Always Go Home with the Lady Who Brought you to the Dance
bothsidesofthetable.com
bothsidesofthetable.com
I'd use the "reasonable terms" principle with friends I worked with for some time, or with people who have an immensely strong reputation for being reasonable (YC, etc.) But if you met someone two weeks ago, and they bring up the concept of an emotional bond into what ought to be a commodity transaction, alarms would go off in my head. (Note that it's easier to talk about an emotional bond when you're on the better end of the deal).
Mark probably is one of the very few people who work in a reasonable manner, but unfortunately for every person who works this way there are dozens of impostors who'll pretend they're reasonable and then eat you alive the moment you let your guard down.
So my advice would be the opposite. Unless you've worked with the person for a while, or have really strong evidence that they put insanely strong ethics before profits (and believe me, gut feeling is not strong evidence), or you've already indicated commitment, take the better deal.
I'm a great believer in behaving ethically, but this is not the sort of example I'd give.
The impression I meant to leave was that I risked losing out on the deal all together because the CEO could have simply done the deal with the other investor.
I would rather that have happened than to screw over the VC who convinced me to look at the deal in the first place.
I wonder how much of that is "doing the right thing" vs. protecting one's reputation so you can continue to do deals. (And you clearly referred to protecting reputation ..)
If you are just interested in "doing the right thing" then the issue of protecting one's reputation wouldn't even come up in the discussion, right? (And nothing wrong with sounding "pollyannish"?)
I wouldn't have done what your friend did at the dance. Not because I'd be worried about reputation but because it would make me feel bad to do it. I wouldn't want it to happen to me (empathy). I can tell you have empathy just by the way you wrote the post. I'm wondering if you feel a need to cloak it in "reputation" and are you sure that's as big a motive as you make it out to be? As if it won't be manly or something.
It seems to me that this situation started when the company had a signed term sheet but still went around to VCs trying to interest them in investing. Is this normal? (I'm a bootstrapper, so I have no experience with these games.)
Proven innocent: close friends you'd trust with your children or your money, colleagues you've been through the crucible with (you know the measure of each other), YC and other small companies with a strong rep built over years and a simple management structure that isn't likely to be co-opted, etc.
Gut feeling = wishful thinking + rose-tinted glasses. Ignore it.
Here's what "guilty until proven innocent" misunderstands: without trust, the relationship is doomed regardless of whether the mistrust is justified or not. If I don't trust someone, I don't do business with them, period. And if I subscribed to your "simple rule," there would be practically nobody I could do business with.
I spoke about it here: http://www.bothsidesofthetable.com/2010/02/08/how-do-you-ref...
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In the case of the new vc / old vc example that wasn't me ... yes, there was a 'no shop' clause. but ...
1. those are mostly unenforceable (is a vc going to sue an entrepreneur over no shop? not likely) 2. if the team really wants to get around it they can just run out the clock. most no shops are 45-60 days.
In the end, a term sheet is really just an expression of honor and reputation.
If there was a handshake deal, the company should certainly have stuck with the original VC. Not because of any complicated rules about who introed whom to whom, but simply because you have to honor handshake deals.
If there was not a handshake deal, it's less clear. The company seems to have been fairly eager to raise money. Which implies they'd have taken a sufficiently good deal if one was offered. Which implies it had been in the investors' power to get a handshake deal if they wanted one, and if they didn't have one, they essentially blew it by negotiating too hard. If so then I don't think the company would be obliged to stick with the original investor. But I'm just speculating; it's impossible to say for sure without knowing more.
Well put but it raises a (possibly naive) question. At what point can one assume that a 'handshake deal' has taken place, and is that point really the same for both parties? e.g Is it literally a handshake and the words "We're going ahead with this!" Or could it be more vague where one party thinks there's a deal but the other's not so sure.
You've said that deals exist to fall through and that "The key to closing deals is never to stop pursuing alternatives ... don't believe it till you get the check." [1] From my point of view, I'd want to spend as little time as possible in 'handshake-limbo' and get something signed. The deal might still fall through but the intent to close is more explicit.
Aside: Mark says "... so I thought they should take the deal", which implied to me that not taking the deal was still a valid option. i.e. no handshake.
