Always Go Home with the Lady Who Brought you to the Dance

Posted on Mar 3, 2012 | 99 comments


I had this ethical dilemma pop up on one of the first deals I even did as a VC.  I had been looking around at several deals in late 2008 as the markets were tanking.

I had gotten close on a couple of deals but nothing rose to the level of “must do.” I was learning which VCs I wanted to work with, what stage & check size I wanted to commit to and what teams would be a good fit for me.

I got a call from a VC friend of mine who said, “we’re looking at this deal but can’t write the full check. I think you should look at it.”

I’m sure I’m not the only one he called. But I had just seen the company present at a recent tech event and thought highly of what they were building. I was interested in the company but I wasn’t chasing the deal. The call from a fellow VC to “look harder” made me decide to request a site visit. I went and spent a day with the team and loved their vision and their entire team.

It mapped pretty well to my dream team for an A round investment. I decided to write a $2+ million check along with my co-investor who offered $750k.

Since I didn’t originally source the deal I let my co-investor set the terms and negotiate the deal with my consent. The company agreed on a price but felt it was a bit lower than they had hoped for. But it was early 2009 and not many companies were getting new financings at all so I thought they should take the deal.

Another VC called me when they heard from the company that I was going to do the deal. The other VC offered to invest $2 million alongside my $2 million so the company would be getting more money. The potentially new co-investor agreed to increase the price of the deal by nearly 50% so it would have a real impact. He also called the company. He wanted us to drop the original, smaller VC.

The CEO called me. He told me he wondered if we should consider switching partners so the company could get more money and at a higher price.

I told him that if he did he’d have to do the round without me. The truth is that I wasn’t as valuation sensitive as my original VC partner was and I would have been willing to raise price. But my other VC partner had a smaller fund and raising price would have a big impact on his ability to finance the company.

I told the CEO:

“The original VC brought me to the dance. Without him I wouldn’t have travelled to see you and spent as much time as I did getting comfortable with the deal. 

I know it’s tempting to switch partners. The other configuration seems more attractive to you. But part of the reason the other VC called about the deal is that he heard we were doing it in the first place. Had he not heard about our commitment it’s not clear whether he would be rushing to submit a term sheet.

If you decide to go the other way, I’ll understand. But for me I care too much about my long-term reputation. I don’t want my reputation to be built on abandoning friends in good times or bad. If you decide to stick with us you at least know that I’d treat you with the same respect if you were in a difficult situation.”

We closed the deal. We later gave the company another $5 million and my original VC co-investor committed another large check relative to their fund size. They have been a very active and an awesome partner.

This analogy has stood the test of time with me and steers my actions. I saw it first hand in college, which is where I first developed the analogy.

A close friend of mine was looking to ask somebody to her sorority dance. She asked me what I thought about her asking one of my fraternity brothers. He was the son of a Hollywood celebrity and looked like he could have been a star as well (later in life he became nationally known). I mentioned it to my friend and he green-lit the plans for her to ask him to the dance.

She was beautiful, too, so it wasn’t as though he was “out of her leagues” … but he was pretty sought after.

I happened to be at the dance, too. I saw both of my friends. The night started harmless enough. Lots of dancing and a bit too much booze. Pretty typical college evening. But as the night wore on my fraternity friend started forgetting that he was at a dance in which he was invited to. It wasn’t a free for all. He ended up hooking up with another girl and literally left the dance with her.

My friend who had invited him was obviously mortified. She shouldn’t have been. He was the dolt. I lost respect for him. You learn a lot about people in these situations.

So it reminds me of a recent deal in Silicon Valley from 18 months ago or so. I had two friends who had agreed to co-fund a company. I knew the CEO well and heard what was going on from all sources. One of the best known VCs in Silicon Valley had decided to come in at the last minute and fund the company even though a term sheet was already signed.

The CEO said, “how could I not take VC “X” – they’re one of the best brands in the industry?” I disagreed. He has signed a term sheet. A term sheet is your bond. You’re not legally bound by it but you really hurt your reputation when you pull out for any reason other than something truly extra ordinary.

