After doing this for about 4 months now and only really seeing maybe 5 investment term sheets, I am already seeing a huge variance in investor experience and/or attention to detail.
My lawyers are great. They are super-conservative and I joke to them about being worst-case-scenario guys. It is truly scary to hear all the crazy things that either have happened in the past or all the possible bad things that COULD happen. In their defense, that’s their job which is to protect their client and keep me out of trouble, and in the course of that scare the daylights out of me by talking about possible disaster scenarios.
It is obvious to me that not everyone is employing their lawyers in the same way. Or maybe their lawyers aren’t that good, or even stylistic differences in approaching financing changes the equation. Or maybe the company doesn’t want to spend the money to do things right. Or the investor either doesn’t want to spend legal fees or has no legal help at all.
In reviewing these term sheets, they range from being, “These investor terms are super-dangerous; I can’t believe anyone would sign this!” to “WOW these are great balanced terms that serve both the company and the investor”. I don’t see the ones which are (most likely) initially given to companies which are totally investor friendly and screws the company.
For some of the more experienced investors, I see definitely a jockeying of position for control happening in subtle and not-so-subtle ways. It is the interesting interplay between company and investor, and if you have large assets coming to the table, the company definitely wants to bring that cash in. But either side exhibits differing levels of experience. Generally, I find the big venture firms having more leverage and experience, but sometimes they seem to sign early stage docs a lot quicker and with less attention to detail since less money is involved. When bigger sums of money are involved, then the real jockeying begins as negotiation for rights and control are passed back and forth.
Still, as I ask around, I find that there are many of the big VC firms that also operate haphazardly. I do not know all the reasons behind this yet, but it seems that time is a big limiter, as is cost for applying legal fees, and also experience, especially among junior partners trying to get a deal done.
In some instances, given that it’s friends and family who are the angels, I think they operate on trust. They are relatives/friends of the entrepreneurs and give their support by putting up some of their own cash. They typically have little or no angel investing experience and probably not much legal help at all. So terms are not read or read and then not understood, and paperwork is signed on the assumption that the entrepreneur will not screw over their friends/family.
What can I say? I hate reading legal docs too. It’s why I asked my lawyer to really simplify my advisor agreement. You can actually read the damn thing if you’re not used to legalese, and understand what you’re getting if you sign me up. Before that, it was really tough to read; lots of legalese and weird words like “hereunder”. What the hell does “hereunder” mean? I see it everywhere in legal docs. Sheesh.
But I have forced myself to really read and understand term sheets and also the final expanded investing paperwork. As investors, I believe that we need to do this so that we can be prepared to defend why we’re asking for term changes, and to not be afraid to push for changes even though we’re not the lead investor. It is essential that we become experts in this and be good at reading docs, and not be shy about spending a bit on legal fees to keep us angel investors out of trouble.