We Always Do It This Way . . .

is a phrase managements sometimes hear from an investor or his lawyer, normally, at the point where management has negotiated the main deal points with the investor and the parties are in the process of putting that deal onto paper. Suddenly, the investor’s lawyer presents the company with forty-five pages of representations and warranties he wants management to sign. Management remembers the investor saying that he wanted to keep the deal simple, with the minimum reps and warranties. Management protests, and the lawyer says, "But we always do it this way."

Management is supposed to roll over and gladly comply with the lawyer’s request. After all, they always do it that way. This is the first venture capital financing the company has been involved in, and the investor has done dozens. So he must know what’s appropriate. Right?

Wrong. There are certain conventions observed in venture capital financings, including "normal" types of representations and warranties that companies and their managements customarily make. Nonetheless, management is entitled to receive a rational explanation about anything the venture capitalist asks it to do that it does not understand or agree with.

An explanation such as "we always do it this way" is not enough. That explanation probably means the company has been presented with the lawyer’s standard form, which he always uses as a starting point in negotiations. Like all standard forms, much of what it contains will not apply to the company or its funding.

"We always do it this way" implies that the way the investor did his deals in the past is the way the current deal should be done. But this company and its needs are different from all those other deals. And, while it may be unrealistic to expect an investor to abandon the deal structure or basic deal documents that have worked well for him, it is realistic to expect him to deal openly with management and to explain why each provision of his documents is necessary. See: Boilerplate, Negotiation, Reps and Warranties, We Never Exercise Our Rights Under This Section.