He tried to get new VC and previous VC to split the deal (the third VC didn’t care either way). Previous VC said, “no” – if that’s how you’ll treat us now we know how you’ll treat us down the road. I agree with their position. So new VC did the deal. And they have now given the company A LOT of money. We’ll see what happens. I still think the CEO made a mistake.

In life you’ll be faced with many situations like this – moral dilemmas. You’ll learn that there are many bad actors. You’ll find that there are very few people who still believe in honor. When you find those people they’ll be lifetime friends and business associates.

But you can start with yourself. It’s funny how many people I’ve known for 20+ years keep popping back into my life. It always reminds me the importance of always treating people with respect. You can have disagreement. You can have fights. You can even have people with whom you don’t want to work. But if you act in ways in which people question your ethics – people will have very long memories.

Me? I’d rather walk away from a deal than leave with somebody other than the lady who brought me to the dance. And it’s not for purely “Pollyana-ish” reasons. I believe that your long-term reputation matters more than any individual deal. And life’s too short to work with dicks.

  • Frank Smythe

    Greatness
    comes having a vision and character  that goes beyond you and even beyond the organization. The most valuable of all education is
    the ability to make yourself do the thing you have to do when it has to be
    done, whether you like it or not. Greatness doesn’t come from a
    tactical sense of execution. 

    What we believe and focus on becomes our reality. Turning problems into solutions
    requires that we adjust our perception, suspend our judgments, and remain
    open-minded to all possibilities. In other words, it means seeing reality for
    what it ‘really’ is and for what it ‘really’ isn’t.

    Excellent story of character and doing the right thing Mark.

  • http://bothsidesofthetable.com msuster

    Yeah, I get that situation. It’s complicated. There are times where I think it’s totally wrong for the VC to talk about other opportunities. There are times where it IS appropriate.

    On several occasions I’ve seen entrepreneurs who 
    - have taken major dilution from their investors due to problems in the business or 
    - their investors haven’t given them more money but are stringing them along month-to-month or
    - they were a hired CEO but the investors aren’t really supporting the company
    - etc.

    where I will tell the entrepreneur what I honestly think. I never use it as inducement to run one of my companies. But I often will say that if their investors aren’t supportive then perhaps they need to think more seriously about their future.

  • http://bothsidesofthetable.com msuster

    thanks, sholto

  • http://bothsidesofthetable.com msuster

    ha. sounds like your mom was a bit extra harsh / old school ;-)

  • CliffElam

    We got that too – and in retrospect they were right and we should have been a lot smarter.  I never minded someone saying: you need to pull the ripcord.  It was the recruiting bit.

    Running a failing company is a very in-the-moment thing, much more so than, in my experience, running a successful one.  Different fear levels/types.-XC

  • https://www.testmymarketing.com/ Matthew Lenhard

    You’re absolutely right, you should never disrespect someone by abandoning them  at the last minute. You never know what that person could have done for you in the future and being greedy and selfish isn’t worth losing a friend or a contact.

    You can learn a lot about someone through their actions and if they would do this to someone else, I’d bet they would do it to you as well. I had a friend do this at one of my school dances and I made sure to distance myself from him after.

  • Nick Bassill

    It seems to me that everyone wants to be respected, loved and honored.  That means being loved, respected and honored by someone else.  Yet, it truly starts with ourselves.  When we respect, love and honor ourselves first, we will likely choose the right path and make choices that will make us and the others we are working with or living with feel good.  If there is a question about a decision to make, simply ask:  will I feel good about myself, will I respect, love and honor myself, if I make this choice? There never is enough money to fill up an unhappy feeling.

  • http://bottomlinelawgroup.com/ Antone Johnson

    Such timeless folk wisdom.  ”You dance with them that brung ya” is an old Texan expression of loyalty going back a good century or more.  Why is this so hard for people with Ivy League MBAs (and JDs — we lawyers aren’t immune) to figure out?

