Comments on: The “Hold Your Nose” theory of legal documentation

By: Michael O'Daniel

Michael O'Daniel — Thu, 03 Jan 2013 05:09:24 +0000

To be more precise, Dirty Harry actually may have said, “Is that a risk you’re willing to take?” It scans better anyway.

By: Don Ross

Don Ross — Thu, 03 Jan 2013 00:01:30 +0000

It is worth bringing up the “stinky clauses.” I’ve had success approaching the entrepreneur with “this is unusual and frankly does not make sense.” The push was for a win-win. The entrepreneur cared about treating his investors well–this was critical.

In one deal, we were “last in” and had a smaller investment in the round. The legal docs were missing important clauses (e.g., no information rights).

To “save money” the lead investor suggested that the company counsel write the term sheet and legal documents. Small wonder that certain investor protections were missing.

Although we didn’t get everything, the “deal killer” problems were resolved. For the others, we made a judgment call (and held our noses). As a result of our efforts, all investors in the round got better terms.

We liked the entrepreneur, and he demonstrated a high level of integrity. If the entrepreneur had been intractable, we would have walked.

By: Frank Castle

Frank Castle — Wed, 02 Jan 2013 23:55:37 +0000

Point well taken, Michael, but Dirty Harry actually asked, after saying that he didn’t know if he’d fired five or six shots, “Do you feel lucky………well, do ‘ya punk?”

By: Chris

Chris — Wed, 02 Jan 2013 19:51:23 +0000

You will invariably find a bad clause in any deal you do. Just look at the Fiscal Cliff package… However, I have encountered this many times in doing early stage investments, and the decision for me is simple — if the term is of such importance to be a go/no go item, I simple and honestly convey that fact to the Founder and let them make the call. If it is a reasonable request (and the Founder is reasonable), they will often come around, if not, there are another 50 deals in front of you at any given moment, so move on and feel good that you held your ground and did not contribute to the frothiness of an unreasonable marketplace. [Last time this happened to me, it was AFTER the company had taken money on the round and already signed docs. with other investors. But my request was reasonable – as was the Founder – so the change was ultimately made to all document – both backwards and forwards, to the benefit of all.]

By: Michael O'Daniel

Michael O'Daniel — Wed, 02 Jan 2013 19:28:58 +0000

When one encounters stinky language and is contemplating whether or not to ask for changes, it’s good to remember that “What’s the worst that could happen?” eventually will. As Dirty Harry said, “Is that a risk you want to take?”

By: Michael

Michael — Wed, 02 Jan 2013 19:02:57 +0000

In my experience if you are ‘negotiating’ with people whose lawyers are inserting ‘stinky’ clauses to trip up/setup litigation at a later date you are not getting the reflection of integity I require for all my deals. Walk away if there is not full flexibility and willingness to amend problem clauses. There is always another deal. I always trust my gut. No uh-huh. No deal.

Happy New Year,

Michael

By: dennis@caganco.com

dennis@caganco.com — Wed, 02 Jan 2013 18:48:12 +0000

Well penned my friend.