The Retrade

Brad Feld has a post up about The Retrade. This is when you have a handshake or a signed term sheet on a deal (M&A or Financing) and the person on the other side calls you up a day or two before closing and tells you why they are going to have to change the terms of the deal. Go read Brad’s post, it is a good one.

My view on retrades is that they are part of the way the investment and M&A business gets done. You should not get emotional about them. You should not walk away over them unless you have a better option. You should simply accept them as part of the way the game is played and deal with them as best you can. You can often negotiate a retrade. You won’t get back to where you were before the retrade but you can often do better than what is being suggested.

In a market when retrades are common (private equity or the down cycle of the venture business), you should always negotiate more of a premium than you need or desire in the initial signed term sheet or LOI. That way you are building in a cushion for the expected retrade. If you are playing a game, you need to know how the game is played and act accordingly.

The thing about retrades is it is a signal about the person or institution you are doing business with. Sometimes retrades happen for legitimate reasons. A typical one is the due diligence shines a bright light on a problem that was unkown at the time of the signing of the term sheet or LOI. That is the most common explanation for retrades. But sometimes it is legitimate and sometimes it is not. Understanding all of this and how it reflects on the “retrader” is important. Because the one thing you do want to avoid is getting into business with bad people. Retrading is a potential red flag that the person you are dealing with is not a good person, but it is not definitively so.

As always, I suggest doing references, and as many of them as you can, on people you are thinking about getting into business with. If you hear that the person is a serial retrader, then you know that’s what you are dealing with and you might want to think twice about getting into business with them. If you have heard nothing but good things about the person or firm, then I would take the retrade in stride, deal with it, close and get on with things.


Comments (Archived):

  1. Kirsten Lambertsen

    “Retrading is a potential red flag that the person you are dealing with is not a good person, but it is not definitively so.”It certainly was for me. I actually successfully talked the other side out of their proposed retrade, but the fact that they asked for it in the 11th hour (and I do mean 11th) ended up being a very bad omen.Seems to me, if someone has a legitimate retrade they need to ask, a truly honorable partner will have already put some thought into how to make the other side whole in the bargain.

    1. Joe Cardillo

      It does seem like a relationship killer, especially considering VC + startup relationship is so much more high risk and about execution / operation than other contracts

      1. Kirsten Lambertsen

        When I think about it even more, maybe the fact that I was able to talk them out of it was an even worse sign. They were just seeing how much they could get away with.

        1. PhilipSugar

          Yes, the question is how did it go from there??I have found that once you realize somebody is purely transactional, they are always purely transactional.You earn trust by the eye dropper you lose it by the bucket.

          1. Kirsten Lambertsen

            It went about as badly as it could have. Many lessons learned, scars acquired. C’est la vie!

          2. PhilipSugar

            Yup, I’m sure that was some experience gained at the expense of bad judgment. No disrespect, I have learned that lesson myself.You do what you do, but how you get back up is the key.

          3. Anne Libby

            Ouch. Tuition.And as @philipsugar:disqus said elsewhere in comments today, hopefully someone comes around and asks you about Joe/Josephine X.And then listens, when you politely express what a great partner Joe/Josephine Y is…

          4. Kirsten Lambertsen

            Oh, yes. Happy to share with anyone who asks 🙂

          5. Lawrence Brass

            Earned scars are better than fancy tattoos.

        2. LE

          See I wouldn’t have looked at it that way. I would have passed it off to my skill in getting them to reverse their decision. This is not to say you aren’t correct (because neither of us know) but it’s just my way of framing things in order to benefit myself. Most importantly I don’t typically fault or blame someone else for acting in their own self interest, and I actually expect and try to prepare for that. Ideally of course.

          1. Kirsten Lambertsen

            “I would have passed it off to my skill in getting them to reverse their decision.” I did, at the time. Hindsight has given me some perspective on that. If the retrade was something they really needed due to changing circumstances they wouldn’t have backed off.I’ve always been like Henry in “Barfly.” He gives Wanda all his money, and she asks, “You trust me with this?” and he says something like, “Sure, why not? It’s easier that way.” But I’ve stopped ignoring my instincts in service of trust. My instincts have proven themselves right too many times.

          2. PhilipSugar

            I agree. I’ve learned when I don’t feel something is right to trust my instincts and move on. I can’t think of a single time when I thought this person is going to screw me, but I’ll protect myself, that it didn’t end up working out badly.

    2. ShanaC

      I can think of similar issues for me…….

  2. William Mougayar

    We used to have a say during my old sales days “It’s not an order until it jingles in your pocket.” Big item enterprise sales situations are full of twists and turns.Or, “when you get the order, stop talking and walk away.”But in the case we are discussing here, can the entrepreneur add a clause in the term sheet to mitigate the downsides from a re-trade?

    1. fredwilson

      i don’t think that is possible

      1. William Mougayar

        so, closing fast is the best option. if it drags further than 30 days, it’s not typically a good sign.

        1. PhilipSugar

          Time kills all deals.

          1. Mario Cantin

            Time is killing a lot of things, including my sexy looks.

          2. LE

            Right. And the inverse of that is that a short timespan doesn’t give people a chance to think and change their mind. Or do I mean “corollary”. Whatever.

      2. avifreedman

        Advice to founders: If they’ll do it, get a bridge from your current investors long enough to extend runway (incl what you have) to 6 months total, from start of term sheet. Have seen that give leverage on retrade attempts.

      3. Vasudev Ram

        It should be possible when investors/VCs do that all the time themselves, i.e. things like preferred classes of shares, etc.

