to care at all about the other party. Those are the people that you need to identify.
I thought the catchphrase was "Dance with the lady who brought you to the dance". I guess that's quaint and old fashioned nowaways, so it's been updated to don't "hook-up" (a euphemism for something more intimate) with someone else!
Very valid points. People will forgive all kinds of mistakes and failures - except for ethical ones. There are always reasons to take the short cut in prisonner's dilemma but work and life is a repeated game where trustworthiness pays.
In the first example (staying loyal to a lower valuation) financial incentives are on the aide of ethics. The later example (tossing out a signed term sheet to get a better investor) is where it's a real test. It's not an ethics decision until there is downside.
IIRC Zuckerberg reneged/begged his way out of a deal in similar circumstances. The Washington Post had a deal to invest and then Accel came in with a huge valuation -- which Zuck took.
In the phrase "all's fair in love and war", love and war aren't (or at least shouldn't) be meant metaphorically. This isn't war and it sure isn't love. (Which also isn't referring to the full set of the million things "love" can mean but specifically to romance.)
Sometimes, when you get a reputation for behaving unethically, you limit the types of people who will do business with you. Consequently, you paint yourself into an unethical corner. When the only people who will do business with you are unethical, it increases the amount of risk you face in each transaction. Moreover, when you do get taken advantage of, few people care as you reaped what you sow.
On the other hand, if you behave ethically, other ethical people will be drawn to you. This lowers your risk per transaction. And, I suspect it will help you sleeP a little better at night!
I am not sure that everything is fair in love and war. The ideas of "cheating on someone", and "banning clorine gas" might be taken as the counterexample.
Certainly I would avoid a known backstabber in business to the point of not doing business with them, even if they had the better financial terms.
> Banning clorine gas was a silly thing to do -- it didn't exactly stop the next war and only made the concept of war less terrifying.
This is such a silly statement I don't know where to begin. They knew there was going to be another war, did they? How did it make the concept of was less terrifying? WW1 was the "Great War" because it was the first time war was terrifying for everyone (except the stupid British generals, but don't get me started).
On this statement, one would disagree with the nuclear non-profileration treaty and think that WMDs are ok because war would be more terrifying.
What about ethical behaviour of the new VC in the last case? It's like the old VC did due diligence and the new VC "used" all that work without a shred of decency.
Truthfully, I fucking hate this sort of shit. VC's and entrepreneurs are at opposite sides of the table. You can pretend it's a friendship, but it's not. Now, I don't extend this to angels. They are making a personal investment, or at least that's how I perceive it.
VC's represent a corporation with a corporate interest. I do not extend ethics to corporate entities. I will feel bad if something bad happens to a person, but not to a corporation. I will never allow myself pretend that corporations deserve anything close to a personal bond. And fucking shame on you for trying to make people think of that.
You are business partners. At the end of the day, it is money. You want to put a guilt trip on me? GTFO.
I'd use the "reasonable terms" principle with friends I worked with for some time, or with people who have an immensely strong reputation for being reasonable (YC, etc.) But if you met someone two weeks ago, and they bring up the concept of an emotional bond into what ought to be a commodity transaction, alarms would go off in my head. (Note that it's easier to talk about an emotional bond when you're on the better end of the deal).
Mark probably is one of the very few people who work in a reasonable manner, but unfortunately for every person who works this way there are dozens of impostors who'll pretend they're reasonable and then eat you alive the moment you let your guard down.
So my advice would be the opposite. Unless you've worked with the person for a while, or have really strong evidence that they put insanely strong ethics before profits (and believe me, gut feeling is not strong evidence), or you've already indicated commitment, take the better deal.