Lawyers Posts

Sorry we haven’t posted for a few days—we’ll get back to venture hacking this week. In the meantime, here are some hacks from the deep recesses of our personal blogs…


VC Bundling

Microsoft bundles its Office applications. Record Labels and Game Publishers bundle cash and distribution. Silicon Valley Venture Capital bundles Advice, Control, and Money. In lean times, you, the entrepreneur, have to buy the bundled good.

Want Cash? It comes bundled with an Advisor on your Board of Directors, like it or not. And they take Control.

Want Advice? VCs won’t take Board seats without putting in Cash – it’s the only way to get enough leverage. And they take Control. Always the Control.

Smart entrepreneurs in times of plenty (like our current financing bubblet), serial entrepreneurs, and those with profitable businesses break apart these bundles. To un-bundle, you must have multiple bidders (that’s a longer entry), and you must have the ability to refuse capital (on Sand Hill Road, collusion is just a lunch away).

Lawyers or Insurance Salesmen?

Watch out for the bait-and-switch – this is when you interview the gregarious, smart senior partner, who then swaps in the less popular, less experienced partner once you’ve signed them up. And the new person might be cheaper, but not much cheaper.

Put them on fixed-fee per job, especially for closing a financing, and especially for lawyers for the other side (one of the old great VC tricks is that startups pay for the VC’s attorneys in closings! A ridiculous practice justified as being “standard”)

The 80-hour Myth

Let’s get serious. Nobody works eighty hours a week. Not eighty real, productive hours. Look closely at workaholics (and I’ve been one, and worked with ones), and a lot of the time is spent idling, re-charging, cycling, switching gears, etc. In the old days this was water-cooler talk. In Silicon Valley, it’s gaming, email, IM, lunches, and idle meetings. Let’s drop the farce, ok?


Don’t target large and obvious markets?

“Because the process of securing funding forces many potentially disruptive ideas to get shaped instead as sustaining innovations that target large and obvious markets, the very process of getting the money to start a venture actually sends many of them on a march toward failure.”

Womb-to-tomb Investing

“… failure to execute operationally is not the only source of risk [in startups]; every venture is also subject to volatility in the price and availability of capital due to the volatility of the stock market. After the collapse of the Internet Bubble, many promising companies foundered because their funding dried up.

… [Warburg Pincus has] supported the multi-year process of building a sustainable business by underwriting all of the capital needed to reach positive cash flow, thereby not only enabling management to focus full-time on the business but also insuring against the risks generated by a volatile stock market.”

Dear M.B.A.,

“Morons! I know there’s nothing out there. That’s why I want to build the railroad!”

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.”


“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!”


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.”

You can now subscribe to our comments RSS feed.

“Having information that the other side doesn’t have gives [VCs] an advantage… they take advantage of entrepreneurs who haven’t been through this before… they were totally willing to take advantage of us.”

Mitch Kapor, Founders at Work

“Knowledge is Power.”

Sir Francis Bacon

In this series of articles, we’re going to explain how to negotiate a great deal with your Series A investors. We’re calling this series Term Sheet Hacks.

The VCs know more than you do.

You, the entrepreneur, negotiate a term sheet once every few years. You negotiate your most important term sheet (the Series A) when you have the least experience. You negotiate against a VC firm that issues two to three term sheets per month. You negotiate against a “standard” term sheet that encapsulates decades of combined knowledge from hundreds of venture firms.

Like a good chess player, your prospective investors know what the game looks like many moves from now:

  • Their term sheet foresees the Series B, possibly terminating you, selling the company, and more.
  • Their term sheet anticipates those events and includes terms like ‘protective provisions’ and ‘election of directors’ that create the best future outcome for their firm.
  • They employ a full-time CFO or general counsel who ensures their firm is cutting good deals. And his shelf is filled with books on the hilarious topic of term sheets.

On the other hand, you probably have a basic understanding of a few simple terms like ‘valuation’ and ‘vesting schedules’. You barely know what the game looks like right now, let alone at the Series C.

Your investors can take their time – they have years to invest their money – but you’re under pressure from your employees and co-founders to deliver the money that will keep your company alive. The clock is ticking…

Good companies get bad deals all the time.

Many of the successful companies that we all read about in the news didn’t negotiate good deals simply because they didn’t get good advice. Consider Jim Clark‘s (founder of SGI and Netscape) account in The New New Thing:

“At [SGI] board meetings… Jim’s face would get red and he’d start shouting that [an investor and board member] had cheated him and his engineers.”

Or ask a friend who has taken money from investors.

Whether these stories are true is irrelevant. Like any negotiator, your prospective investors are not in the business of giving you a good deal. They are in the business of making money for themselves and their investors (their limited partners).

Isn’t this what my lawyers are for?

In principle: yes. In practice: no.

With few exceptions, most law firms advise their clients to accept “standard” terms.

Most law firms do a lot more business with VCs than they are likely to do with you. VCs refer new clients to the law firms, hire the law firms regularly, and know the attorneys socially. Where do you think the law firms’ loyalty lies?

The basic incentives between you, your law firm, and your prospective investors are not in your favor. Your lawyers make money by executing transactions and your investors simply bring more transactions to your lawyers than you do.

You can’t hack a term sheet without leverage.

Don’t bother trying to apply any of these term sheet hacks if you don’t have leverage. You can’t negotiate at all without leverage. Roughly speaking, leverage is power.

Alternatives are the most basic type of leverage in any negotiation. Fancy negotiators call their best alternative a BATNA (Best Alternative To a Negotiated Agreement). If you’re negotiating a term sheet with the famous Blue Shirt Capital, your BATNA may be an independent term sheet from the renegade Herd Mentality Management.

A BATNA is just one type of leverage and it is possible to negotiate effectively without a good BATNA. Hostage negotiators do it all the time. But if you’re not in the mood for a hostage negotiation, get multiple offers before you apply any of these hacks. Don’t let anyone tell you that creating competition to invest in your business is a bad thing.

Let’s get this party started.

Our goal here is to give you the knowledge to effectively negotiate against the experts. We don’t have all the answers but we’ve negotiated enough term sheets, started enough companies, and learned from enough entrepreneurs, lawyers, and VCs to understand how this game can play out. Term Sheet Hacks is a work in progress and we’re looking forward to learning more from your comments and emails.

These articles assume that you either have a term sheet in-hand or are anticipating one. If you need a basic understanding of term sheets, read Brad Feld’s term sheet series and hire a lawyer.

Before you go on, please read our disclaimer:

This site provides information. Use it at your own risk.

Information is not the same as legal advice – the application of information to an individual’s specific circumstances. This site does not provide legal services or legal advice.

Although we try to make our information accurate and useful, you should consult a lawyer to interpret and apply this information to your particular situation.

We are not lawyers and we do not take any responsibility for rashes, financial ruin, or anything else that follows from applying this information.

Our first two hacks show you how to create a board that reflects the ownership of the company and why you should make a new board seat for a new CEO. We also maintain a list of all the term sheet hacks. Please do read on…