You Can Do Too Much Due Diligence

Fred Wilson

You can do too much due diligence. It's important to talk to the market and hear what it is saying. But you have to balance that with other things; the quality of the team, the product, the user experience, etc. You cannot rely alone on due diligence, particularly early on in the development of a company and a market.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Because It's Standard

Fred Wilson

I never ever say that a specific provision is "standard". Nothing is standard. You either need it or you don't. Explain why you need it and most of the time you'll get it or something like it as long as both sides really want to make a deal.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Reading Your Legal Docs

 Babak Nivi

Some docs are too long and boilerplate to read, so this is how I read financing docs: (1) Read and understand everything in the term sheet. (2) Get a good lawyer because you probably don’t have one. (3) You probably can’t tell the difference between good legal advice and bad legal advice. So you will need a great advisor. 

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Off Balance Sheet Liabilities

Fred Wilson

Balance sheets and income statements are important to understanding a company. But they do not tell the entire picture. They don’t tell you if the team is solid. They don’t tell you if the product is any good. They don’t tell you if the market is big. And they don’t even tell you about all the costs and they don’t tell you about all the liabilities. So you have to dig deeper and understand what is really going on before putting your capital at risk. That is called due diligence and it is critical to investing.  And looking out for liabilities that aren’t reported on the financial statements is an important part of that.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Time is the Enemy of All Deals

Mark Suster

You all know this intuitively.  But on a scale of ABC (always be closing) there is a wide degree of urgency that entrepreneurs show.  As as I’ve said before, I believe that getting things done is one of the major things that differentiates successful entrepreneurs from just reasonable ones.  This is a reminder for all entrepreneurs to remember to be careful about “deal drift.”

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Backing Out Of A Term Sheet

Chris Dixon

Venture capital term sheets are not legally binding (except certain subclauses like confidentiality and no-shop provisions). That said, there is a well-established norm that VC’s don’t back out of signed term sheets unless they discover something really, really bad – fraud, criminal backgrounds of founders etc.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

How to Deal with Skeletons in your Closet

Mark Suster

What about issues that might have a slightly negative connotation that the VC couldn’t know in advance?  Skeletons in the Closet are these types of issues.  They are issues, though, that your VC would certainly find out during due diligence or at a minimum you’d be ethically obliged to tell them. These are all things that you know you’ll eventually need to tell your VC and ethically you must tell them before they fund you.  But when in the process should you tell them? I’ve had this debate several times with VCs – sometimes they agree with me and sometimes they violently disagree.  In this particular case – I’m right.  Here’s my advice: Don’t reveal your “skeletons” in the first meeting but you need to tell your sponsoring partner before the full partner meeting.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Entrepreneurs Need to Learn Some Law

Chris Dixon

Entrepreneurs, especially first timers, should have lawyers review everything they sign. But you can’t outsource the understanding of key financing and other legal documents to lawyers. My point is you can’t leave these judgements to lawyers. They don’t have the expertise to make these expected value calculations nor do they understand how various scenarios affect the founders personally.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Don’t Shop Your Term Sheet

 Chris Dixon

From VC’s perspective, one of the most annoying things an entrepreneur can do is “shop” a term sheet. That means after they’ve offered you a term sheet in writing you take it to other investors to try to get a better deal. Why are investors so sensitive to this? First of all, no investor wants to think they are “just money” – the idea that you want to get an explicit auction going suggests that. More importantly, what often happens is that once a VC has offered you a term sheet – especially if that VC is well respected – other VCs suddenly become interested.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

The Ideal First Round Term Sheet

Fred Wilson

 There are multiple benefits of using "boilerplate documents." First, it leads to a very fast close. Second, the legal costs are minimal, certainly less than $10k and they should be less than $5k. And third, it sets the company up well for future rounds of financing because there is nothing funky in the docs.
 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Beware of Gym Salesman VC

Mark Suster

Every term sheet has an expiration date in it.  That’s normal and no reason for alarm.  A VC isn’t going to give you an unlimited offer to stay on the table as you shop the terms around town.  But there is a difference between a term sheet with an expiration date and a VC that puts pressure on you to sign and alludes to pulling if you don’t close by the date.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

How to Close a Term Sheet Quickly

Babak Nivi

How do you quickly turn a signed term sheet into cash in the bank? I’ve seen entrepreneurs do it in one week and I’ve seen them do it in four weeks. How do you do it as quickly as possible? (1) Complete all business diligence before you sign a term sheet. (2) Set a firm closing date for your lawyers and justify it with something like, “I’m leaving the country on that date.” (3) Have a strong BATNA that keeps the other side moving quickly.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Discuss Your Plans Before Signing a Term Sheet

 Babak Nivi

“Do you agree with our plan for the next two/three/four quarters?” Discussing this before you sign a term sheet has a few benefits: (1) You learn what it’s like to work with the investor; (2) You discover if your investor agrees with your plan; and (3) Getting agreement on the plan before the financing is normative leverage.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Lawyers Are Referees, not coaches

 Babak Nivi

Lawyers teach you the rules of the game. But they usually can’t teach you how to play it. Lawyers say whether you can do something, within the confines of the law and your existing contracts. Lawyers will also write the contracts and do the filings. But they usually can’t tell you what to do—that’s what coaches do. 

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Should I Pay My Investor's Legal Fees?

 Babak Nivi

Venture capitalists don’t want to pay their legal fees for financings. Don’t fight this term—that’s a “big move on a little issue.” Instead, cap your contribution to the investor’s legal bill. And watch the legal bills in small financings: don’t spend a large portion of the investment on lawyers or give up a lot of equity for the privilege of paying your investor’s legal bill.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing

Should I Shop Around?

 Babak Nivi

A deal is only as good as its best alternative. Keep improving your alternatives until you have a signed term sheet. And keep developing your current offers or they will die. Finally, don’t say “shopping around”, it puts investors off their stroke.

 



Filed Under:
Collection: Funding
Category: Negotiating & Closing