Excerpt from the Growth Company Guide 4.0
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Negotiating Phrases to Watch Out For

A constructive, reasoned negotiation works best for most deals. But even in the most reasoned of discussions, parties strategize and employ tactics to work the process to their advantage. Consider the following phrases as wake up calls if you hear them in your negotiation.

·        It’s only a non-binding term sheet. True, but term sheets and letters of intent should be treated as seriously and with the same level of attention to detail as binding financing agreements. They set the tone for future negotiations and place practical limitations on the more detailed provisions of the binding agreements. Provisions expressly addressed in the term sheet can be next to impossible to change unless there is a demonstrable change in circumstances or a material concession from the other side.

·        We never exercise our rights under this provision. This phrase often follows "we always do it this way" and begins with "don’t worry." It is designed to comfort management when the investor insists on an onerous provision. Sometimes the phrase is different: "We don’t expect to have to use this provision," or "We never use this provision, but we always require it." Management should be careful when someone asks for something they insist they will never use. If they really will not use it then they do not need it.

·        It’s only boilerplate. These more standardized and routine provisions in agreements are just as binding and important as the rest of the contract. Failure to address them seriously and with a view to their impact on the company can be a costly mistake.

·        You can get your lawyers involved later. If the company’s lawyers are not already involved they should be closely consulted when a term sheet is being negotiated. Engaging counsel during the term sheet phase before the final financing agreements are created is the best money a company can spend with counsel. The time it takes to review and discuss a term sheet is miniscule compared to the time and effort it takes to complete the formal deal documents. While the cost may be relatively small, the benefit of counsel’s advice during the term sheet discussions can be enormous.

·        We always do it this way. Companies sometimes get this from an investor or his lawyer after management has negotiated the main deal points and the parties are putting that deal onto paper. Suddenly, the investor’s lawyer presents the company with forty-five pages of representations and warranties he wants management to sign. The explanation that investor always does it this way probably means the company has been presented with the lawyer’s standard form, which he always uses as a starting point in negotiations. Like all standard forms, much of what it contains will not apply to the company’s deal. "We always do it this way" implies that the way the investor did his deals in the past is the way the current deal should be done. But this company and its needs are different from all those other deals. And, while it may be unrealistic to expect an investor to abandon the deal structure or basic deal documents that have worked well for him, it is realistic to expect him to deal openly with management and to change provisions when appropriate.

·        Let’s use the projections from your plan for the benchmarks. The financial projections in a company’s business plan usually make poor benchmarks. Since plans are often used to attract investors they may tend to be optimistic. In fact, most venture capitalists routinely discount company projections when they price a deal and do not really expect a company to meet all the goals stated in their projections.

·        You need to stand behind your plan. No investor has ever seen a growing business unfold in exactly the way it was detailed in its fundraising plan. Real life contains too many variables to reasonably expect a company to meet all the objectives or projections contained in its plan. Few, if any, sophisticated investors price their investment proposals off the numbers contained in a company’s plan without applying some discount to account for the uncertainties inherent in growing a business.

·        We all have the same goals. Companies sometimes hear this from investors. Yes, it is true that investors, like management, are concerned with seeing the company progress. But beyond that, the interests of investors and company diverge in many meaningful ways. For one thing, investors are more diversified in their investments and, frequently, have investors of their own they have to satisfy. Their time horizon for liquidating their investment can be quite different from management’s and their perspective on company direction and management often differ from management’s.

·        We are not interested in controlling the company. In general, this is true of venture capital investors who purchase a minority interest in a company. One of the key attractions to investing in the company in the first place is the perceived strength of the management team. The mistake that is made with this statement is when management interprets it to mean the investor is not interested in control under any circumstances. The reality is that if the company fails to meet expectations or if an investor’s goals change, investors frequently get more interested and involved in company management. If management was not careful in preparing the financing documents, the outside investors may have the ability to effect serious change at the company or even take control.

See: Benchmarks, Boilerplate, Control, Deal, Projections, Reps and Warranties, Stage Financings, Venture Capital Deal Structures.