We love the quality of the comments on Venture Hacks. You’re missing out if you’re not reading them.

A lot of the comments contain great anecdotes from founders. Others contain good questions which we make sure to answer.

Here’s a few recent ones that are especially good. You can also subscribe to our comments RSS feed.

Legal Fees

Joe Greenstein (from Flixster) says:

“I just want to throw in that my personal pet peeve with regard to the “standard” term sheet is the bit about the company paying the VC legal costs. C’mon – you have $500M and I am raising $1.5M and you want me to take the first $25k to pay your legal expenses for doing the deal? That’s like your dad giving you your allowance and then asking you to buy him a hot dog.

When we were raising money for flixster i thought that must be a trick — like if i agreed to that term they would pull the term sheet at the last second and say i failed the secret fiscal responsibility test…”

Option Pools

Andrew Parker (an Analyst at Union Square Ventures) says:

“In a negotiation, you can also try to change the rules of the game (change the formulas). For example, I know a few CEOs that have successfully negotiated that any option pool be created after the investment by institutional money, not before. So, the investors took the pool dilution along with the founders. This represents a significant increase in valuation without asking for an increase in valuation. It’s a hard chip to win in bargaining, but it’s worth taking a shot considering the high reward.”

Negotiation

“Anonymous” says:

“Some part of the term-sheets is like negotiating “pre nups”. You are basically negotiating the framework to follow when things go wrong or you end up in disagreement in future, just at the point where you are agreeing to work together in present.

One thing the article should expand upon is how to negotiate without scaring of the VCs. An entrepreneur has to balance protecting his interest with not coming across as someone that might be a “problem founder”. No VCs like to work with someone they perceive as a problematic founders. It is a tight rope walk!”

Vesting

Suzie Dingwall Williams (a lawyer) says :

“Whatever you do, make sure that the [double] trigger runs for a period of time BEFORE as well as AFTER change of control. You want to avoid any pre-emptive house cleaning of management before the deal is done.

I still get a good deal of moral outrage from investors when I try to negotiate this provision into the deal. Their objections seem to be a knee jerk reaction to anything that might cut into their ROI on a liquidty event. As if.”

“Entrepreneur” says:

“I would like to add it is possible to raise VC money without founder vesting provisions. I recently closed a series A round for a six month old company with no founder vesting provisions. We took them out of the term sheet and they weren’t discussed again. We’ve worked previously with the same VC with great outcomes so we had a strong hand.”

“A Founder” says :

“I went to these VCs with a new CEO candidate whom I had worked with for 12 months previously. The investment proceeded and I stepped aside. Four months later I was asked if I wanted to leave and sell my shares. The offer was way below the value of the previous round so I said I would leave, but retain the shares and a board seat. However, they really wanted me gone. The deal was I would be terminated without cause, but loss of employment meant loss of board seat, which meant no ability to protect my shareholding (about 20% at that point). I was actually told by the CEO (a buddy?) that they would engineer a down round just to force me out.

Eventually we reached a compromise, but the lessons learned were:

1. Resist vesting if you have devoted time and your own capital to a business prior to VC investment.

2 Have a board seat linked to the shareholding, not the employment contract.”

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Topics Comments · Lawyers · Option Pool · Vesting

2 comments · Show

  • Andrew Parker

    I should note that Union Square Ventures has not done a deal like this :)

    But, I have seen it happen a number of times in the BioTech space.

  • Andres

    Nivi, Naval,

    Congratulations to both of you on the quality of the info in your blog. Building a community of entrepreneurs that are sharing their experiences and advice is the BEST way to prevent the horror of realizing you signed a terrible term sheet.

    Here’s a suggested topic:

    Topic: For many first time entrepreneurs its hard to get in the door at established VCs. Talking about different strategies for doing this will make a great post. We are currently doing a round A for http://www.english180.com and we decided to work with SVB Venture Exchange. They did a great job of introducing us to the VC community in exchange for the right to invest at the Round A valution set by the VC.

    That’s all for now. Thanks