
Term Sheet Negotiation Tells - jsavimbi
http://permanentrecord.firstround.com/2011/10/31/term-sheet-negotiation-tells/
======
patio11
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.

------
ChuckMcM
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.

------
joshu
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.

------
sunchild
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?

~~~
blacksmythe

      >> How often are these term sheets enforced anyway?
    

Virtually every time. Nothing is ever going to turn out better for the founder
than what you see on the term sheet.

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.

~~~
sunchild
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.

------
WeWin
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.

------
nirvana
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.

~~~
joshu
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.

------
Daniel_Newby
> 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?

~~~
rprasad
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.

~~~
Daniel_Newby
Indeed. So why do VCs want to stuff the expenses inside the corporation?

~~~
rprasad
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.

------
nknight
> _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...

