Beware of the complicated deal

At this point I’ve done my share of deals of all sizes and shapes – equity, partnerships, licensing, JVs, etc.

There is one rule I like to follow that I’ve learned the hard way.

Beware of the complicated deal.

There are times that complicated deals can be rather seductive. For example, a big honking deal with a large company can be extremely helpful. But there is almost always a catch.

Few more examples:

1 – Frequently a large company will ask a small company for equity in a big deal. Their logic: this commercial agreement is going to “make the small” company so they want upside. I guess no one wants to repeat the original IBM/MS-DOS deal. Generally I’m against those equity deals unless they are performance based. If the big company fails to live up to their end of the deal then why should they own equity in the startup.

I often tell our startups that the big company should own 0% or 100% of our stock. Giving them a minority stake makes life complicated. There are reasonable exceptions of course.

2 – Partnership agreements. I’ve helped create and also witnessed some deals that have literally taken a year (or more) to put together. There is something wrong with that picture if a deal takes that long.

3 – Employment agreements. I really don’t like complicated employment agreements. I understand that both sides need to be protected or whatever. But when employment agreements start generating lots of legal fees then there is something wrong.

4 – Good vs great. There is an old saying: “don’t let a great deal get in the way of a good deal”. There is much wisdom in that one. You can interpret it in several ways but I take it to mean – keep it simple, give yourself some flexibility and go execute.

5 – Financing. I like simple straight forward venture investment structures. Straightforward rights for the VC and clear rights for the founders & common shareholders. When the structure of the deal and legal fees of the deal start becoming a significant percentage of the actual equity financing…..well that too should be a yellow or red flag for both sides.

6 – The bad deal. There is nothing worse than a bad deal excepted a messy bad deal that is hard to unwind. I like deals where there is a natural reason to go forward and a natural reason to terminate.

I’m sure I’m going to do a few more complicated deals in my life. But I always go into them with reservations.

Simple is better.