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.
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