I had this ethical dilemma pop up on one of the first deals I even did as a VC. I had been looking around at several deals in late 2008 as the markets were tanking.
I had gotten close on a couple of deals but nothing rose to the level of “must do.” I was learning which VCs I wanted to work with, what stage & check size I wanted to commit do and what teams would be a good fit for me.
I got a call from a VC friend of mine who said, “we’re looking at this deal but can’t write the full check. I think you should look at it.”
I’m sure I’m not the only one he called. But I had just seen the company present at a recent tech event and thought highly of what they were building. I was interested in the company but I wasn’t chasing the deal. The call from a fellow VC to “look harder” made me decide to request a site visit. I went and spent a day with the team and loved their vision and their entire team.
It mapped pretty well to my dream team for an A round investment. I decided to write a $2+ million check along with my co-investor who offered $750k.
Since I didn’t originally source the deal I let my co-investor set the terms and negotiate the deal with my consent. The company agreed on a price but felt it was a bit lower than they had hoped for. But it was early 2009 and not many companies were getting new financings at all so I thought they should take the deal.
Another VC called me when they heard from the company that I was going to do the deal. The other VC offered to invest $2 million alongside my $2 million so the company would be getting more money. The potentially new co-investor agreed to increase the price of the deal by nearly 50% so it would have a real impact. He also called the company. He wanted us to drop the original, smaller VC.
The CEO called me. He told me he wondered if we should consider switching partners so the company could get more money and at a higher price.
I told him that if he did he’d have to do the round without me. The truth is that I wasn’t as valuation sensitive as my original VC partner was and I would have been willing to raise price. But my other VC partner had a smaller fund and raising price would have a big impact on his ability to finance the company.
I told the CEO:
“The original VC brought me to the dance. Without him I wouldn’t have travelled to see you and spent as much time as I did getting comfortable with the deal.
I know it’s tempting to switch partners. The other configuration seems more attractive to you. But part of the reason the other VC called about the deal is that he heard we were doing it in the first place. Had he not heard about our commitment it’s not clear whether he would be rushing to submit a term sheet.
If you decide to go the other way, I’ll understand. But for me I care too much about my long-term reputation. I don’t want my reputation to be built on abandoning friends in good times or bad. If you decide to stick with us you at least know that I’d treat you with the same respect if you were in a difficult situation.”
We closed the deal. We later gave the company another $5 million and my original VC co-investor committed another large check relative to their fund size. They have been a very active and an awesome partner.
This analogy has stood the test of time with me and steers my actions. I saw it first hand in college, which is where I first developed the analogy.
A close friend of mine was looking to ask somebody to her sorority dance. She asked me what I thought about her asking one of my fraternity brothers. He was the son of a Hollywood celebrity and looked like he could have been a star as well (later in life he became nationally known). I mentioned it to my friend and he green-lit the plans for her to ask him to the dance.
She was beautiful, too, so it wasn’t as though he was “out of her leagues” … but he was pretty sought after.
I happened to be at the dance, too. I saw both of my friends. The night started harmless enough. Lots of dancing and a bit too much booze. Pretty typical college evening. But as the night wore on my fraternity friend started forgetting that he was at a dance in which he was invited to. It wasn’t a free for all. He ended up hooking up with another girl and literally left the dance with her.
My friend who had invited him was obviously mortified. She shouldn’t have been. He was the dolt. I lost respect for him. You learn a lot about people in these situations.
So it reminds me of a recent deal in Silicon Valley from 18 months ago or so. I had two friends who had agreed to co-fund a company. I knew the CEO well and heard what was going on from all sources. One of the best known VCs in Silicon Valley had decided to come in at the last minute and fund the company even though a term sheet was already signed.
The CEO said, “how could I not take VC “X” – they’re one of the best brands in the industry?” I disagreed. He has signed a term sheet. A term sheet is your bond. You’re not legally bound by it but you really hurt your reputation when you pull out for any reason other than something truly extra ordinary.
He tried to get new VC and previous VC to split the deal (the third VC didn’t care either way). Previous VC said, “no” – if that’s how you’ll treat us now we know how you’ll treat us down the road. I agree with their position. So new VC did the deal. And the have now given the company A LOT of money. We’ll see what happens. I still think the CEO made a mistake.
In life you’ll be faced with many situations like this – moral dilemmas. You’ll learn that there are many bad actors. You’ll find that there are very few people who still believe in honor. When you find those people they’ll be lifetime friends and business associates.
But you can start with yourself. It’s funny how many people I’ve known for 20+ years keep popping back into my life. It always reminds me the importance of always treating people with respect. You can have disagreement. You can have fights. You can even have people with whom you don’t want to work. But if you act in ways in which people question your ethics – people will have very long memories.
Me? I’d rather walk away from a deal than leave with somebody other than the lady who brought me to the dance. And it’s not for purely “Pollyana-ish” reasons. I believe that your long-term reputation matters more than any individual deal. And life’s too short to work with dicks.