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September 27, 2006


A decent lawyer would line most of this stuff out. We certainly would have laughed in the faces of people proposing them. These items are for people too dumb to know that the underlying deal metrics don't require them.

Unless, that is, as a team you are desperate (have already run out of cash), which is when it gets funny, because the VC's who go in for this stuff get hit by adverse selection coming the other way: the provisions they require end up aligning them with the dumber management teams.

Founder buy-back sounds to the founder like: we like the idea, we don't like you. We'll take your idea and throw you out as soon as we've put the management team we like in place.

Otherwise why would the VC insist on without cause?

I'm not too familiar with cases of the founder walking out after going thru the wringer to get funding - that would be downright masochistic. Perhaps it happens.

To the VC, it's an investment. To the founder, it's her baby, her idea, her night and day for the foreseeable future. Tell her you have the right to throw her out and take her shares whenever you feel like with no cause, and you have a serious trust problem on your hands.

It's contract terms like this that keep me from ever taking my business in a direction that would require VC-level cash. It's heartening to know that there's a VC out there who agrees that such contract provisions are offensive.

Excellent post!

Regarding entrepreneurs saying "No" to paying due-diligence expenses, right on! After my last VC experience, I consider it a deal-breaker if the VC insists on it. Who's with me?... Anyone?... Guys??

At least you're not being insulted with the expenses PLUS break fee provision a Boston VC recently put on my desk. It offended my manhood, and I'm a woman. Never go with a US fund that has less than $250 Million to deploy - their management fees are too skinny. Let us all praise Canadian LPs for not being as stingy.

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