WARNING: in dealmaking, you're not agreeing to math.
Details matter. Overlooking them could cost you...
I bet most of you don’t understand how dealmaking and contracts work. This could burn you when you’re negotiating your fundraising terms.
I know this because even as a post-MBA from Harvard working at a Venture Capital firm, I still didn’t fully grasp these concepts.
Let me tell you a story.
Back in 2014, I was working on a deal with a partner at Greycroft. We were excited about the founder and the potential of the company. The deal took slightly longer to negotiate because we needed to increase the option pool and decide how some convertible notes (the precursor to SAFEs) would convert into the new round.
After some back and forth, we agreed on the mechanics and explicitly described them over email with company counsel looped in.
The email thread pretty much read like this:
Investors: So we agree on our ownership to be A+B
Founder: OK, I’m good with A+B
Investor: A+B works for everyone. Awesome! Let’s do this
Founder: Onward!
Investor & Founder: Lawyer, please put A+B into our docs and we’ll get going!
Lawyer: Will do! You can count on me!
From there, my partner and I congratulated each other on another great deal in the books.
Five days later, the partner emailed me saying the final docs were ready, had been signed by the company, and only needed our firm’s countersignature to fully consummate the deal.
He told me to take one last look at things, and we’d execute it fully the next day.
When he sent the docs, I happened to be waiting to board a flight back to LA from the Midwest.
This is an important point because I had been asked to do a “final check” many times before, but this was different. Usually, I’d get the request in between pitch meetings, mountains of emails, and diligence work on other live deals. The final check-in in those situations consisted of my skimming through the docs and just confirming we had all the signatures… something cursory like that.
[before you freak out… this happens A TON at firms of all types. Especially when there is zero training, as is often the case at VC firms]
In this situation, I had about 3 hours to kill ahead of me with little else on my plate.
With that extra time, I decided to dive into the final docs with extra precision. And this time, when I saw the ownership numbers listed, I double-checked their math.
What did I find?
It turns out the lawyers had miscalculated A+B. The answer should have been C, but it came in at C minus 2%.
I was surprised
This realization kind of stunned me. First, I thought lawyers were infallible robots who didn’t make mistakes regarding contracts. Wasn’t their WHOLE JOB to create a contract based on WHAT WE SAID?
But the crazier thing was, had I not done that final check, everyone would have signed, and that’s the ownership the firm would have gotten. C minus 2%... EVEN THOUGH we had all agreed to A+B = C!
The takeaway – you’re not agreeing to math (oh, and lawyers f*ck up)
The takeaway is no matter what you agree to in a conversation or negotiation, in the end, you’re going to get what is written in the contract after you sign.
DOUBLE-CHECK THESE THINGS
Also, lawyers are far from infallible. Don’t just assume they’re doing this right!
DOUBLE CHECK THESE PEOPLE. ASK THEM QUESTIONS.
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