Because It's Standard

I woke up thinking about Morty this morning. I haven't seen or heard from him in over ten years. But Morty taught me one of the most important lessons about negotiating that I've ever learned.

Morty was Isaak's partner in Multex early on. They put up the initial money to get it started. Morty wasn't a venture guy. He was a real estate lawyer and sometime real estate investor. He was as conservative as you can get and never liked the startup/venture business. But he was Isaak's partner. And Isaak asked Morty to negotiate the term sheet for the seed round with me.

This was late 1992 and I'd been in the venture business for five years and was on my second or third deal on my own. I'd negotiated a bunch of term sheets by that point, but I'd never had a negotiation like the one I was in for with Morty. Actually I don't think I've ever had one as rough as that since.

Morty wasn't familiar with venture terms. They didn't make sense to him. So standing in an airport pay phone (before cell phones) I went line by line, term by term with Morty.

We got to redemption and he started in. "Why do you need this provision Fred?". I was getting tired of his non stop push back and blurted out "Because it's standard. We always get this provision. Always have, and always will".

That got Morty pissed. He shouted over the phone:

I don't give a f>>>k that you always get this provision. Doesn't mean shit to me. This deal will be the first time you don't get it if you don't explain why you need it.

That set me back on my heels and I weakly explained that if the deal goes sideways for years, we need some way to get out of the deal and redemption provides that path. I don't even remember if he bought that argument. But I do know that we had redemption in the Series A at Multex and pretty much every deal I've ever done.

But the point Morty made rang true to me and I've lived by his rule ever since. I never ever say that a specific provision is "standard". Nothing is standard. You either need it or you don't. Explain why you need it and most of the time you'll get it or something like it as long as both sides really want to make a deal.

Comments

[howard lindzon]

Same argument with Ellen on the prenup - But Honey...it's standard...

I bitched but signed it anyway :)

[captain flummox]

That makes such perfect sense that surely it can't happen on a broad scale. I've noticed that terms and conditions are getting longer and longer, and more inscrutable. True, they don't represent actual negotiations, being take-it-or-leave it, but it's scary enough that I actually force myself to read through them all now. Unfortunately I suspect legal agreements evolve by the kitchen-sink theory for CYA purposes.

[Andy Swan]

Hmmm, you mean I could have not gotten the undercoating and extended warranty? :)

[Nate Westheimer]

How about voting shares. Is that standard?

[TheBillfold]

Well said, Fred. Nothing is standard. When you finance a deal, one finds things that one needs and one finds things one doesn't need. One also finds things that are necessary, but not necessarily "standard". Try saying those last five words over and over again - kind of a tongue twister!

[Karen E]

Hi everyone, I'm trying to up the women's comment-to-reading ratio! I am woman, hear me roar!

Seriously, this was a great post, despite the diminishing (but eye-opening!) comments from Howard and Andy.

I take it as: to strengthen and ultimately win a tough case, you gotta be able to "back it up." We say that in our house all the time. "Back it up, baby."

[DLambert]

Outstanding post. This is an important message that could very easily have been glossed over, but Morty made his point well!

[David Dufresne]

Another one I hear often "Because... well, it's a matter of principles".

[carl rahn griffith]

standard t&c's/provisions in term sheets/whatever, can and do scupper many a deal - they are seen as being sacrosanct because companies like to provide a generic, standard boilerplate document with no/minimal customisation for their legal people to have to review. it becomes a point of machismo corporate pride in many instances - "these are our terms - take 'em or leave 'em."

the time and energy wasted in such contractual negotiations is staggering - regardless of whether it's a contract for a software licence or a term sheet. tradition has meant many such legal/fiscal documents tend to be burdened down with past expectations which time and time again need to be justified/re-negotiated.

time to rip it all up and start again, i'd suggest.

[Fraser]

Great post.

This is why I think a naive individual brings a lot of value in many situations - by simply asking "why" they challenge the status quo and force an explanation beyond "because it's standard" or "because that's the way it's always been done"

[Fraser]

And... I find posts that communicate a message through a personal story/anecdote are far more entertaining and sticky than any other.

Please keep them coming!

(your friend, Tom Evslin, has mastered the art of this)

[Grand Egress]

PTL

Whenever someone tells me, "Because it's standard..." I reply, "Well, my mommy told me just because Johnny jumps off a bridge doesn't mean I have to, too."

BTW, a similarly common and hollow line is, "Because its market..."

[Jeremiah]

I do think that an appeal to standards and norms is often an important negotiating tool to move discussions forward when they are stalled; in many cases these norms and standards have strong underlying logic and importance.

[Cate Long]

Wish I had a Morty...someone to set back the VC on their heels...

[JayR]

I think about Morty a lot. When we did the Multex deal, I had been doing venture and buyout deals for about 4 years. In the early '90s, the industry was very much a WASPy old-boys club - including the lawyers who serviced it. Morty was the first guy I came across in a venture deal that reminded me of my relatives (the smart ones, at least).

It's usually a challenge to work opposite a lawyer on a venture deal who doesn't do venture work. If it's a small firm, it often means having to work both sides of the deal. If it's a large, Wall Street-type firm, it can mean having to train their third-year associate or (worse) just getting pummeled with inane changes to registration rights provisions that almost never see the light of day. Morty was different. The challenge with him was that he made you think and come up with valid reasons for your positions. He certainly wasn't easy to deal with, and he wasn't always focused on the really important issues - we spent more time negotiating rights of first refusal and co-sale than any other issue in that deal. But he knew what he knew and what he didn't know, he didn't try to fake it and he was smart.

I have a corollary to your Morty principle, and it's that if I hear a lawyer say certain things, it's likely that he doesn't know what he is talking about and we have to deal with the client directly to get our point across. The line you mentioned is one of them. The other two are:

1. But my client is [Mr. Big Swinging Dick]; and

2. Fuck you, asshole!

[Dan Cornish]

It takes sooooo long to get a term sheet, so the advantage is almost always towards the VC. If you begin to negotiate, the VC gets an excuse to say NO. It is a rare deal where you can quibble over each detail in a term sheet. The best time to negotiate is when you don't need the money. How often does that happen?

[Dan Cornish]

It takes sooooo long to get a term sheet, so the advantage is almost always towards the VC. If you begin to negotiate, the VC gets an excuse to say NO. It is a rare deal where you can quibble over each detail in a term sheet. The best time to negotiate is when you don't need the money. How often does that happen?

[Rob]

Hey Fred

Cool post, its so interesting to hear stuff like this. Perhaps one day you could publish a post on your deal sheet best practices or lessons learnt.
My long term goal is to get into VC and I absolutely love reading your blog as it really makes me think.

[Danny]

I couldn't agree more with Morty (and Carl). When somebody (usually a lawyer) gives you the "it's standard" line, it's either because (1) he can't explain why he needs it or (2) he's got BSD issues and refuses to negotiate. Either way, you're stuck with a loser.

And if you hear your lawyer say it, get a new lawyer.

[Larry]

Thanks for the memories, Fred. Morty was a character and a good person to learn from. (I worked at Multex).

[Dean]

Late comment, but I agree. Saying something is "standard" is like saying it's a "no-brainer." I hate it when people say that.

[john]

Anyone who has been through a bidding war between VCs learns that nothing is standard. To get a desired deal, VCs will give up things.

Another related trope to "it's standard" is when someone says: "You don't want to take money from those guys, they'll do X and that's just not standard." Then when you get your termsheet from the supposed good guys, they're doing X as well.