    2. sigmaalgebra

      In private equity and/or M&A, that’s called a “breakup fee”, right? Sounds good.

      1. avifreedman

        It wasn’t market unless you were super-super-hot before the funding market tightened. A variant on my comment below – I have seen new investors do bridges at the same time (but not as part of) signing a term sheet, and sometimes those terms have had the note stay outstanding for 6 months from issuance even if the deal doesn’t consummate due to the investor backing out.

      2. William Mougayar

        Right, but a VC would not agree to that.

    3. LE

      Or, “when you get the order, stop talking and walk away.”Oh man. Like I used to say “get your ass out of dodge”. One of the first lessons I learned from my dad when I was 6 (arbitrary who knows when I learned this but it was forever ago). He would tell me how a salesman he was dealing with was stupid for continuing talking after he had the sale. To wit “he should stop talking he might say something that makes me change my mind”. Actually it was probably worse than just saying “stupid”.”It’s not an order until it jingles in your pocket.”Variation I would use is the “opera is not over until the fat lady sings”.

      1. Vasudev Ram

        Saw an article (Wikipedia? can’t remember) stating the origin of that last line of yours – “… until the fat lady sings”. The origin was different from what I “expected”. And I was wrong to have expected some other source, that’s why I put it in quotes in previous sentence. In life, always expect the unexpected, as I said once to some colleagues ..

      2. William Mougayar

        Yep. definitely agreed.

    4. Vasudev Ram

      Yes, I was going to write a top-level comment on roughly the same lines, but since I read yours, I’ll just piggback on it, or rather, suggest a variation:What’s wrong with the entrepreneur just requiring a clause that “the terms here cannot be changed due to some external circumstances, except by mutual agreement” and walking away if that clause is not agreed to.

      1. Vasudev Ram

        Or another option is let the investors do their due diligence first, and only then should both parties sign any terms? Any issues with that, such as confidentiality of the product?

        1. PhilipSugar

          No, no, you would never, ever, ever, want somebody doing due diligence ad then coming to terms. Never, ever ever.

          1. Vasudev Ram

            Why not? I’m not an expert on this area. Does doing it that way have some risks? The only obvious one I can think of is that they might not invest, because they find out something you don’t want them to. But then they would find it out later anyway, if due diligence was done after terms but before actual investment.

          2. PhilipSugar

            Has nothing to do with hiding. If you let somebody do due diligence without some sort of commitment you have two problems.1. When somebody does due diligence they KNOW your business. I mean KNOW it. If they are interested in buying they are interested in your space. If I KNOW what you charge, what your terms are, who your clients are, who your suppliers are. If I wanted to compete after doing due diligence it would be 1,000 times easier.2. Due diligence takes a huge amount of time. Time that you take your eye off the ball. If an acquirer has the money to acquire you and has every single bit of info on your business possible, they should offer you 50% less than fair ask, because if you turn it down you are the one screwed.

          3. Vasudev Ram

            Ah, good points, thanks. I did think about the potential competitors point before asking you, but decide to wait for your reply.

          4. Vasudev Ram

            However that begs the question (if I’m using that phrase in the right sense, could never quite figure out its meaning 🙂 of what the purpose of due diligence is. I always thought it meant researching enough about the company you are considering buying or investing in, to know whether it is worth it or not. So if you agreed to terms, what happens if, after the due diligence (done after agreeing to terms), you find some bad info which means you should not buy / invest?

      2. William Mougayar

        As Fred said, that won’t work, and I don’t know a VC that would accept that. The process is such that an offer is made, then you have some time to close it.

    5. Hash Zahed

      I think an entrepreneur can add language expressly imposing a duty to negotiate in good faith and specify Delaware as governing law for the term sheet. As I’ve mentioned above, this protects the entrepreneur by raising the likelihood that an investor’s bad-faith dealing by substantially changing the terms of the deal without legitimate justification would result in “benefit of the bargain” damages to the company. I think this language is also fair to the investor in that it allows the investor to modify deal terms (or even pull out of the deal) if red flags are raised in diligence, but it doesn’t allow an investor to simply change material terms on a whim. It would also protect investors by imposing a similar duty to negotiate in good faith on entrepreneurs.

  3. Richard

    Super hard to comment on any deal without knowing the facts, about the offer, acceptance, consideration, and mutuality.

  4. LIAD

    A change of terms based on material discoveries during diligence or change in market fundamentals is one thing.A change in terms purely because you have leverage is another.Once again it seems we use a term that softens and legitimises the action. Retrade seems wise, pragmatic, honourable even. If the term used instead was ‘the squeeze/the bait and switch/ or la mafiosa ‘ it would be viewed very differently.

    1. Mario Cantin

      I enjoy your philosophical answers. Kudos.

    2. creative group

      We find ourselves agreeing with what makes sense. And this post shined a flood light on it.If your group has no track record and you are on the wrong side of funding, the King makers get to label you. Define yourselves before they do. Truth established overshadows opinions told.

    3. ShanaC

      market fundamentals changing that fast underneath you is a warning sign already that something is afoot.

    4. Chimpwithcans

      For this reason, I think whoever came up with the term ‘global warming’ has doomed the environmental argument from the start – something like ‘pollution cancer’ might have worked better

    5. TeddyBeingTeddy

      One man’s “retrade” is another man’s “we got lied to upfront about the numbers, now that we’ve uncovered that lie the price obviously needs to come down accordingly.”

