Even in a field in which transactions are in many respects highly repetitive, as in the case of venture investments, and even when the parties agree upon a standard form for a starting point, there is still a lot to consider in any give deal. These considerations range from the most material (say valuation) to the annoyingly trivial (say nuances in the reg rights language). At some point in the proceedings when confronted with open issues, entrepreneurs ask what’s market?

One way to attack this question is to divide the concerns into two buckets: First, things which change in response to what appear to be market forces, and second, things that have to be resolved but are more often than not deal specific. I am not going to go into the second category, at least not now.

With respect to the first category, things that appear to change in response to market forces, it might include some (all?) of these: (1) preferences, capped preferences and participation and (2) dividends whether to have them and at what amount. There are other items that might fit this group, but these will serve to illustrate the point.

When the discussion comes down to what is market, VCs tend to have a significant informational advantage over entrepreneurs for at least these reasons: (1) Entrepreneurs, even seasoned ones, have a limited number of deals in their personal experience base (most are likely to have done one, two or perhaps three). VCs who have been in the business for any significant amount of time will have dozens of deals under their belts. (2) Entrepreneurs have friends and VCs have partners. Even the most well networked entrepreneur is unlikely to be able to match the collective historical and current experience of a partner in any established fund. Advisors, especially lawyers, can help level the playing field because they see many deals and, in some cases, their firms have many partners who work in the space and can be drawn upon.

Everyone is a prisoner of his or her own experience, and people sometimes will assume that their experience and observations are consistent with the outside world. I recall hearing a VC investor assert, without qualification, that every deal his firm did had a dividend component. Now that did not seem right to me because I had done deals with his firm before and I did not recall dividends. So, I had a paralegal check (not hard to do since VCs list their investments on their web sites and the Delaware Secretary of State is on line). Well, it turns out that the firm in question did have some deals with dividends, but it had a significant number (perhaps half) without dividends. When I pointed this out to the investor, he took dividends out of the term sheet.

This is a round about way of saying that even the VCs don’t really know what market is. They may not even know what their own firms are actually doing. They, like all market players, have an impressionistic sense of what market is. Oddly enough, that impressionistic sense is often colored by self-interest.

The only way to know what’s market is to research a broad enough base of deals both current deals and over some reasonable past period, in a relevant market (geographical, stage (series A or follow on) and a relevant industry (biotech, renewable, etc.) to be able to draw some meaningful conclusion. Some law firms do this (and publish some of their results). Ours is one of them. Here is a link to our publication, EEC Perspectives. It is a place to start.