Term sheet manners and getting the most out of negotiations

Fred Wilson posted yesterday on the subject of Term Sheet Manners and his main point was that it is better to get on the phone or meet up to walk people through changes you are proposing to deal docs than to simply email them a mark up.  I couldn’t agree more with that, and I would even extend the principle to communicating the original deal in the first place.

I learned this lesson the hard way back in 2000 when I issued a termsheet for an inside round into a company called UltraDNS that we had invested in when I was with Reuters Venture Capital.  We had agreed the headline terms (from memory, valuation, split of the round, liquidation preference, anti-dilution) but not some of the ancillary details (legal fees, composition of some committees etc.) and I wasn’t expecting much more than a quiet negotiation after I emailed the termsheet around.  What I got instead was a series of calls and emails, including some to my managing partner, all expressing outrage, a number of which were from people who were upset explicitly because I hadn’t walked them through the termsheet before sending it out. 

At the time we thought that the reason they were upset is that the proper etiquette is a call first, and by failing to do so I had shown a lack of respect, and I still think that is a big part of it.  Analysing it to the next level though I would now say that there is also something deep inside the human psyche that dislikes nasty surprises, and these days if I think for a second that anything I’m suggesting might have that effect I call first to soften the blow.

Calling or meeting up to discuss changes in deal terms is also a good idea beyond reasons of psychology.  Again this is a point that Fred makes, but one I want to expand on in what is the main point of this post.  Fred put it this way:

2) Discussing deal terms principal to principal is so much easier than working through lawyers. I’ve gotten way more done this way.

3) Many times, there is a misunderstanding of the deal terms being discussed that documents and lawyers can’t break through. A conversation can usually resolve these kinds of misunderstandings quickly.

For me there are two parts to good negotiations (and this harps back to training courses I and doubtless many of you have been through) – firstly looking for the win-win solution that gives both sides what they want, and then secondly getting the best result you can in the head to head areas where the outcome is more zero-sum.

When Fred says he gets more done discussing deal terms principal to principal it is because it is really hard to find those win-win solutions without talking to people face to face.  Often times people are only interested in a subset of what they are asking for and it is impossible to get to that unless you are communicating direct, it is very unlikely that the lawyers know, and often it is only through discussion that the principals come to see it that way themselves.

This is all the more true because of Fred’s second point – that misunderstanding of the terms is common.

I think in most venture deals the main thing that both parties want to know is that they are getting a deal which is broadly ‘market’.  That is obviously much easier for the VC who does deals every day, but can be less easy for the entrepreneur.  My final piece of advice in areas of disagreement is not to get hung up on specific terms and legal constructs but rather to think through to the underlying impact on the economics and/or control going forward under a range of scenarios as a way to navigate towards a solution.

  • I agree completely on the communication bit, but with regard to negotiations (which you allude to in the last paragraph) entrepreneurs are likely better off negotiating asynchronously (via email, 3rd party, etc.). Face-to-face, real-time negotiations are tough when there is a big information asymmetry between the parties.

  • You can meet to 'negotiate' without actually agreeing anything and focus 100% on simply understanding each others' positions, then take some time out to consider, talk to friends, advisors etc., and then reconvene. I wouldn't let the information/experience asymmetry put you off meeting face to face.

  • Most of the time I agree with you…I just wouldn't make it a hard-and-fast rule is all. BTW, love the design of your blog (content too). Impressive for a VC 😉

  • Thanks

  • As a former banker, I think that professional advisors can have a role too. In my experience (both as an advisor and as a CFO), the bankers can provide a useful backchannel: “Listen, Mr VC, I think that the real issue is X and if you concede on Y, I may be able to get my principles to agree.”

    I think that the same can sort of be done by the principles being the back-channel to the lawyers, but bankers are explicitly doing that role.

    Finally, I think it can really depend on the lawyers. I have worked with great City lawyers who say things like “there are 23 points outstanding. Only three of them matter and the issues are A, B and C. You need to make a decision. We can resolve the others.” I have also worked with rubbish lawyers (sorry to generalise, but I've found these generally to be regional practices) who are prepared to kill a deal over VAT status or other very minor issues.

    A good lawyer resolves all the simple issues and only leaves the key issues outstanding, while also making sure you understand the implications clearly. And they are definitely worth paying for.

  • Poor misuse of principles/principals. I blame jetlag.

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