Advice for start-ups in negotiating with investors
13 Dec 2016
Should you as a start-up (although this advice is applicable to any party in a contractual negotiation) find yourself negotiating with potential investors, you will most likely be presented with a term sheet, or even final transaction documents, which set out the broad terms upon which the investor is prepared to invest in your company. If you raise a question regarding the meaning, or implications, of a particular provision, you may often be met with the “this is standard” response. A variation on this reply might be the “I’ve been in this business for [insert number of years] and no one has ever had a problem with this clause or asked this question”.
In my experience, this response generally means either “we don’t know the answer”, or is a negotiating tactic which creates the impression that the particular provision is non-negotiable, or that you (or your lawyer) do not know what you are talking about, which can cause you to doubt yourself, or your lawyer.
Regardless, this response is antithetical to the negotiating process in that it excludes any further discussion about the point and undermines the skills and leverage of the person asking the question.
It is not up to the investor to look out for your rights in a negotiation – this is your responsibility. It is up to you to be knowledgeable and acquaint yourself with the terms of the deal. So while there is nothing inherently wrong with the “this is standard” response, accepting this response could be doing you, and your company, a disservice. The truth is, while most private equity, venture capital or angel investments do have common provisions which you typically see from deal to deal, there is no provision which is so “standard” that it doesn’t merit understanding fully or tweaking to suit your circumstances. Even the most seemingly innocuous provisions can have unexpected consequences depending on the nature of the deal and your company’s circumstances, now and in the future.
No matter how alluring the siren song of investment capital or finance may be, you, or your lawyer, are the only people who are going to take care of your and your company’s interests. Never feel intimidated to interrogate any provision that is put in front of you, no matter how “standard” or “typical” it may be.(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)