A Quick Hack for Speeding up Term Sheet and other Negotiations

Posted on Mar 17, 2012 | 48 comments


I’ve started a series on negotiations in startups. In it I list some books and also link to some of my previous posts. It’s the first functional series I’ve done since sales & marketing.

The very first time I ever negotiated a term sheet (and then legal docs for closing the round) I found the experience very frustrating. I was desperate to get my funding finalized to derisk my business as well as to get capital in the bank to meet our growing cash needs.

But my VC didn’t seem to be in such a rush. Nor did their lawyer.

The process went something like this:

  • My lawyer tells me 8 clauses that need to change. He marks up the term sheet. We take a half a day to agree the points and send them over. Seems like the term sheet will be done in a day or so.
  • The other law firm gets the docs. They’re traveling that day. They are in a board meeting with clients. We press them 24 hours later. They say, “I haven’t been able to reach my client (the VC) yet.” We hear back in 2 days
  • We get back our version. They’ve totally ignored 5 of our requests and marked up the other 3. Four days have now passed.
  • I call the VC to discuss. He says, “I’m not sure your lawyer knows what he’s doing. These are strange requests.”
  • I talk to my lawyer. He says the other lawyer must never have worked on a startup deal before. We agree where we can live without our points being met. He concedes on one point and sends over our doc re-marked up.
  • Rinse. Repeat. 10 days have passed. Four points are open. We finally get focus on those points. We whittle it down to two. I find out my lawyer was digging in on something I thought was important but the more I understood the issue it seemed like an edge case.
  • I talk to the VC. We work the two issues. We compromise. We move on. We ask the lawyers to mock up the docs. We sign. 13 days have passed.

Whew. Now the hard part begins. Now we move to definitive documents (long-form legal docs) and the whole freakin process starts again. This is not atypical and I found it very frustrating.

I talked to my co-founder Brian Moran (we launched the company in Ireland) about it. He had been working in the 1990’s for a large global real estate developer called Hines (which he has now rejoined).

He told me that when they needed docs signed they had “signing parties” where they made every party involved with a project fly to a single location and they would all stay in a hotel together until the deal was completed. He said to me,

“We had a lot of money at stake. Delays in a project could cost us millions of dollars.

It was a very small fee for us to pay for everybody to fly together and stay in a hotel relative to the costs of delays.

Naturally when people are located in different places and working on different projects, documents don’t get turned around fast enough and you’re always waiting for somebody.”

So we thought, “Why not have a ‘signing party’ for our company?

We asked the VC, their lawyer and our lawyer to join us for a working session where we could walk through our legal docs page-by-page until they were completed.

I was surprised how reluctant everybody was. I realized that their lawyer much preferred not giving up his working hours. He would prefer to turn the docs at 1am between other stuff he was working on. And by “1am” I mean three days from now. And without agreeing all of our points.

My VC wasn’t that keen either.

But they acquiesced. We spent several hours in a room. We took several breaks for each side to discuss issues privately that were in contention. We made phone calls to others. The VC mostly to come back and say some version of, “In all of the 50 deals we’ve seen in our portfolio we’ve never seen this term approved.”

[side note: please don’t fall for that line. either the point makes sense or it doesn’t. I have seen VCs hide behind this “we’ve never done it before” line many times]

Anyway. It was a long day but at the end of the meeting we had a final agreement. The lawyers drafted it within 48 hours and we signed it in 72 hours. 1 week later the market crash of 2000 began and the dot com market began to collapse and financings with it.

It’s not always easy to get the various parties of your deal to agree to be in a room all together at one time. But if you can make it happen I promise it’s a much faster way to get a deal done.

And it obviously doesn’t just apply to a VC financing.

Image courtesy of Fotolia

  • Raad Mobrem

    Great article Mark. I think that is a great idea to get everyone in one place and just focus on getting the deal done.

    Imagine if there was some sort of software/site that would be the intermediary for both parties and fine any side that did not complete their docs in a timely manner. Maybe a feature for Angel List down the line.

  • http://bothsidesofthetable.com msuster

    might be good in theory, doubt it would work. sometimes you just need to be in the same room

  • http://joeyevoli.com/ Joe Yevoli

    Can you elaborate a little more on the “I’ve never done it before” VC line?  How is an entrepreneur expected to handle that?