      1. PhilipSugar

        Believe me that is not a retrade. See his comments and mine. You know when somebody is doing a retrade.Yours goes like this in the middle of due diligence weeks from the close date:You didn’t tell us half of your product monthly recurring revenue comes from one customer where you have to have two people on site 5 days a week, they can request a change and it must go into the release, they can dictate when releases are done, and they have an out clause for any reason, and you must support them for the next year free of charge. Dude…….that is straight up consulting with a contingent liability. We need to talk.The other goes like this:The day before close: Uuuuummm, yaaaaah, we need to lower the price by 25% to get this done. Why???? Welllllll, we’ve just had a change in mind, we’re not as comfortable about this. Why??? Well, that is what it’s going to take to get this done.

        1. TeddyBeingTeddy

          I’m not in the VC game, but that just seems like suicide in normal investment circles. Hard to believe anyone would do that… Whatever discount they’re trying to get like that seems much more than offset by lack of deal flow and lost potential IRR in the future…

          1. PhilipSugar

            Get’s done all of the time.

  5. pointsnfigures

    Part of it is truly ethical. Suppose I was a VC that issued a term sheet in July of 2015. In the ensuing month or two of diligence, economic conditions change (big market drop in August of 2015, Snapchat writedown etc). As a VC, I need to protect my LPs and it’s entirely correct for me to adjust to the new economic conditions.At the same time, the CEO has a fiduciary responsibility to his existing investors, and employees. They have to get the best deal for the firm. If they have a business that can move along using a different financing strategy than a Retrade with a VC, they might be better off playing those cards. But, if they don’t have a business that cannot survive without a VC, then their alternative is to go out of business and that is much worse than accepting cash at a lower valuation.

    1. PhilipSugar

      Sorry I disagree. You came to terms (term sheet) in July. The rest is just time to close. Externalities don’t count.No term sheet?? No issue.Just because you took a forward oil contract a couple of months ago can you renege when the price went down??

      1. LE

        Sounds to me, and I don’t do this shit, like things that can be built into a contract. If that is the case and if you believe people learn from their mistakes then it’s a risk of business.That is also one of the reasons (among many) that the saying “time kills all deals” applies.

        1. PhilipSugar

          It’s not really a contract. it’s a letter of intent with all sorts of outs.It does kind of protect both sides in a complex transaction.The seller wants to get an idea if price and terms are in the right ballpark before giving up a ton of detail.The buyer wants to go through a ton of detail before they buy because as I’ve outlined I’ve seen a ton of crap when I was on the buy side.But where it gets dirty is when somebody decides they can renegotiate without reason.

          1. LE

            I’ve had them with real estate. In one case the LOI stated terms and conditions and rent but the attorney for the other side waited until the last minute to get me the lease leaving me hanging. Didn’t return phone calls from my broker and just showed up 2 weeks before they needed to occupy the space with the lease (or something like that). Not only that but it was a two months later than they were supposed to occupy the place. The rent I quoted was for occupancy, say, in March and they didn’t start until, say May. Given both the uncertainty and the fact that I knew they were up against a wall at that point, I raised the rent on them and took advantage of the situation.My point is depending on who is telling the story, and the exact facts, and details someone can look bad or look smart. In my case (and there are more details) I stand behind what I did despite the LOI. And to be honest I don’t remember if the LOI stated the occupancy date was immediate but that was 100% what was communicated by the broker to me and why I gave the rent that I did.Same lawyer came back for lease renewal this year. Waited until after the 90 day notice period and wanted to get the renewal rate that was in the lease. Was way past the 90 day period. I said “no no deal”.Bottom line: The tenants lawyer screwed this up for them and that is why they are paying more rent then they should be. Because their attorney is to busy.

      2. pointsnfigures

        But often, term sheets are given and conditional based on diligence. If market conditions change, the price might change. If I did a forward on oil, and it was subject to diligence, yes I could renege. On the other hand, the better way to do it might be to purchase an option.

        1. LE

          Agree. Of course in theory though a deal with less contingencies is a deal where the goods should trade at a lower price. The risk is born by the buyer.This is one of the problems (if you want to call it that) of business education. They teach specifics and not as much generalities and concepts that are applicable in a broad variety of situations. I had a person ask me recently “oh can we actually do that in this type of deal? My answer was “why not we can do anything we want there is no rule book that we are sworn to follow under penalty of law”. No need to ask permission just go for it and see what happens.In negotiating part of the game is trying to structure an offer so you can slip things in later prior to signing whereby you keep the offer price low per my initial point. By revealing other things up front (especially when the deal hasn’t even been accepted yet) you stand the chance of paying a higher price because of the uncertainty.

        2. ShanaC

          and this is why standard contracts in highly standardized open markets almost always are better

    2. avifreedman

      Also disagree. If I agree to something and all that has changed is macro, it’s on me to honor my commitment. Serious diligence issues, OK – but call them out as soon as you see them and be a mensch and let the other side out of the term sheet/LOI.Market changes, sorry, LPs know that’s part of the business.

  6. PhilipSugar

    I really, really do not like “retrades” unless they are for legitimate internal reasons.You didn’t disclose X. Got it ok. LinkedIn stock went into the tank? Nope.Otherwise “retrade” is bullshit, it really should be spelled renege.The negotiating should take place before the term sheet. Once that is done and a handshake is completed you are done. Then you should figure out how to make things work.I assure any investor there are so many ways as an entrepreneur I can “teach you a lesson” that you can’t even fathom. No different than an investor can put in so many terms to teach me a lesson (I’ve learned many)

    1. Matt Kruza

      See the problem here is the advantage is to the person who does it dozens or hundreds of times (has the opportunity to rather). And that is always the VC / private equity guy. Because almost no entrepreneur creates more than 3 vc funded companies in a lifetime (probably lless than a handful ever maybe?) and someone like fred has done betweeen 50 -250 in his life. Advantage Fred, Brad and other investors with power. Now they seem to be more honorable than most, but still huge institutional power. Is it bull shit. Yep. Does it happen? Yep. Just be readyto fight them back as you say!

