Why Convention in Venture Scale Startups Matter
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Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies. The information on this page should not be construed as legal advice. |
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“Because that’s the way we do things” is a horrible answer to just about any question. I know when I start referring to “convention” in certain transactions, I have to be careful not to sound like I’m presenting a dressed up version of because that’s the way we do things.
Convention plays a strong role in venture scale startups. This may sound dissatisfying to some, especially entrepreneurs who scrutinize the status quo. However, there’s a good reason for deference to convention - not conformity or complacency.
When a startup gets to big events – venture capital financings, mergers and acquisitions – part of the process is called due diligence. There, the investor/buyer scrutinizes the company’s finances, business, legal history, and tech. Lawyers comb through the company’s contracts and ask other questions to determine that things are in good order.
When everything that comes out in due diligence sticks to convention, there is not too much to hold the deal up. If, on the other hand, contracts deviate from convention, the investor/buyer has to get comfortable with the deviation, in the best case, or else ask for remedial efforts, an adjustment to the principal terms of the deal, or the deal falls apart. With every deviation, the process is slowed down, the overall comfort level may be influenced, and the transaction costs on both ends go up (though the company may be paying for investor counsel, anyway).
Creative attorneys may want to craft creative structures for various transactions. However, a highly customized transaction, while perhaps optimal for the matter at hand, requires that future investor/buyer counsel make sense of what’s been done, and determine that the custom transaction does not present any problems.
Usually, I advise clients that unless there is a good reason to deviate from convention, that convention should dictate. Even when there is a good reason, we should still use constructs that will be familiar to other attorneys, rather than writing spaghetti code contracts, so that they can easily assess why our good reason should prevail over convention.