    Is it as cut and dry as you make it seem? “Either it makes sense, or it doesn’t?”

  • http://twitter.com/ScotchGuyDan Dan Bowen

    I’m actually surprised more deals aren’t done via “signing parties.”  Spending nearly 15 years in the world of litigation I saw more than my fair share of settlements handled over marathon sessions between hostile parties.  While both sides normally realize that settling the lawsuit is of course in the best interests of each company, it was amazing to see how much agreement could be had even between bitter enemies when they were all in the same conference room…or at least the same building.  Hammering out deals with those you want to do business with should be at least as efficient!

  • http://WWW.FAKEGRIMLOCK.COM FAKE GRIMLOCK

    IF EVERYONE NEVER DO THING THEM NEVER DO BEFORE, ENTIRE WORLD BE ONE BABY IN WOMB, AND ONE VERY ANNOYED PREGNANT WOMAN.

  • Rakesh Soni

    Wonderful insight, Mark. Being a startup founder, I wanna say this is so true. Seems like its nature of this business. I am in similar situation and you cant do much I guess!

  • http://www.repeatablesale.com/ Scott Barnett

    The best part of this post was Mark calling out this negotiating tactic.  It happens all the time, not just with VC financings (as he points out).  It’s a great way for somebody to try to get their way without any real logic or meat behind their perspective – and it’s impossible for you to prove.  The way I perceive this line is “I’m much savvier than you are in these terms, I’ve done them a lot longer, so trust me this is the way it should be”.  Kinda similar to when your parents told you not to do something “Because I said so”.  Once you become a parent you realize that the line really meant “I don’t have any rationale for telling you not to do it, I just don’t want to have to explain myself and I’m the authority.”

    Nothing is cut and dry in a negotiation, but it’s also not that hard.  Is the issue at hand important to you?  If so, then you explain why it’s important to you and the other side needs to respect that and either (a) convince you it isn’t, or (b) figure out a way you get what you want without them giving up something that is equally important to them.  It’s a little more than whether it makes sense – because what makes sense to you may not make sense to them.  What’s most important is that they understand why you want it – if you can’t get them there, it’s hard to make forward progress.

    And I’m still laughing at FAKE GRIMLOCK’s response to you….

  • http://www.camblain.com/ Jerome Camblain

    I think the key to unlock the “we’ve never done it before” is to ask the other party (VC here) what objectives he/she tries to reach to protect his firm (here his/her LPs) and demonstrate that your proposal, even unusual, does not make the other side worse.
    For that, you must ALWAYS enter in the negotiations understanding what is a VC firm and how they operate (age of the fund, exit strategy for the LPs…).
    Thank you for sharing your experience; I raised last year €3m for a company I am invested in, with for only tools a bit of gray hair and 3 blogs: yours, Fred Wilson’s and Brad Feld’s.

  • http://blog.ideatransplant.com Jan Schultink

    It helps to kill “selective memory”:

    “Got that point?” 
    “Yeah, will incorporate it in the doc”
    3 days later: nothing

    After 3 days you might get away with forgetting, after 1 hour definitely not.

  • http://www.bluecoastrecords.com/ Cookie Marenco

    “We’ve never done this before” or “This is the worst deal I’ve ever seen”..  …..   and I thought I was special and the only one who created those kinds of deals.  Guess not!  :)  

    I think lawyers are trained to start every negotiation like that.  I’ve come to expect that right after “hi, how are you? This is the worst contract ever”.  I just can’t take it seriously anymore it happens so often.  Must be part of the legal “how to start a negotiation” manual.  :)

    The delays you experienced, though..   Incredible story you told about your waiting situation and the crash of 2000.  I like the idea of a signing party

    But Mark, really, you must be psychic. 

    I came to your blog thinking, “I’ll bet Mark has new advice posted that will help” and sure enough you did.  I know I’m not the only one who manages to find jewels from your experience and inspiration in your writing.

    In fact, as I begin to enter into negotiations, I’m sure to reread your manual several times.  Thank you!

  • http://www.lawnotes.com D. C. Toedt

    I wonder if there’s a way for the start-up to create some kind of economic incentive for the other side — and its lawyers — to go along with the signing-party approach.   (Legal ethics would be a constraint, of course.)

