Jacques Mattheij

Technology, Coding and Business

The Myth Of The Evil VC

If there is one story of a persistant nature that seems to pervade the start-up world it is that VCs as a rule are evil, they’re out to get you, will drag you down to their level and then beat you with experience. Some people that are very visible in the start-up world are perpetrating this to the point of being irresponsible. In Three Roads To The Top Of The Mountain I’ve already pointed out that dealing with VCs is a choice, and that that choice comes with both advantages and disadvantages. The advantages are mostly visible in the short term, the disadvantages tend to only become visible in the long term, especially for companies that end up not being winners after all (and this is the vast majority of them, so chances are that your company too will be one of these).

I’m sure that ‘Evil VCs’ actually do exist, and just in case you weren’t aware of it yet, they pay for my day-to-day living so you can take this as anecdata from someone who is in the pay of ‘the enemy’, alternatively, you could take this as information from someone who has been very close to the fire in a number of deals that few people will be able to match, and in those deals even though I work for the capital side I try very hard to keep an even keel. Having been a ‘founder’ myself this comes naturally to me, it is in fact much easier for me to connect with the world of the founders than with the world of the VCs.

Now, with that out of the way, let’s have a look at how this Evil VC story came to be in the first place. There have been a number of fairly high profile cases where founders were pushed out by the providers of capital. I’m not going to go into the details of who was right in those cases, I’m not even sure that’s interesting. But what I did get from those stories is one fairly universal element: the founders chose - for whatever reason - to give up control at some point. They decided that to have a small piece of a larger pie was preferable to having a large piece of a smaller pie, and in making that decision technically placed themselves at the mercy of their new shareholders when it came to the future direction of the company. One common theme is that a combination of conditions cause a company to need more capital than they initially planned causing the founders to end up with the difficult choice of shutting down or giving up control. Continuing on terms that are not favorable to the founders then gives the company a new lease on life.

That can be a winning strategy, but it sets the stage for being side-lined if the company does badly at some point in the future. Like every other deal that you enter into ‘regret’ is usually not a valid option for annulling a contractual agreement and this is where VCs have the upper hand to some extent. They tend to have done more deals than founders, they tend to have a lot more experience in writing contracts in such a way that those pesky little ‘small print’ clauses work out in their favor should the future not go as planned. You may call that evil if you want, but I think they are simply good at looking out for #1, and as the providers of substantial amounts of money they would be remiss in their obligations towards their partners and limited partners (who in turn provide them with capital) if they did not do this.

Opposite of the ‘Evil VC’ (which again, I’m sure exists) is ‘the evil founder’. The founder that figures that getting funded is a success in and of itself, the founder who will screw over their co-founder, who will risk the business for short term personal gain and so on. This person, like the Evil VC again is mythical to the extent that I’ve never actually met a founder that had any of these ideas when they started out with their venture. But aspects of that do surface with some regularity, and it is against these aspects that VCs try to arm themselves when they show up with their army of legal professionals and domain experts in tow just after they’ve signed the terms sheet. They are not assuming you - the founder - will do any of the above but just in case they have built in a whole slew of provisions into their contracts that will take care of those things and more if and when the situation occurs. And given that they, rather than you, have drawn up the contracts in the first place (the usual state of affairs) they already have an advantage here. But it need not be that way.

The thing to remember is that there are two sides to the table, not just one and at that point in time your goals (the founders) and the VCs are not yet aligned. You are not yet partners in the same venture, and you are facing the harder part, your opposite party has a ton more experience than you do at these things and small changes in the contract can have huge effects in the longer term. That’s why one of the recurring themes in these blog posts is ‘BYOL’, bring-your-own-lawyer. That way you will have someone who is at least as experienced in the whole dealmaking game and even though this may cost you some money (especially if you end up not consumating the deal), it is probably one of the best investments you can make. It will stop you being taken advantage of or signing a contract that is not the very best for you (and your partners) even if you feel that you are ‘in control’ of the situation (and if that is what you feel when you’re a first time founder and you’re dealing with a venture capital company on it’s 30th or so deal then I can pretty much guarantee you that you are not in control).

All those line-items that are present in the ‘standard contract’ (there is no such thing!) should be considered one-by-one with respect to whether or not you can live with them at all, and what the long term implications of these clauses are given the various scenarios that may play out in the future. Remember that each and every line in a contract like that was born from experience, experience that you don’t yet have where putting that clause in safe-guards the VC from some kind of un-specified risk. Contrary to the name VCs are actually to a large extent risk-averse, they will do everything they can to eliminate risks or to enumerate them so that the risk they are entering into is a known quantity, that still leaves plenty of opportunity for things to go wrong (as the average returns on venture capital prove), but at least they will have mitigated and taken care of the visible portion in so far as this is possible. If your venture is special enough you can push back against any or all of these items, it may cost you the deal but there is no such thing as a bad deal that you did not do. The only bad deals are the ones that you did do and that you end up regretting in the long run.

Remember that you don’t have to sign anything at all. Contracts are entered into of your own free will and if you’re not comfortable with what you are signing then simply don’t. Relax and take the long view, it’s not a disaster if you choose to forego a funding round on terms that you feel are to your disadvantage. Also remember that there is no such thing as ‘a standard clause’. If you don’t want a clause strike it, explain why you don’t want that clause and if the relationship and the deal survive then good. If the relationship and/or the deal does not survive then too bad, then it wasn’t meant to be anyway. But once you do decide to get funded that contract becomes the basis for the future and you can’t go back afterwards and point to ‘that evil VC’ on account of them doing what they are supposed to do in the first place: protect their own interests. Just like you should. That way the ‘Evil VC’ myth can finally die and we’ll be able to look at VCs just like we look at other people, there are good ones, and there are bad ones, but they’re not structurally bad.

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