He says the founders should not deal with capital raising anyway since this distracts us from running the company, and that he knows more than us about this stuff, which is, of course, true.

So he demands full rights for searching and choosing Series B investors (and all investors after that) when he think it’s necessary, and he says we’ll also have the right to veto the ones he chooses.

He’s as an honest person, and we like him. But we don’t think this is reasonable. It’s the only point of divergence, but he says it’s a deal breaker if we don’t accept. What would you say?

We really do need to prioritize the hacks at some point and talk about how to use them in an overall negotiation.

But we have attenuated protective provisions before. And I have seen other entrepreneurs do it. I have even seen an (east coast!) investor argue that protective provisions aren’t really necessary as long as the board is neutral, e.g. 1 preferred, 1 common, and 1 independent that can be removed by either party.

WARNING: This web site features hacks performed either by experienced entrepreneurs or under the supervision of experienced lawyers. Accordingly, Venture Hacks must insist that no one attempt to recreate or re-enact any hack performed on this site without adequate supervision.

Readers need to understand that all hacks are not equal and that arguing for certain hacks may decrease negotiating credibility. Working the option pool shuffle is a reasonable hack. Trying to attenuate typical protective provisions generally strikes me as a losing argument.

I am looking forward to the next installment where you guys suggest strategies to counter protective provisions.

One approach would be to ask the Investor to clearly elucidate the situations where they would like to have a veto right. For example, they should not have a veto right when less than 1% of stock is to be sold (ESOP sale by employee).

Thanks,
Santosh

I managed to use some tactics similar to those you’ve provided to whittle the list down to only 4 pages, and 31 preferences. Took 3 weeks, but we closed. As careful as I was, one “intricate preference” escaped my and my lawyers’ attention/understanding. It had to do with senior rights.

30 days after this (our first outside coporate /strategic partner investment), we had 3 top-drawer (Sandhill Road types) VCs around the table, all jockeying to give us $3.8 for 38% of the company (June 1994). On our terms. B^)
It seemed like so much at the time…

Unexpectedly, our corporate investor hung up the closing by not relinquishing its seniority rights to the new VC investor. After 4 weeks of getting nowhere, the VC almost walked away. I had to give an additional 10% in cheap warrants to get our “strategic partner” to let us get further funded, and then agree with the VC’s demand to eat it all. It was after all, a bed we’d made before their acquaintance.

And in hindsight, I must acknowledge that this “strategic partner” was totally supportive of us from that point forward ($250K/year in contracts), and its investment had clearly been the spark that ignited the race for ecommerce. Even with the 4 week delay, we’d closed on $3.8M in 60 days.