I finally closed a deal that took maybe a little longer than it should have (in the process of closing this deal, I also started and closed a follow on investment in one of our companies, and started another closing for a new company).
While there has been a bit of mud slinging back and forth about how long this has taken and who’s fault it is, at this point, I’m very happy that its done. There are definitely some take aways from this one which I’ll list below:
Keep the lawyers out of it » As much as possible. If you disagree with something in a document, the first thing you should do is call your investor and talk to them. Once you agree on the intent of the term, then you can direct your lawyer to draft as such. This may sound counter intuitive, but let me explain. A lawyer’s job is to protect their client. That means that any time you want to make a change, they’re going to tell you everything you’ve just exposed yourself to by agreeing to that change. The way to keep a transaction going smoothly is to talk to your investor about the provisions and protections you want, and then make sure that your counsel drafts the provisions in this way too. Sometimes things get lost in translation and you may all have to jump on a call or two to iron things out. But the best way to do things is to ensure that you and the investor agree on the intentions of terms and then stick to those. This is not to say that you should not trust your lawyer, but, especially when you’re first starting out, you need to really be clear about what you want from a deal. Term sheets are non binding, and drafted agreements always have more clauses than the original term sheet had, but if you let two lawyers iron out an agreement, its going to cost you an arm and a leg, and will take an eternity to finish.
If you’re the lead investor, LEAD » I learned this the hard way. The basic etiquette of investment syndicates is as follows: the lead investor takes point on the deal. They decide counsel, they communicate with counsel, and they notify the other investors of the various changes as the agreement changes. As a lead investor, your job is to review docs for anything that is a glaring problem for investors in general terms (eg. no investor board seats), as well as anything that you need in there to fit your investment philosophy (for example, if you need liquidity for your fund in 5 years to pay back Limited Partners, you probably need a retraction right at year 4). Lawyers will always circulate docs to the syndicate (all investors). As lead counsel, your job is to make your changes, copy everyone on comments, and send it back, to keep things moving. It’s not your job to herd cats and wait for the entire syndicate to make their comments - they trust you to catch the basics and its their responsibility to make sure nothing contravenes their investment philosophy/LP agreement terms. If you’re part of a syndicate and not the lead, its your job to speak up on draft iterations so that your comments are incorporated. No one wants to hold up closing because they haven’t read the agreements until signing.
These are the two big things I’ve learned. I could devote an entire post to legal and seeking legal advice, and I just may in the near future…