      1. LE

        Because almost no entrepreneur creates more than 3 vc funded companies in a lifetimePresumably though the entrepreneur has people who are equally skilled to advise and help them.

        1. Matt Kruza

          The issue there though is their advisors don’t have nearly same skin in the game as the entrepreneur and vc. To be clear, not really trying to complain about it, but just acknowlege the massive power balance. By being aware when / if I encounter this situation I will be prepared and likely “win”. And advisers almost always go to those with bigger pocket books.. wouldn’t you agree LE?

          1. LE

            Could be. But the idea is not to get beat to bad and to limit the damage. The trophy in the end is perhaps not whether you get screwed or not, but not getting screwed to much.An analogy I could use is the old days of car repairs. Was probably a given that the repair shop was dishonest and might rip you off. Because they had all the knowledge and you have a hidden defect. Who knows if they are telling the truth or not? Not like you are gowing to drive around to 5 shops once they took your car apart. So as long as it was within a narrow band it was the cost of doing business. Many businesses actually operate on a tolerance system like this. Have acceptable loses.You know why the other 5 shops were also dishonest? This goes to my saying “you can only be as honest as your competition”. The collective shops determine how honest an individual shop can be.

          2. PhilipSugar

            I think your first point is the right one. Generally the person retrading is the “buyer” who does this 20 times for every time the seller does 1. That is the leverage.For the buyer they can go get another 19 done for the seller it’s a 0 or 1 game. If you want to have sharp elbows you just think you are doing your “fiduciary duty”Don’t get me wrong I’ve seen both sides having been bought by big companies. There are many reasons to reprice a deal: You counted consulting revenue in MRR, you book 100% of revenue today when you still have an overhanging liability tomorrow, you forget to mention that you have one huge customer that accounts for a ton of revenue that has all sorts of crazy terms in the contract.

          3. Matt Kruza

            Fair point, but not if everyone would call that “retrading” vs “due diligence”adjustment? But that inherent vagueness is part of the difficulty. Ultimately like Fred and Brad say it is just a fact to accept, but its important to be prepared to limit the impact would be my impression.

          4. PhilipSugar

            In my limited experience it has been pretty clear:One goes:You didn’t tell us half of your product monthly recurring revenue comes from one customer where you have to have two people on site 5 days a week, they can request a change and it must go into the release, they can dictate when releases are done, and they have an out clause for any reason, and you must support them for the next year free of charge. Dude…….that is straight up consulting with a contingent liability. We need to talk.The other goes:The day before close: Uuuuummm, yaaaaah, we need to lower the price by 25% to get this done. Why???? Welllllll, we’ve just had a change in mind, we’re not as comfortable about this. Why??? Well, that is what it’s going to take to get this done.

      2. JLM

        .This is why smart entrepreneurs seek the counsel of others who have done it more times than Brad/Fred.In the end, you never get what you deserve, you get what you negotiate.And, then, you have to close the deal.JLMwww.themusingsofthebigredca…

        1. Vasudev Ram

          Right.Similar is the point – in the context of getting work done by people – that it’s not what’s expected that GETs done, but what’s inspected.A fact which some people (including some I’ve known) just do not GET – pun intended, but a sorry situation all the same.

  7. Christopher Ayala

    Question – what’s your position on founder retrading based on a materially good event happening between shake and close (i.e. Big new customer, favorable tech discovery etc)? As a VC do you appreciate the retrade ask and open to accepting different terms?

  8. William Mougayar

    Memo to entrepreneurs: Add a Question for your VC “Have you done retrades in the past 24 months?”Good luck in getting a straight answer :)Hey LE, maybe is available.

  9. Ryan Feit

    As much as everyone is going to bash investors and acquirers who retrade, Fred is spot on that they are often just a reality in the way private equity, venture and M&A deals get done. Additional information almost always develops during the due diligence phase and it’s not always black and white which side is responsible. The best thing an entrepreneur who is selling their company or raising capital can do is simply be aware of this potential risk and make sure you have more then one option. In any trade, if you don’t create multiple options for yourself, you are always going to reduce your potential leverage and increase retrade risk.

    1. creative group

      Ryan Feit:If these deals (And Fred has encountered hundreds of deals) are not being completed in days or weeks how is the due diligence (Market exceptions) not uncovered unless something intentionally was hidden? (Then that deal shouldn’t be funded anyway).And if the retrade is 99% being initiated by the investors is it a ploy to negotiate a better equity position? (Questions from Entrepreneurs who fortunately don’t require equity groups, Angel investors, etc)

      1. Ryan Feit

        A lot of information can flow between term sheet and closing. It depends on the situation but it is not atypical for an investor to rely on an company’s investor deck or PPM which simply focuses on positives and omits (intentionally or not) some of the negatives. The full picture is often only uncovered during full on confirmatory due diligence. Doesn’t always lead to deal killers but can certainly result in a different deal then what was portrayed.Agree with others that a retrade based on a market-related MAC (material adverse condition) is a different story altogether.

        1. ShanaC

          *two eyebrows over glasses* Just a deck? That is ridiculous.