  • Sheilahkalfors

    I have “shared and enjoyed”! Thank you.

  • http://priceonomics.com/ Michael Flaxman

    A cynical explanation:  you used a smart negotiation tactic to pressure an entrepreneur into accepting a low price for the round you wanted to participate in.  Whenever I hear an investor asking the entrepreneur to do something that in the short term will help the investor at the entrepreneur’s expense, I get *extremely* skeptical.

    In this example, it feels like you did something self-serving in the short-term and then wrote a blog post about it to benefit in the medium/long term:  this will bolster your reputation and you’ll be able to point to in future rounds when this situation inevitably repeats itself.

    Mark, am I being unfair?  None of the other commenters have taken this view.

    I want to be very clear that I don’t think you did anything improper at all,  I probably would’ve used the exact same tactic.  Also, I love the blog.  Please keep it up!

  • http://twitter.com/LexInterior Alexis Peterka

    It’s good to hear this from a VC.

    One of the risks of founding a startup is that it’s easy to be blinded to everything but the vision. It’s easy to forget the golden rule, that we need to treat everyone – co-founders, investors, and especially our customers – as we want to be treated. Even if it means not scaling as fast, or working with an investor who isn’t a big shot. It’s worth the short-term sacrifice to have honorable people on your team.

  • http://www.quantifire.net/blog Will

    Thanks for writing this Mark.  Really timely as these thoughts of reputation and honor were swirling around in my head for the longest time.

  • JamesHRH

    Mark – I found it interesting that noone seems to pick up that an underlying lack of confidence drives going home with someone else.

    If a ‘brand name VC’ turns your head, you must think you need them to be successful. Or you won’t get them at a later date (always a classic mistake on the dating side, I think).

    To steal from Malcolm Gladwell, you need VCs that are good enough. You don’t need any particular VC.

    One other thought, isn’t the obvious solution:
    - jeez, stoked you want to be in our deal
    - but it is closed already
    - however,  your interest probably shortens the cycle on our next raise
    - you are front of the line on that round
    - why don’t we connect everyone and get started on the second raise discussion, ASAP

  • http://about.me/mikeschinkel MikeSchinkel

    @Mark – This post probably many than any of your other posts has me wanted to work with you someday, in whatever capacity.  

    I will say though you might have preferred a slightly different title, i.e. “Always LEAVE with the Lady Who Brought you to the Dance.” Your existing title might just be a little bit too presumptuous for certain ladies. ;-) 

    P.S. I hope your lady friend that got treated so badly went on to have great success in her life, however she defines it.

  • http://www.mattmireles.com/ Matt Mireles

    Well, experience has a way of changing your mind and teaching you things. Before I’d actually raised money and, you know, done a startup, I focused waaay more on price & dilution. Now, while that stuff still matters on some level, I don’t really care about that stuff. Price & whatnot is more of checkbox and making sure it falls into an acceptable range. What really matters are the people, who they are and how they behave.
    Honestly, there are some lessons you can only real learn with experience, no matter how smart you are.

  • Ayush Ghai

    Yes, one mustn’t back down on one’s word. ever.

  • http://www.interscope.com/ Rob Harvey

    I’m relatively new to Mark’s blog but have to point out not only do his posts teach ultra-valuable inside the VC world info, but as important, inside info that pertains to other businesses. Today’s post is spot-on when applied to my world, the music business. The artist/label relationship is similar to the VC/startup relationship, long with a lot of money, expectations, reputations and trust on the line. Regardless of which side you represent at the onset, negotiation must be approached smartly, but most important, ethically. By doing so, even if the artist goes to another label, artist and team leave the table knowing what the other companies are made of and capable of, and will come back when another opportunity arises, and they do. Similarly, there are only a handful of major record companies out there, and the major players have been there forever, and aren’t going anywhere. If either entity burns the other in a deal, mark my words, they just burned several future deals too. Personally, I do what’s right because of the person I am. It just so happens I benefit beyond being able to sleep well at night.

