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“Give me “Market” or give me death!!”
16.05.2018
My firm just finalized another successful VC investment transaction. I should be happy, right? Well… guess what – I’m not.
It’s not because we didn’t do a good job – since I believe we did. It’s not because the clients were a pain – because they really weren’t and it’s not even because we didn’t get paid – because thank G-d we did. The reason is that the transaction took too freaking long to complete – and for no good reason.
‘Why’, you might ask? ‘Were you not efficient? Were you, perhaps, understaffed? Was the deal very complex?’ – The answer is ‘no’, ‘no’ and ‘no’.
The reason is simple, and it’s the crux of this post – It took too long because the counter-party’s lawyers were simply ‘not market’.
Allow me to explain.
Following thousands of VC and M&A transactions, gazillions of dollars transferred and the aggregated experience of the best legal minds the world has to offer, by now it is safe to say that a standard for relevant transactional documents has been created.
This doesn’t mean that there is a completely perfect and objective set of transaction documents out there which can be used as a benchmark or guideline for such transactions (even though there are some very good resources out there like NVCA’s template documents (https://nvca.org/resources/model-legal-documents/), Y Combinator’s SAFE (http://www.ycombinator.com/documents/#safe), SRS’s annual M&A deal terms, and more), however it DOES mean that there is a standard for what these documents look like more or less, and a practitioner dealing with such transactions knows what the document landscape will look like even before receiving the documents. The seasoned practitioner will also know what the standard ‘tolerances’ are and what is appropriate or inappropriate to request in the framework of a VC Investment/M&A transaction. And most importantly – a good practitioner will guide his client and help him/her focus on appropriate requests/demands/gives.
You might ask - ‘Who are you to tell your client what is right or wrong to ask for? (It’s his/her money and they can ask whatever they want!) or, if you are representing the target - ‘its their company, they know ‘what’s what’ – and they can ask whatever they want’. Well this is true, and clients can ask for whatever they want, however since this industry is so standardized by now – chances are that a lot of time and money will be wasted on negotiating points that in the end will probably reflect the standard more or less. In worse cases – the documents will not at all reflect the standard (say, where the investor is very aggressive and the target is desperate for cash) – and then when the target tries to raise money in the next round, or the PE fund tries to flip the target to the next buyer – the next-round investors or purchaser (as the case may be) will not like the contractual arrangements reflected by the documents – and once again time and money will be wasted to bring the contractual arrangements back to the standard.
In the current swamped legal industry (at least on the transactional part of it), where everyone is trying to grab on to whatever work they can put their hands on, too often lawyers who don’t have enough mileage on these types of transactions are involved, and they try to ‘reinvent the wheel’, disregarding any standard and unwilling to look at the resources out there to see if perhaps they are in the wrong direction. The result is usually a frustrating, unpleasant and costly process.
To the clients out there, I say – make sure your lawyer has experience with the type of deal you are doing, and then trust him/her to guide you through the process.
To the lawyers out there, I say – (a) there is no shame in saying ‘I don’t have experience in such transactions’; and (b) when crafting your engagement letter for a transaction – make sure you put in a caveat that your projected timelines and caps are subject to the other side having a lawyer who knows ‘market’ standard (or you can say – from a leading reputable law firm, which will usually ensure that they know ‘market’), otherwise – you might find yourself out of pocket….
Yisrael Spero is the managing partner of Spero & Co., a business law firm specializing in investment and transaction activity of all types, ongoing representation of both start ups and mature companies and servicing high net worth individuals. Spero & Co. prides itself for providing premium services with unmatched personal attention and an acute ability to get things done. For more on Yisrael and Spero & Co. - see www.sperolaw.com
It’s not because we didn’t do a good job – since I believe we did. It’s not because the clients were a pain – because they really weren’t and it’s not even because we didn’t get paid – because thank G-d we did. The reason is that the transaction took too freaking long to complete – and for no good reason.
‘Why’, you might ask? ‘Were you not efficient? Were you, perhaps, understaffed? Was the deal very complex?’ – The answer is ‘no’, ‘no’ and ‘no’.
The reason is simple, and it’s the crux of this post – It took too long because the counter-party’s lawyers were simply ‘not market’.
Allow me to explain.
Following thousands of VC and M&A transactions, gazillions of dollars transferred and the aggregated experience of the best legal minds the world has to offer, by now it is safe to say that a standard for relevant transactional documents has been created.
This doesn’t mean that there is a completely perfect and objective set of transaction documents out there which can be used as a benchmark or guideline for such transactions (even though there are some very good resources out there like NVCA’s template documents (https://nvca.org/resources/model-legal-documents/), Y Combinator’s SAFE (http://www.ycombinator.com/documents/#safe), SRS’s annual M&A deal terms, and more), however it DOES mean that there is a standard for what these documents look like more or less, and a practitioner dealing with such transactions knows what the document landscape will look like even before receiving the documents. The seasoned practitioner will also know what the standard ‘tolerances’ are and what is appropriate or inappropriate to request in the framework of a VC Investment/M&A transaction. And most importantly – a good practitioner will guide his client and help him/her focus on appropriate requests/demands/gives.
You might ask - ‘Who are you to tell your client what is right or wrong to ask for? (It’s his/her money and they can ask whatever they want!) or, if you are representing the target - ‘its their company, they know ‘what’s what’ – and they can ask whatever they want’. Well this is true, and clients can ask for whatever they want, however since this industry is so standardized by now – chances are that a lot of time and money will be wasted on negotiating points that in the end will probably reflect the standard more or less. In worse cases – the documents will not at all reflect the standard (say, where the investor is very aggressive and the target is desperate for cash) – and then when the target tries to raise money in the next round, or the PE fund tries to flip the target to the next buyer – the next-round investors or purchaser (as the case may be) will not like the contractual arrangements reflected by the documents – and once again time and money will be wasted to bring the contractual arrangements back to the standard.
In the current swamped legal industry (at least on the transactional part of it), where everyone is trying to grab on to whatever work they can put their hands on, too often lawyers who don’t have enough mileage on these types of transactions are involved, and they try to ‘reinvent the wheel’, disregarding any standard and unwilling to look at the resources out there to see if perhaps they are in the wrong direction. The result is usually a frustrating, unpleasant and costly process.
To the clients out there, I say – make sure your lawyer has experience with the type of deal you are doing, and then trust him/her to guide you through the process.
To the lawyers out there, I say – (a) there is no shame in saying ‘I don’t have experience in such transactions’; and (b) when crafting your engagement letter for a transaction – make sure you put in a caveat that your projected timelines and caps are subject to the other side having a lawyer who knows ‘market’ standard (or you can say – from a leading reputable law firm, which will usually ensure that they know ‘market’), otherwise – you might find yourself out of pocket….
Yisrael Spero is the managing partner of Spero & Co., a business law firm specializing in investment and transaction activity of all types, ongoing representation of both start ups and mature companies and servicing high net worth individuals. Spero & Co. prides itself for providing premium services with unmatched personal attention and an acute ability to get things done. For more on Yisrael and Spero & Co. - see www.sperolaw.com