          1. PhilipSugar

            Many deals go to letter of intent over a deck. I deck full of high level numbers but a deck.You don’t want somebody poring through your details without knowing that you can come to price.

          2. ShanaC

            Maybe I should get copies of these decks then…

          3. PhilipSugar

            Oh, they are most beautiful.

          4. ShanaC

            may I ask how I get my hands on some?

          5. PhilipSugar

            Ask somebody who has made an raised on one. That is not what I do but I have seen them. I also cannot share them.

          6. ShanaC

            hmmmm. Need to think

        2. PhilipSugar

          To me your first paragraph does not describe a retrade.I’ve seen both sides having been bought by big companies. There are many reasons to reprice a deal: You counted consulting revenue in MRR, you book 100% of revenue today when you still have an overhanging liability tomorrow, you forget to mention that you have one huge customer that accounts for a ton of revenue that has all sorts of crazy terms in the contract, you recognize 100% of revenue even though you should only be booking the 5% commission.Those are just the ones I remember.

          1. Ryan Feit

            Don’t necessarily disagree but I question whether most early-stage entrepreneurs see it that way.

          2. PhilipSugar

            Well then they are wrong.

  10. sigmaalgebra

    For a startup, the much bigger issue than a retrade is being successful in the business. Head butting, pissing matches, etc. are highly counterproductive. Instead, for the success, there needs to be a team that works well together.E.g., semi-great: The quarterback just got sacked and is on his back, after a turnover, and his center explains “retrade”. No thanks. Maybe at Dunkirk, when the French collapsed on the British flank, the French just told the British “retrade”? Instead, when Patton told Ike he could get to Bastogne in 48 hours, that was solid and without a later “retrade”.E.g., the team needs to talk: For the talking to be worth more than just warm methane, need to be able to trust the words.So, if only just for the sake of the business, no way does a founding team want to report to a BoD with one or more people who speak words with forked tongue, words can’t trust. If there was a handshake, term sheet, LOI deal, then that should be solid or was premature and should not have been given. Cases where the guy tempted to do a retrade would not just accept the setback should be so rare that they don’t count.Else, a CEO will have to get into negotiation, i.e., counterproductive, time-effort wasting pissing match, tactics: So, read some Michael Watkins, Lawrence Susskind, Chester Karrass, Donald Trump, etc.Yes, I know; I know: 90% of a CEO’s job is negotiating; 90% is raising funds; 90% is building the team; 90% is motivating the team; 90% is understanding the market; 90% is directing the product/service strategy; 90% is getting “fingertip feel for what the customers think, feel, and want”; 90% is keeping black ink on the bottom line; and 100% is ABC — always be selling. Right. And a serious CEO is supposed to take such stuff seriously? Pissing matches are no darned good.Heck, due to the term sheet, the CEO took his wife to a fancy French dinner with a great Champagne dessert on a high end yacht cruise on Long Island Sound — total bummer if there is then a retrade.Somehow I seem to remember that one of the most important decisions in business is who you partner with, as a co-founder, as a BoD member, etc. There, won’t want retraders.Yes, there will be a stock plan. The BoD is finalizing that now. It should be done in three weeks. The stock will be based on salary, and that will make you quite high up. If the plan is not equitable, then the next plane out of Memphis will be full of high level ex-Federal Express employees.That was from SVP Art Bass. And my offer letter had similar words. Eighteen months later after I had twice, alone, literally saved Federal Express from going out of business, there was still no stock.If handshakes are worthless, then don’t shake hands. If do shake hands and then “retrade”, bummer.Sure, if doing an IPO or M&A and some GS IBs claim over a fancy Manhattan dinner that their buy side clients are drooling to buy and at $55 a share the offering will be oversubscribed with a big first day pop but it ends up at $30 a share, well, it was just from a Manhattan GS IB, and could do as well with a crystal ball. Besides, won’t be doing business with that IB or GS for long — don’t they say “What happens at GS stays at GS” or some such, or is that out west somewhere? So, the GS thingy is not a marriage but just a quickie and will just take the liquidity and run — buy a nice place in Maine, enjoy the seafood, wildlife, forests, have fun each winter with three backup Diesel electric generators, a big, well insulated, heated garage with a big snow plow, ah, at least two for reliability, ready to go, etc. to enjoy beating back the worst Mother Nature can do, and do something else.

  11. JLM

    .The nature of “retrades” at the last minute — when leverage is the most powerful on the side of the VC — is all one needs to know in order to assess their fairness and the character of the people involved.The fact that a VC waited until then having “discovered” something of substance is also a telling fact.In many languages, the word “retrade” translates to chickenshit. It is an accurate translation.I once walked away from a low 9-figures sale when the buyer tried to trim $6MM on the Saturday morning before a Monday close.I ultimately made them eat shit before it was over. It was one of the most satisfying business experiences of my entire business career.It’s a slightly longish story so I won’t tell you about it here. Some other time.JLMwww.themusingsofthebigredca…

    1. PhilipSugar

      I totally agree. I’ve had a customer “retrade” me at contract renewal. We gave them nothing but above and beyond support 24/7. I had the support person tell them when they needed something off hours later, “I didn’t get a raise because you re-negotiated, sorry it will have to wait” (they did get a raise)Oh, the cries: “how could you do this???, why would you poison the relationship??”