  • http://bothsidesofthetable.com msuster

    Michael, thanks for the courage to write that comment here. I have no problem with pushback. That’s the exact comment people have been making at Hacker News.

    The point I wanted to make wasn’t about negotiating a lower price. The price was set by my partner. I told the CEO I would understand if he took the other offer. Just that I couldn’t be part of it. He hadn’t yet signed a term sheet so he had every right to talk to the other partner.

    The point I had wanted to make was that at times it’s OK to miss a deal in order to do right by those the brought you to the dance.

  • http://bothsidesofthetable.com msuster

    I love your outline. It’s what should have happened. And it’s what IS happening as we speak on another deal in which I’m involved. But that’s too fresh to write about.

  • http://bothsidesofthetable.com msuster

    Ha. I can see now what you mean about the title! Didn’t mean it that way!

    My friend is a jewel and did just fine in life. Thanks.

    Thanks for the kind words.

  • Camille

    Thank you. Character always prevails, just a matter of when. Thxs for leading with action.

  • JamesHRH

    On the ‘loved your outline’ theme, I really loved your raising money framework:
    - why should I buy?
    - why should I buy from you?
    - why should I buy now?

    That’s the customer question framework, for sure. Terrific stuff.

  • http://twitter.com/devrimyasar Devrim Yasar

    First I liked the article a lot (We went home with the lady who brought us to the dance!) , kept scrolling down, and I was double impressed that Mark replied to almost every comment.. Now I want to go back to Quora and paste this link as an example of a good investor vs the ones who just enjoy the glamour and skip the work http://d.pr/Ut98

  • Tomasvdb

    I never tire of that last sentence :) for a long time I assumed that dealing with dicks was just part of the job. Luckily nowadays I have the luxury of walking away. Some people I know still think I lose out on opportunities because of it, but it’s reassuring to hear that someone of your stature does the same. 

  • raphifix

    This post was very enlightening. As a student who is looking to learn more about tech venture capital, it is refreshing to see that venture capital has rules and norms. I feel like the average person hears “venture capital” and interprets it as “corporate raiders.” Thanks again for the post.

  • http://hrnasty.com/ HRNasty

    Long time lurker, first time poster.  This was a great post.  I really appreciate how you relate your experience as a VC to something everyone can relate to, the dating world.  

  • http://twitter.com/clarkjam James

    Thanks & agreed. Though I had to learn the hard way.

  • http://twitter.com/quidavoto David La Motta

    “And life’s too short to work with dicks.”

    That’s got to be the most accurate closing line I’ve read in a long time.  Mark, excellent post, as always.  Truly enjoy your articles.

  • Andrew Williamson

    A
    very good article; I was a Director at one company where we sold to a VC twice
    during my tenure.  Unfortunately I did
    not experience this level of integrity

  • http://twitter.com/ascalisi Alex Scalisi

    No deal is bigger than the opportunity for the next

  • Dhawal M

    I remember someone saying reputation is hardest to build and easiest to lose. Why to take risk on losing your reputation? And my parents always said – “If money is lost nothing is lost, if time is lost something is lost and if character is lost everything is lost”. Thanks for reminder Mark.

  • http://www.ToolSpinner.com/ Daniel Cole

     @roberthaydock:disqus  Sometimes what is “best for the business” is not always obvious. In the post I’m sure the first CEO thought long and hard about dumping the first VC for the higher valuation and addition cash; in the long run, loyalty was best for the company.

  • http://essaychampions.com/ buy essay

    Great!