  • Hania

    I live in Geneva, Switzerland, and I am a International Relations major. There are many international organizations over here, and it is very common to see an inter-States negotiation in one of these fancy  little houses surrounding the lake. The negotiators can spend one afternoon, or several days in a row, and they don’t leave the house until they find an agreement.
    My point is this technique can work in many circumstances. Definitely a must-know!

  • http://bottomlinelawgroup.com/ Antone Johnson

    Great post, Mark.  As a young corporate lawyer getting started in the mid-’90s, I started out doing larger corporate finance and M&A deals at a New York firm before moving to early stage startup work.  It was routine to have “drafting sessions” in which both sides and their lawyers got in one room to hash out terms of a merger agreement or S-1, etc.  Everyone seemed to recognize the value.  I was surprised when I got to the Valley to find this wasn’t the norm with venture deals.

    My guess is that it’s mostly a matter of deal size and priorities; when you’re doing “yet another round of venture financing” it’s something the typical big-firm partner will shoehorn in along with work for half a dozen other clients that day or week.  When it’s a nine- or ten-figure IPO or merger, they do whatever it takes to clear the decks and make it a #1 priority for an intense burst of activity.  (For example, we worked straight through from Thursday night to Monday morning to negotiate and sign the merger agreement between News Corp. and Intermix/MySpace back in 2005.)

  • David Hernand

    Very good point, Mark. In this era of digital disconnectedness, there is no substitute for getting all the key decision makers “in the room.”. Sadly, when I first started practicing law and doing deals 20 years ago, it was much more common for principals and lawyers to actually meet face to face to hammer out the issues. All too often nowadays, principals and lawyers simply send drafts and comments through the ether, often without much discourse to understand nuance and positions. The fact is, not surprisingly, that much gets lost in the negotiation process when handled entirely in an asynchronous manner. As such, principals are often better served by getting everyone in the room and locking the door until the deal is signed, or at least the key points resolved. When that is not possible, and it often isn’t, at least get principals and lawyers on the phone together so as to reduce the game of “telephone” where nuance and positions get lost in the repeating.

  • http://twitter.com/davidsmuts David Smuts

    All the more reason this industry needs to move towards standardised terms. I know every investment is unique in its own right but, a more informed base of Entrepreneurs and enlightened VCs need to demand this. We’re getting there slowly, but surely.

  • http://bothsidesofthetable.com msuster

    A classic negotiating technique for somebody who does many transactions (corporate M&A, VC, procurement department) is, “we’ve done 50 deals in the past 2 years and none have had this terms. They have asymmetric information that they’re using in the debate because each entrepreneur deals with the issue only occasionally. 

    1st – that information may or may not be true. But to me it’s most irrelevant. Every negotiation is unique and it could be that this term makes sense in the 51st case.

    For years I heard VCs say, “we’ve never allowed founders to sell stock in secondary sales” and I never understood the logic. Now it’s become more common place. 

  • http://bothsidesofthetable.com msuster

    Nice! Exactly. Thank you.

  • http://bothsidesofthetable.com msuster

    “because I said so” … that’s the perfect analogy. Love it.

  • http://bothsidesofthetable.com msuster

    That’s a great poing. If it works for litigation it ought to work for garden variety biz dev deals.

  • http://bothsidesofthetable.com msuster

    awesome. thank you. I raised money once with the help of Brad Feld’s blog so I know what you mean.

  • http://bothsidesofthetable.com msuster

    “selective memory” is a huge problem in deals, board rooms and in other meetings. I see it all the time. We think we agreed to X but without good documentation or summarization at the end of the meeting the X can change (or be forgotten) over time.

  • http://bothsidesofthetable.com msuster

    Thanks, Cookie. I appreciate the kind words. And yes – I do think it’s standard training in large law firms ;-)

  • http://bothsidesofthetable.com msuster

    Well who wouldn’t want to be holed up in Lausanne, Montreux, Evian or even Gruyères for that matter! Memories of old holidays. What a lovely part of the world. Lucky you ;-)

  • http://bothsidesofthetable.com msuster

    I’m sure you’re right, Antone. It seems that size really probably matters. So I get why these deals get de-prioritized. But for each entrepreneur, their first $3 million financing feels as important as a large merger. So for each individual it sucks ;-)

  • http://bothsidesofthetable.com msuster

    Thanks, David. I’ll bet it maps to a broader trend in business to do things via email / remotely. In deals it ends up with both parties feeling more acrimony over term differences that in person would easily be resolved. Some things will always be better served in person.

