Legal Blog

Are There Really “Standard” Deal Terms? The Venture Capital Investment in Snap

From the Desk of Herb

Lightspeed Venture Partners, a Silicon Valley venture capital firm, invested $485,000 in Snap, the parent company of Snapchat that popularized disappearing messages. According to the New York Times (February 24, 2017, page B1), it is anticipated that Lightspeed will make more than $1.0 billion when Snap goes public.The IPO was on March 2, 2017 and the price jumped 44% on the first day.

Interestingly it was reported by the NYT that because Snap needed Lightspeed’s money “What Mr. Spiegel and Mr. Murphy (the Snapchat founders) paid less attention to were the exact terms that Mr. Liew (of Lightspeed) embedded in the deal….Such terms effectively let Lightspeed have veto power over investments at Snap. It also made Snap an unattractive investment for other investors . . . ” It was reported that Lightspeed later removed the problematic deal terms in exchange for the purchase of more Snapchat shares at a discount.

Most curious is that in 2012 Snapchat’s founders mistakenly thought the Lightspeed deal terms were “standard.” Mr. Spiegel reported that “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 . . . how the deal is structured.” NYT, page B4.

Many times I have heard from opposing counsel that the proposed offensive deal terms are “standard” or always used. Sometimes as leverage, counsel even urges his or her client to tell my client that the offensive terms are “standard terms – always used.” There are many terms in legal contracts which are “boilerplate,” however, the business terms are always subject to negotiations regardless of how common they may sometimes be. Even for terms that are common or even “boilerplate,” the specific language used is rarely “standard.”

I find it is a remarkable common practice for the party with the upper hand to say “this is a standard form of contract, just sign it.” This tactic is most typically used, for example, with leases and vendor financing documents and sometimes used by certain lenders. Consider the not so standard loan documents wherein there is no right to pre-pay the loan before the term loan matures. Without the right to pre-pay (e.g., a so-called lock-out loan) the borrower later can be compelled to pay outrageous fees to the lender in order to prematurely pay-off its mortgage loan, for example, to sell its mortgaged building. This type of restriction can be implemented merely by omitting any reference to pre-payment, so the unsuspecting borrower might not even know of the problem. At least if there is a pre-payment penalty term, it is disclosed and there is a known fixed charge. Therefore, it is important to have a professional review your loan documents including amendments.

As Mr. Spiegel explains, if you hear the words “it’s standard,” you need to be more cautious, and not automatically let down your guard.  You may need to pay more attention, not less attention.

 

 

ABOUT HERB FINEBURG

hfineburg@offitkurman.com | 267.338.1376

Mr. Fineburg is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or unrelated business partners and has handled the resolution of shareholder and partner disputes and buy-outs. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales. Mr. Fineburg, who began his law career as a commercial litigator and bankruptcy lawyer, frequently provides litigation counsel and assistance to a wide range of firm clients. His articles have appeared in the Pennsylvania CPA Journal, the Journal of S Corporation Taxation and other publications. A graduate of Washington University in St. Louis, Mr. Fineburg received his law degree from the University of Missouri and a Master of Laws in Taxation (LL.M) from the New York University School of Law, Graduate Division.

 

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