In a fascinating article in today’s Business section of The New York Times (“Two Founders Tightened Grip on Snap After a Spat”), it is suggested that the reason Snap’s founders have demanded almost complete voting control of the company is because venture capital investors had earlier taken advantage of them with onerous investment terms that included “the right of first refusal to invest in a future round of funding and the ability to increase its share of the company in that round,” effectively letting the investors have veto power over investment at Snap. Admittedly, those investor rights were agreed upon by Snap’s founders, but only because their lawyers suggested such terms were “standard.”
In a stunning statement, Snap co-founder and CEO Evan Spiegel took aim at his lawyers at the time and is quoted in the New York Times article as having previously said:
“When we were first getting started and took financing, our lawyers would take us through the documents and they’d say: ‘Oh, don’t worry about it. It’s all standard.’”
“I’ve since learned that standard means either the person who’s walking you through documents doesn’t understand them or you could be getting taken advantage of.”
“When someone says something is standard, just ask why, and why and why and why, until you really understand intricately, I think, how the deal is structured.”
We often hear that “this is market in industry X” or “we get this in all of our deals” and caution clients that even if these things are true, to fully understand the terms of the transaction and its implications, and, if the terms are too onerous, consider whether there are any suitable alternatives.
We agree with Mr. Spiegel – corporate clients deserve more than the “standard” terms explanation from their lawyers.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...