  • http://www.Siffter.com Russell Killgo

    Somehow your articles are always right in tune with the step I’m at in my startup.  I found myself questioning our PowerPoint presentation yesterday and asking the question of flash or substance.  When dealing with an investor I know and have a personal relationship with, can I forgo the usual flash needed in a presentation to grab the person and jump right to the substance?  It’s like a movie trailer.  Anyone can make a trailer look good, but it’s the movie itself that will get people talking about it, and word of mouth is better than any trailer.

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

    Another good post, Mark.  Thank you.  Was just tearing through your sales & marketing series and noticed “3. Embrace Losing” no longer links to the post.   

  • http://bothsidesofthetable.com msuster

    It does feel like a lot more is standardized these days. For sure.

  • http://bottomlinelawgroup.com/ Antone Johnson

    Oh, I completely agree.  It might help for the entrepreneur and lead investor to agree up front on process so they can lean on their respective lawyers accordingly.  Otherwise people tend to just follow the same approach they’ve always taken.

    Also, the practice of billing for travel time doesn’t help.  All else being equal, with partner billing rates at large Valley firms going from the $300’s to the $700’s over the last decade or so, the disincentive to pay for your lawyer to travel can only have increased.  If the company is paying for investor’s counsel as well, you have an early stage startup potentially paying $1,500/hr just to get everyone in the same room.  That seems absurd.

  • Xxxtemp2001

    Not sure your picture is reality. Most of the time the deals don’t have 5 20 something white folks 2 of whom are gorgeous blondes.

  • http://bottomlinelawgroup.com/ Antone Johnson

    Oh c’mon, the bald guy on the right might be at least 30 or 31.

  • http://www.repeatablesale.com/ Scott Barnett

    I’ve used that logic in combating this type of objection in the past… when a VC (or potential customer) says “I’ve never seen this before” – then I tell them how smart we’ll both look when this becomes a common-place provision in an agreement and we can tell everybody that we did it first!

    Now, of course that is a bit tongue in cheek, but it does typically help to get the discussion back on track and focused on the facts, not intangibles…

  • Guest

    Thanks for the post Mark.  I was advising a start up recently that ran into similar headaches negotiating their first developer hire.  It seemed like the Lawyer was talking in Italian and the developer in Chinese.  I think your point about getting everyone in the same room at once is spot on.  That seems like it would help to avoid any excuse making and require each party to be as direct and forthcoming as possible.

  • http://www.Siffter.com Russell Killgo

    He’s the attorney!

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

    The idea is great and works for hundreds of years: that’s how new Popes are elected. Bishops go in, and don’t come out until there isn’t a new Pope. But if this process is so painful, wouldn’t it worth both for investors and founders to agree on using a Plain Preferred Term Sheet or a Vanilla Term Sheet more often? How common is it anyway to use them?

  • Saul_Lieberman

    Here are some benign reasons for the phenomenon:

    If your deal is being staffed by a young associate, he (and
    the partner in charge) will prefer to be able to respond asynchronously to
    check with the partner, consult legal forms, etc.

    Some lawyers are more comfortable negotiating via their
    drafting than meeting face to face. (Litigators are different.)

    Lawyers take pride in their drafting, which is very hard to
    do properly with everyone sitting around the table waiting to sign.

  • Michael

    Mark, great post. Being right in the thick of it, your advice is timely. Question for me is not the “we’ve never done that before” tactic, but the ”partnership won’t approve that” bs. Any thoughts?

  • http://hireflo.com/ Rudy Lacovara

    I like the idea of the signing party and I’ll add one to it, whenever possible don’t let lawyers talk to other lawyers.  