The CEO's job is to get the best deal for existing shareholders and optimize the growth. The investor's job is to buy in at the lowest price / strictest terms they can get away with. When a better deal comes along for the company and the investors cannot match it they start coming up with all sorts of phony excuses to buy in at the original lowball offer. If you feel strongly enough about the company don't be a cheapo and match the new offer. If "it does not fit the structure of your fund" then move on to the next deal.
Jeff Bezos walked away on the offer by Olympic Venture Partners (OVP) when Kleiner jumped in and outbid them big. I heard this in a talk by OVP partner who complained that John Doerr could make what he believed to be an "outrageous" offer because the fund already had Netscape IPO exit and could take much greater risk. Guess what, Jeff Bezos did the right thing for himself and his existing investors and employees.
VCs walk away on term sheets all the time and typical deal structures favor them anyways. The deal is done when the legal papers are signed and the check clears. Nobody should act as though they are entitled to anything, whether they are VCs or CEOs.
1. You negotiate and have a handshake deal with a company for a round of funding.
2. The company gets an offer for a higher valuation from someone who wants in on the round.
3. The CEO asks you whether to take them or not, but basically leaves it up to you?
In other words, assuming the CEO didn't "backstab" you but rather sought your advice, would you be upset that he's even considering a different deal? Would you tell him he should take it, assuming the deal is still worthwhile for you? How would you react?
Of course I might be really misreading here.
The CEOs weren't brought to the dance, they could pick whichever VC they wanted to. It's just that he would have left the deal if they hadn't picked his VC.
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He also throws in a story at the end about another company who signed a term sheet, then reneged on it and considers that as a black mark on their reputation. Maybe it is, maybe it isn't but its a separate story.
I would say that playing these social games IS what constitutes business and while it's important to bond to allow for future business sometimes, actually, the right thing is rather to not to play along if your gut says no, even if it was good for business.
It's nice to say that they'll stick with you but that could change in an instant. Plenty of stories out there where people have gotten screwed over by unscrupulous VCs.
PS. obviously, there are exceptions to the norm but I'm a big believer in understanding people's primary motivations.
I think the key is knowing the parties with whom you're dealing and knowing their past behavior. I advocate reference checking portfolio companies that failed: see http://www.bothsidesofthetable.com/2010/02/08/how-do-you-ref...
So given the complicated web of legal documents from the exits of folks that have been screwed over, how would you find the worst cases?
This is an analog situation. Things like this are a matter of degree not absolute. Just like speeding, insurance claims and taxes. Some people can definitely be trusted less than others to care at all about the other party. Those are the people that you need to identify.
In the first example (staying loyal to a lower valuation) financial incentives are on the aide of ethics. The later example (tossing out a signed term sheet to get a better investor) is where it's a real test. It's not an ethics decision until there is downside.
http://idioms.thefreedictionary.com/_/dict.aspx?word=Alls+fa...
The point is, though, it is an excuse, not an ethical argument.
Sometimes, when you get a reputation for behaving unethically, you limit the types of people who will do business with you. Consequently, you paint yourself into an unethical corner. When the only people who will do business with you are unethical, it increases the amount of risk you face in each transaction. Moreover, when you do get taken advantage of, few people care as you reaped what you sow.
On the other hand, if you behave ethically, other ethical people will be drawn to you. This lowers your risk per transaction. And, I suspect it will help you sleeP a little better at night!
Certainly I would avoid a known backstabber in business to the point of not doing business with them, even if they had the better financial terms.
As for your cheating example, cheating is generally frowned upon but it is not even close to illegal and people do it all the time.
This is such a silly statement I don't know where to begin. They knew there was going to be another war, did they? How did it make the concept of was less terrifying? WW1 was the "Great War" because it was the first time war was terrifying for everyone (except the stupid British generals, but don't get me started).
On this statement, one would disagree with the nuclear non-profileration treaty and think that WMDs are ok because war would be more terrifying.
My grandfather was gassed and it was horrific.
Sounds like the poor CEO got 'guilt'ed into taking a worse deal.
NDA or no way.
VC's represent a corporation with a corporate interest. I do not extend ethics to corporate entities. I will feel bad if something bad happens to a person, but not to a corporation. I will never allow myself pretend that corporations deserve anything close to a personal bond. And fucking shame on you for trying to make people think of that.
You are business partners. At the end of the day, it is money. You want to put a guilt trip on me? GTFO.
Always accuse the seller of having bad ethics, and turn it into a moral dilemma for them so you can take advantage.
Always threaten their reputation.
Always avoid using sexist analogies.