      1. LE

        I literally never heard that term used in this context. It’s simply a renegotiation of a contract.I once dated a girl whose old man “rich” grandfather was in the closeout business (prior to the dollar store craze). He told me stories of where he would order a lot of goods and then show up to pickup and pay and then renegotiate what he would pay. If the company selling didn’t agree, he would walk. Just the way he did business. In what he did honor didn’t matter. If it did (if he needed these people again) he wouldn’t be able to do that. So like when someone who tries to win at sports, he used every legal advantage that he could. It sucks for the person on the other end. Otoh probably the last time they made that mistake so maybe the lesson ended up being a good thing. I know I remember and learned from that to this day. That’s why business involves risk taking. It’s not science it’s art. Or more art than science with a multitude of factors involved. The challenge of business is trying to consistently be on the right side of shit that happens.

        1. PhilipSugar

          I have inflicted more pain on that grandfather than he ever knew.First time yes, but second time………I would do things I would never consider doing on anybody else.

    2. creative group

      JLM:We find your business antedotes in line with our business experiences but what in the world happened in the social thought views area? Confusing to say the least.Keep it business.:-)

      1. JLM

        .WTF is “social thought view area”?JLMwww.themusingsofthebigredca…

        1. Matt Kruza

          diversity and “political correctness” sensitive areas…. that would be my guess

        2. Chimpwithcans

          Yes, JLM – Please separate your character and opinions from your business stories. The 2 are completely unrelated (note the sarcasm)

    3. LE

      I once walked away from a low 9-figures sale when the buyer tried to trim $6MM on the Saturday morning before a Monday close.I ultimately made them eat shit before it was over. It was one of the most satisfying business experiences of my entire business career.However the way you tell that story it sounds as if you acted out of emotion more than you acted out of rationality. By the fact that you got such satisfaction in the end I mean.

      1. JLM

        .Rational thought and emotional thought are not mutually exclusive.I often act out of emotion alone.In the jockey, horse, course business sometimes all you have is emotion as there is no rational evidence.JLMwww.themusingsofthebigredca…

  12. Tom Labus

    There is no second shot for guys who do this but I’m also sure that they’re doing just fine. There is an endless line of companies looking for funding and also willingly to forgo common sense to get cash. It’s pretty close to a con most of timeBut where is the line for those deals?

    1. Vasudev Ram

      > There is an endless line of companies looking for funding and also willingly to forgo common sense to get cash. It’s pretty close to a con most of timeGreat point that I can corroborate from reading tech news and my personal experience. Been contacted many times by half baked (and not all are young) startup founders who are just on the “wannabe FB/Instagram/” trip, thinking they can whip up a prototype of a SoLoMo clone and get instant rich. Some asking for consulting, others looking for a tech cofounder.

  13. sigmaalgebra

    The Great Dictionary of Life’s Euphemismsretrade — renege, back out, cheat, mafiaosi

  14. bobmonsour

    I think that these are the money sentences in this post:”Because the one thing you do want to avoid is getting into business with bad people. Retrading is a potential red flag that the person you are dealing with is not a good person, but it is not definitively so.”While building companies is about a lot things going well, I think it’s mostly about choose the right people to be on the team.I was introduced to a company last year that was seeking some advice. I had no intention of investing (famous last words). The advice they sought was about an prospective lead investor who had engaged the company as a “finder.” As it turns out, he then went on to position himself (and his friends) as the lead investor. The more I learned and watched, the more I thought that the founding team was getting screwed. While there was a retrade involved, there was far worse behavior than that. I ended up building a relationship with the team and leading the (small) angel round. We closed it in a little more than 2 weeks after signed term sheet.

  15. sigmaalgebra

    So, let’s see, an investor is doing a deal with a techie: The investor wants to be some sharp pencil guy, Williams College history major and Harvard MBA, blue shirt, white collar, red suspenders, and red Ferrari who paid his MBA tuition by ripping off his grandmother and knows so little about tech that he doesn’t know one line of code from another.So, this bozo wants to play fast and loose with a techie?Later he finds that the software in the production server farm self-destructs each 24 hours, that the server farm has no copies, not source, not even executable, and that the executable copies are downloaded with encryption to a special virtual machine from a server farm in Ireland 100% owned by a shell company in Bermuda 100% owned by a shell company in the Cayman Islands 100% owned by a shell company in Las Vegas 100% owned by the former CEO. Only the farm in Ireland has the executable, and it is encrypted. The source code is on DVDs that the ex-CEO has hidden somewhere.So, in 24 hours, the server farm of the company goes dead.Somehow the due diligence didn’t discover that the company the investor bought didn’t own the software and, that, instead it was just leased, 24 hours at a time, from the farm in Ireland.And this scenario is just off the top of my head; with a little thought, much more intricate and obscure situations could be constructed.It’s not nice for non-technical people to try to rip off techies who just want to be honest and make money from some really good technology.”Retrade”? Ah, the lease rates from Ireland just got 10% higher.

    1. LE

      Well put. Techies always whine like musicians whine about their managers. Something that I don’t know that much about other than a few choices stories that I have read or heard. But it makes total sense that a newbie or someone not experienced would blame the other party in a transaction instead of themselves for not being smart enough to know how to play a game correctly (or even to protect themselves). As if life is and should be fair.Look, there is a big gray area between total fraud and the other end. And in this in between area many things can and do happen.I am guessing that if we assume many techies aren’t nuanced, and look at things very black and white, they wouldn’t be in a particular position to understand how the business games works especially when they are right out of college and wet behind the ears. And a honey pot like that might just be all to tempting for an experience operator who they are dealing with.People may wonder why I am such a cynic and a skeptic. That’s because I’ve done so many transactions over my lifetime and have a gut feel for how the game operates (and even in areas that I’ve never played in). Because it’s all explainable by human nature.

