Article Four – Common Ground January 24, 2010Posted by Lawrence Lenihan in Uncategorized.
The common ground here is fairly straight forward: the VC and the entrepreneur need to engage and agree on mutual expectations PRIOR to signing a termsheet. Easy advice, but hard to do! Why? Because it is against human nature to seek out unpleasantness and disagreement (at least it is against most humans’ nature!). These are not the most pleasant conversations. The VC is trying to sell the entrepreneur and vice versa. In addition, there is love in the air – both sides are really excited about this future relationship, so why do or say anything to spoil it?
If spoiling it is asking for the honest truth, spoil it now, because it will be a lot more painful when it spoils later.
Ask these questions and make sure both sides understand the answers, actions needed and consequences of not achieving:
- Where and on what is the money going to be spent?
- What definable and measurable objectives and milestones will be reached as a result of this investment?
- What will we learn and by when will we learn it?
- How much future funding will be needed and when will it be needed? Who will fund it?
- What happens if the answers we discover are not positive and objectives are not met?
- How does the company report progress?
- What is the VC’s commitment if the company meets its expecations? How can he/she demonstrate that the commitment can be kept? Does the VC have the authority? Has the firm given the commitment? What happens if the VC is not there at the next milestone?
- At what value will future funding be secured? Based on what?
These questions seem straightforward, but they’re not. It is a hard and uncomfortable discussion, but you need to talk about them and not simply hope they are the answers and commitments that you want, but, rather, they ARE the answers and the commitments you expect. And, because human minds are frail things that often “misremember”, a confirmatory email is not a bad idea either. Why not a contract? You could, I guess. But my take on it is that unless there is a real contractual commitment (like a future funding at a specific price), there are so many ambiguities, that you would spend months in contract negotiations. Moreover, these contracts would be difficult to enforce anyway. If you need somebody to have a contract to fulfill an obligation, you have the wrong partner anyway!