Scott Lenet
How should venture capitalists and corporate innovators assess Din Djarin, the protagonist of The Mandalorian? He’s introduced as a bounty hunter, a mercenary vocation in the Star Wars mythos that has been reserved primarily for villains.
One of the most interesting aspects of Jon Favreau’s show is how Din Djarin wrestles with the orthodoxy of his Mandalorian beliefs. His insistence on honor makes the character an appealing hero, and his character’s growth is demonstrated by when he chooses to be flexible versus when he holds fast to the rules he believes.
Although “This is the way” emerged as the show’s quotable soundbite, there is another line that’s more relevant to venture capital and corporate innovation: “You’re changing the deal.” Din Djarin uses this phrase to spar with adversaries who try to advance their objectives by disregarding clearly understood agreements.
Of course, terms change in venture capital and entrepreneurship all the time, with investors and entrepreneurs finding themselves in Din Djarin’s position.
This challenge is built into the very structure of venture capital fund raising, in which a Series A financing is usually followed by Series B, and then Series C, and each of these transactions frequently adds, subtracts, and modifies terms, changing the deal from the perspective of the startup and existing investors.
But sometimes terms shift without a formal “reckoning” event like a financing. One of my colleagues recently asked for my advice on how to address such a conflict.
He’d participated in a startup financing that included certain information and observation rights. These rights had been negotiated directly with the startup’s CEO and articulated in the financing documentation. Yet, in the first board meeting following the close of the round, the lead investor refused to honor the agreement.
Somewhat exasperated, my colleague asked, “What can I do to enforce our rights?” He was even more upset when he heard my answer, which was that he had no recourse whatsoever.
He insisted, “You’re not serious. We have a signed contract and they have to honor it… Don’t they?”
I explained that the lead investor, who was also the board chair, might be legally required to honor the contract — but practically speaking, there was no way to force him to do so. “What are you going to do, sue our co-investor to force them to honor the contract? That’s crazy. You will never be invited into another venture capital deal in your career if you go down that path. Your only option is to develop a strong relationship so the chair wants to honor the deal. Go make a friend.”
Accumulated grievances from this type of back-trading can have a cost: when people feel that they have been unfairly wronged, they often wait for an opportunity to exact revenge. This moment of leverage could be the next time a financing occurs, when a required approval can be withheld, or when a compensation negotiation is happening. Even if the moment never arrives, escalation of tensions can fracture essential relationships in a company’s culture, removing focus from the more important objective of building value in the startup for all stakeholders.
So how should deal-makers think about how to handle themselves when counter-parties attempt to change an agreement? When is it okay to modify terms, and when should deal-makers stand firm?
In my colleague’s awkward situation, we learned that while the startup’s CEO had signed the agreement, the lead investor and board chair was not aware of the existence of these terms. Bad communication was the culprit, not bad faith negotiating. This can happen frequently in fast-moving startup environments when relationships are siloed.
As a result, I apply the following principles to frame my approach when faced with shifting terms:
- Avoid resorting to conflict escalation tactics or tit-for-tat antics that can endanger the overall success of the enterprise.
- Clarify everyone’s goals and positions to understand if insufficient communication has led to an unnecessarily adversarial situation.
- Sometimes circumstances or one of the parties’ goals has changed, and it may be necessary to make an accommodation.
- If I determine that one of the parties is simply negotiating in bad faith, which does happen in venture capital, I hold my ground.
Entrepreneurs and investors should recognize that contracts are worth very little without the ongoing relationship management that keeps all parties aligned. Enforcement is so unusual in the world of startups that I consider it a mostly dead-end path. In my experience, good communication is the only reliable remedy. This is the way.
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