  • https://plus.google.com/u/0/b/114718778524214371963/114718778524214371963/posts kidmercury

    the BFF model of investing is so obsolete. transaction sizes need to get smaller and investors need to invest more of their network in a structured manner. FRC and ycombo are taking some steps in this direction, but it is much, much further to go. crowdsourcing is the really disruptive angle, but that’s illegal in the land of the free, and financial industry incumbents generally aren’t going to argue too much with that rule as it benefits them. at least in the near term. 

    anyway, once all the numbers go down, people care less and the whole issue doesn’t have be magnified into some major moral saga. 

    also what brought me here is that i’m reading hte book “innovator’s DNA” by clayton christensen.  reminded me a lot of your posts mark on entrepreneur DNA. i think you would enjoy the book and find it thought-provoking if you are looking for something to read. of course christensen always is in my opinion, reading him is like gospel.  

  • http://NextVideo.co/ Robert Haydock

    I founded a multimillion dollar company when I was 19 but didn’t pick the best business partner and learned a hard lesson when I let him walk away quietly after stealing money from our company. I thought it was the honorable thing to do, but didn’t realize at the time, that if you are willing to steal, odds are you won’t live up to any agreement you sign.

    I know my situation is probably somewhat unique, but it taught me that you have to look at each situation individually to determine the honorable way to handle things. I still occasionally think about what happened and how the outcome would have changed if I had handled it differently.

  • http://NextVideo.co/ Robert Haydock

     I completely agree with you. Each decision of this magnitude is unique and requires thoroughly weighing all the risks and potential outcomes. You don’t make a ton of these types of decisions in your career but they can have a profound effect on the eventual outcome. 

  • http://lichtman.ca jeremylichtman

    Its a puzzle how anybody who didn’t care about their reputation could last in your industry.

     The VCs I’ve spoken to all seem to be straight-up folks. You obviously would know far more people in the field than I do, but I haven’t encountered a jerk yet.

  • Tommong

    very true. Rohan. thx

  • Tom Mong

    thank you. great article

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    I have no more words to describe your sweet opinion here.This article is best of this blog.I have a excellent feedback to read it.Well done.Keep more update with your goal collection.

  • http://twitter.com/JasonJayDerek Joshua-Derek Bossman

    Thanks for such a great piece, Mark. As always, its good food for thought.

  • Kenneth Breeze

    We enjoyed your blog Mark. Always surround yourself with people of flawless integrity.

  • Kenneth Breeze

    We enjoyed your blog Mark. Always surround yourself with people of flawless integrity.

  • Kenneth Breeze

    We enjoyed your blog Mark. Always surround yourself with people of flawless integrity.

  • http://www.branddikt.com/ Peter Kadas, Dr.

    Absolutely agreed with your opinion. We’ve a saying for these situations in Hungary, which suggests there’re many people who will reappear in your career multiple times (usually in different and sometimes in quite surprising hats). It sounds like this: “World is small. Life is long.”…

  • chrisabrams

    Thank you for this Jason. I was reading Suster’s article and was thinking about a previous experience I had where the other party was furious at me for moving on without them, even though they would never commit to me or answer some very basic but serious questions. I went with my gut though and moved on as I felt my time was being wasted. Your comments have helped me better understand that I was correct in my decision; the first group wasn’t all-in or 100% ready and I was, so I moved on to another group that was 100% ready and all-in. Been very happy. The first group however treats me as a betrayer and “would never work with me again” – I guess that is fine as I don’t have the desire to work with someone who can’t commit to me what they ask from me.

  • chrisabrams

    Agreed. Thanks for the clarification on this point.

  • chrisabrams

    I absolutely agree with your last point.

  • Nickbassill

    I would add a word of caution to entrepreneurs regarding the value of the term sheet. A term sheet is not a done deal. Getting a term sheet is just the beginning of an exhaustive investigation, the due diligence, into your startup. 

    The due diligence most likely will include your detailed financial statements and projections, capital structure, product details, major customers, growth, market share, cost and profitability, detailed customer information, analysis of your competition,  marketing, sales and distribution strategies, research and development, your intellectual property, your management and personnel and any pending legal matters. 

    Given the amount of time this will take you to complete, do your best to have a solid deal on the table with a VC that wants to work with you and then, give them a deadline.