    The first financing I was involved in we hired a lawyer to talk to the investors lawyers, because that’s what you do right?  The negotiations quickly turned south over issues we didn’t really understand, our legal bill skyrocketed,  and the deal almost failed until we showed up at our lawyer’s office and told her politely that we were all going to go sit in a room and talk to the other side and we were going to come out with signed documents.  We di

    That taught me a lesson.  I’ve been through 3 similar negotiations since then and I handle each the same way. I deal directly with the other party (investor, acquirer, etc.)  We agree on the major points, we handle all negotiations, then when I get documents I take them to my lawyer to review.  When issues come up, I’m the one who goes back and discusses them with the other side.  That way my lawyer is handling legal issues, and I’m handling negotiations.  I don’t think this approach would work for every situation, but it’s worked well for me so far.

  • http://www.lawnotes.com D. C. Toedt

    Saul, your point is a good one — and it brings to mind something else, which is that the associate’s *personal* incentive structure will cause him or her to produce a harsh first draft.  Here’s why:

    1.  Imagine that the associate were to produce a “reasonable” contract draft.  So far, so good, right?

    2.  But imagine that, down the road, a problem were to arise in the deal — and that the associate’s client would have had more leverage if the contract had been harsher.

    3.  With 20-20 hindsight, the client surely, and the partner probably, will point the finger at the associate for not having produced a harsher draft, if only to serve as a negotiation agenda. 

    4.  Associates who get fingers pointed at them are less likely to make partner than those who don’t.

    5.  Our associate thus has a personal incentive to produce a comparatively-harsh first draft, every time.

    6. Now consider what happens when a partner and a client review an associate’s harsh first draft.  For any given harsh term, the path of least resistance for them is often to just send the draft on to the other side — “let’s see if they object to it.”

    7.  The other side’s lawyers now have to spend calendar time (and time-sheet time) marking up the draft.  

    8.  And all concerned have to spend time doing the same old negotiation dance for the Nth time — often ending up at much the same place as most other times.

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  • jlemkin

    Agreed 100%.  I’ve done a bunch of ‘signing parties’, with and without lawyers and other non-stakeholders.  They seem to work well when all parties really are aligning on the basic set of terms and economics AND a strong desire to get the deal done …  so I’d suggest another ‘hack’ is to push hard for it.  If you don’t get it, you and the other side aren’t aligned on the priorities of getting the deal done.  That means keep your eyes and options open … 

  • Ramaswamyc

    This post reinforces that there are many situations where a face to face meeting is the most optimal way to get things done. Even with the advances in video conferencing, meeting as a team in one place will always be necessary.

  • Modify Watches

    This is great, what a salient takeaway. I’m raising, as are a few of my friends right now and we’ve all had the same issues. The “signing party” is an awesome insight – I imagine finishing the night/weekend successfully is a huge momentum and morale boost too.

  • Joe Agliozzo

    This idea is so simple and so effective, thanks for putting it in a blog post. As both an attorney and an entrepreneur, I have been on both sides of these types of delays and signing/closing parties definitely speed things along in all kinds of deals.  

    If done “right” and early in the process you might even save some money because you can cut the cycle time which results in lower legal fees.  The other benefit is you get to call the bluff of the other side if they might be delaying the deal because they are uncertain if they want to proceed.

  • Alex Kiss

    Thanks again for the great insight and lifting veil covering another part of the VC world.  If I wasn’t careful, I would think you are an entrepreneur posing as a VC!

  • http://www.chain-cable.com/ Allan @ Chain-Cable

    A real handshake is a very powerful thing. Sometimes the game calls for a video conference or phone conference, I know. If you can avoid the sending docs back and forth, do so. There is a resolution in talking things out, agreeing and then just drafting and signing. Why waste the time and the money when more adventures are yet to come.

  • sachinuppal

    Very interesting point. And I have realised this not just in such contracts even on briefings etc, its always good to talk on phone / in person. However, sometimes, the distances are not just within the states, but international and their for a startup costs might matter a lot (may be not for the VC).

  • http://prometheefeu.wordpress.com/ PrometheeFeu

    I got training in negotiation during which a mediator explained his tactic for getting an agreement. It was really simple: get all the parties in the room and DON’T LET THEM LEAVE UNTIL THEY SIGN. When a party would get up to walk, he would stand up, literally stand in their way and say: “I think we’re making real progress and we can get this done” or something to that effect and he claims every single time the party sat back down. His point was that when everybody was tired and hungry, they would start giving up on things that they didn’t really care about allowing the process to move forward. Now of course, locking yourself and your VC in a room is probably impractical, but the principle probably applies.