  16. avifreedman

    I hope that the current market is not one in which a retrade can be expected, barring material diligence issue. And doing diligence to find such issues (other than asking a new investor directly whether they’ve come up) is in practice much harder than finding out if they’re supportive in rough patches.But… as many have been preaching for years, and even more in the last 3 months, the best plan for VC-backed entrepreneurs is to not have to raise with < 6+ months of cash. Even if that means pulling back on growth that has 3- or 6- month likely ROI.And in Feb 2016, if your investors want you to continue growth investments that would place your runway in question (i.e. defocus from using current $ to get to break-even), get a bridge from them to keep enough $ in the bank to take you through at least 1 cycle of fund-raise + fund-raise falling through, even factoring in that growth/expansion spend.

    1. Kirsten Lambertsen

      Most perfect gif ever.

      1. JimHirshfield


    2. Vasudev Ram

      1) Is there supposed to be audio in that?2) Surely you’re joking, Jim Hirshfield.

        1. Vasudev Ram

          1) I know a GIF when I don’t hear it.2a) Had probably read that years ago, forgot the theme2b) Meant my own 2) above as a pun, but it misfired – I was thinking of this:…Aside: I never thought Charlie Brown comics were all that funny, excepting a few of them, and those too mostly involving Linus and Snoopy. (e.g. like Snoopy’s daydreams – here comes the famous aviator … 🙂

        2. LE


  17. iggyfanlo

    As I read through the comments, I sense a great deal of emotional distress bordering on vengefulness around this… I would suggest that this is like most marketplaces1. VCs are less likely to “re-trade” than PE, because in the end as a preferred holder, it has capital priority in the stack AND they are only buying a piece so everyone will be aligned later2. PE guys are buying the entire company (and usually mgmt) but are taking FAR more risk and the entry price has little or no preference position.3. While I agree with the distress over a re-trade (I’ve been on the wrong side of this)… it’s really about how many folks are interested as buyers… if there are truly several, then a re-trade is unlikely…

    1. PhilipSugar

      Oh, I am vengeful on a retrade from outside forces. I have inflicted pain that the “retrader” never even knew happened but was a magnitude greater.Giant teachers pension fund: “I see you have dealt with Joe X, what are your thoughts?? I love Joe Y. No, Joe X, No I like Joe Y, No Joe X……I don’t think you are hearing me….oh I understand”, when the ass kicking shoe is on the other foot it doesn’t feel so good, that fund didn’t get raised.

    2. JLM

      .Actually the state of the art in PE deals seems to be to try to buy 85%, gain control, issue management contracts to the sellers, and then take a cut at stealing the remaining 15%.I have seen this several times.The term sheets spell this out and there are readers of this blog who I have personally advised who have lived through this exact experience.JLMwww.themusingsofthebigredca…

  18. Matt Zagaja

    This reminds me of a post by Rands on managing nerds:”A predictable world is a comforting world to your nerd. Your inconsistency on the office ruling now has them wondering, “What the hell other random crap is coming down the line? How the hell am I supposed to get my work done when my boss engages in fits of randomness?”” (…Equally applicable to partners, VCs, etc.

    1. Dan Moore

      Yes, the question is, is this a one time transaction or is this a relationship. If the latter, you may be cutting off your nose to spite your face. (Depending on reputation, you may be doing so in the former case as well.)

    2. ShanaC

      hahahahabut so true

  19. JLM

    .In business, you don’t get what you deserve, you get what you negotiate.In the VC business, the deal is measured with a micrometer, marked with chalk, and cut with a chain saw.It is not as exacting as VCs would have one think. These are often raw startup companies and the level of detail is simply not there.This is why 80% of all VC funded deals fail. It is not an exact business. It is as much art as it is science.There are, however, some practical safeguards an entrepreneur can bake into a deal to ensure she gets a “fair” deal and doesn’t lose her negotiating advantage.1. Negotiate only in writing and use a good standard term sheet. No verbal or side agreements. None.2. Specify in the term sheet the term and scope of due diligence with a hard deadline such as 15-30 days. Remember there has been a lot of sniffing going on before the term sheet was ever agreed.3. Attach sample documents to the letter of intent so there is no confusion as to how the non-binding letter of intent becomes a binding contract document.4. Append an exhibit which identifies all due diligence materials (to be returned if no deal goes forward) to be delivered by the entrepreneur to the VC. Deliver these with the signing of the letter of intent and get a signed acknowledgement, as part of the letter of intent, that the due diligence materials have been delivered which triggers the clock for the due diligence time period.5. Require the VC to notify the entrepreneur in writing at the first instant of any areas of concern. Call to check on progress while underway.6. Make the deal binding upon the end of a specific term — a period of time. Do not require any additional documents to make the deal binding.7. Have a clear understanding as to “do not shop” provisions. I have no problem with giving up any right to shop the deal but I would prefer not to. Once there is any due diligence issue, the deal should be able to be shopped.8. I would stay in touch with any other prospective players and if there is no “do not shop” provision, I would keep my powder dry anticipating that you may have to change horses.9. Make any due diligence problems addressable in writing. Don’t get caught in an unspecified “bad feeling.” Make the VC specify in writing his objections with as much specificity as possible. In this manner, the negotiations will address the problem and not some amorphous whole.In the end, the most important decision anyone makes is with whom to do business. The relationship after the initial courtship will always be a notch below from whence you started and it will always be colored by how you got into the deal.JLMwww.themusingsofthebigredca…

    1. PhilipSugar

      This post is worth a ton of money. That is free tuition.

