Venture investment documents have gotten so standardized that investors have stopped stepping back and looking at the larger picture.   I have been, and continue to be, a big proponent of forms. But I am not talking about forms. I am talking about a fresh look at what is important and material to a particular deal.

Recently I have had occasion to work with an investor who is not one of the usual VC suspects. This investor looks at deals with a different eye. I am not going into what is not in his docs, but suffice it to say that there are a lot of “standard” terms that did not make the cut (redemption rights, drag along being two). 

More importantly, there is something in the investment docs that is not often (ever) seen in venture style investment documents. This investor want a post closing adjustment of the number of shares he got to adjust for variances in working capital from the working capital at the time of the term sheet to the time of closing. Now, this is a common concept in acquisition transactions, but I can’t recall ever seeing it in a venture style investment. 

Equally importantly, this investor wanted to have some post closing confirmation that the working capital was accurately set forth in the financials upon which he made the investment decision. The company, of course, did not have audited numbers – not surprisingly for an early stage company. This fact instead of making the investor more tolerant of possible financial statement issues, made him more nervous about them. In the end, the company agreed to the provision.

So, my question is this: Would you rather have an adjustment for variances from some expectation (such as working capital or inventory or something else) that you can audit post closing and get an adjustment for a negative variance or have some right like a drag? (By the way there may be reason to ask for both.)

Now, an adjustment of the sort I have been describing is not appropriate in some deals. For example, in a true early early stage Series A deal the company many not have much more than some IP and a business plan – so maybe nothing to adjust for. But what about a Series D deal intended to fund a company through to an exit (where the company has been around, has sales, has inventory, has debt etc.)?