      1. LE

        What’s always been interesting to me since the beginning of the Internet is how willing people are to offer their help for free to others. I am not talking about comments on a blog (that benefits person commeting in many ways). I am just talking about the general idea that there are techies out there who spend a great deal of time giving away their secrets to others with little in return except for stroking and karma. Things that have taken them a great deal of time to learn and perfect. I chalk it up to both the fact that there were academics involved in the Internet from the start (and they tend to be less protective) but also the nerd effect. Nerds and geeks aren’t used to getting much attention and respect so any chance to make friends is probably greatly appreciated by that group. Not that high school quarterbacks (or the popular set) wouldn’t or don’t help. But nowhere near as prevalent.I remember circa 1996 first person I got advice from on the net. He spent a great deal of time answering questions and helping me. I asked him what I could pay him. I wanted to pay him and send him a check. He didn’t get back to me even after I wrote a few times. Was hard for me to understand back then and I have to admit it still is hard for me to understand. And these are people that in many cases don’t have a pot to piss in and can use a better income.

        1. Chimpwithcans

          Great comment. I think the net has always had a sort of idealism attached to it, and to the geek community who most contribute to it. It is a sense of building something for humanity’s sake – while the rest of the world piggy backs and makes a profit – just a hunch on my part.

    2. Richard Carlow


    3. Lawrence Brass

      I would sleep so well having JLM sitting at the porch with his texan boots, hat and taco loaded shotgun. 🙂

  20. Dasher

    Thanks Fred on the tip to entrepreneurs on how to account for possible retrade in this environment. That’s what differentiates you and Brad from other VCs.BTW, how do VCs take it when the shoe is on the other side? If an entrepreneur renegotiates at the last minute of closing a deal because she finds better options because of market getting better.

  21. ShanaC

    Good times are definitely ending if this is a topic of discussionProbably the number one thing it sounds like in the presence of a market where retrade is a norm – values can change – know if it is you or them early on, and why

  22. hypermark

    The axiom that comes to mind here is that ‘if you want to see how it ends, look at how it begins.’ When the relationship begins with an investor or entrepreneur fundamentally changing the terms — absent material news — that’s a harbinger.Like Fred says, don’t get emotional, but also don’t be surprised when it plays out in other forms down the road.

  23. Chimpwithcans

    I hate unforeseen surprises in a transaction. Erodes trust.

  24. jason wright

    being willing to be constantly retraded is not a good reputation to acquire.

  25. Lawrence Brass

    I would never accept money for a company from people I don’t trust. A last minute retrade obviously hurts trust and is a very bad precedent in the relatonship, in my opinion. The type of investor I would look for is people who still honor a handhsake and the classic “we have a deal”, people whom you would gladly work for/with later.A practical way to minimize the potential investor leverage during the negotiation is to keep the negotiations secret on the entrepreneur’s side, share only with key people, not your mum and never celebrate before you have the cash in the company’s account. That way, if the negotiation fails, you don’t have to deal with the expectations chain crashing behind you.

  26. TeddyBeingTeddy

    Date of LOI: $10mm of LTM revenue -> “ok, in that case we’ll pay you $20mm based on a 2x revenue multiple. Shortly prior to close: $5mm of LTM revenue ->???. What would you do?

  27. Hash Zahed

    I’m curious whether the legality of some of the more egregious cases of retrades will be challenged in court in light of recent case law out of Delaware, particularly where the term sheet is governed by Delaware law and there are circumstances giving rise to a duty to negotiate in good faith. Term sheets and LOIs are generally non-binding in the sense that a court would never force the parties to follow through with the deal, and it’s certainly common for deal terms to change from the time that the term sheet or LOI is signed to when the deal is closed. But a party that substantially changes deal terms for other than legitimate reasons (such as diligence red flags or material changes) could be at a greater risk of being liable for damages and fees.Many courts have held that when a term sheet or LOI is signed, circumstances may give rise to a duty to negotiate in good faith–either through contractual language or otherwise. Typically, these courts award reliance damages to the plaintiff (i.e. compensation for loss caused by reliance on the other party to follow through with the deal).However, in 2013, the Delaware Supreme Court went a step further and required defendant to pay expectation damages (i.e. “benefit of the bargain” damages). Basically, SIGA Technologies entered into a licensing term sheet, but later required terms that were substantially different from the term sheet. The parties had agreed to negotiate in good faith based on contractual language, and the court stated that “where parties agree to negotiate in good faith in accordance with a term sheet, that obligation to negotiate in good faith is enforceable,” and the parties had a duty to “to negotiate toward a license agreement with economic terms substantially similar to the terms of the term sheet.” Based on the 2013 case, a lower court in Delaware awarded $194 million to the plaintiff for breach of the duty to negotiate in good faith.Proving bad faith in these kinds of cases is difficult, and the outcome of the 2013 case was limited to the facts and circumstances of that case. But I imagine that with this new case, there is a higher likelihood that some retrades may be challenged, especially if the term sheet does not expressly waive a duty to negotiate in good faith and is governed by Delaware law. Even outside of Delaware, a party that refuses to enter into terms substantially similar to a term sheet or LOI out of bad faith may be on the hook for the other party’s damages as a result of reasonable reliance on the term sheet.This does not mean that an investor or company is required to follow through with the term sheet regardless of what is uncovered in diligence–only that recent Delaware case law may give rise to increased scrutiny of bad faith dealings after a term sheet is signed.For more, see… and