I had lunch today with an A list entrepreneur and we got around to the topic of whether or not the facts matter.   By the facts, I mean what is “market” in the venture investment world. This is a topic upon which I recently wrote a blog post pointing out that, at least in some cases, the facts don’t matter. I admit that I must have been in a funk, because I took the position that it probably does not really matter what is going on in the market. Basically, I said that if you are a repeat entrepreneur with a strong record you will get good deal terms from the VC community and if not not. 

Babak Nivi commented on this post pointing out that people generally, and investors are no exception, are subject to all kinds of social pressures. Here is what Nivi said,

This post seems to imply that BATNAs are the only leverage in negotiations. They're not. Having access to a database of deals and their terms is great normative leverage. Humans are susceptible to a host of psychological principles (consistency, reciprocity, etc.) and normative leverage exploits them. So the non-rock star in this post can and should use norms to get a better deal.

The entrepreneur I was lunching with made another compelling point. Even if the facts don’t matter you have to do your best to fight the battle because small incremental things that happen early in the deal and seem like things you can give or that seem like they could be minor, can have huge effects over time. 

His specific point was that shifting a small amount of ownership (several percent) from the investors to the entrepreneur at the first round can make a huge difference to the entrepreneur after several rounds of investment. In effect a small amount today gets magnified over time. 

Other terms have a similar effect. Two examples are a dividend and a full participation. If you do the numbers and run a spread sheet out over the eight years (or more) that are likely to pass before the venture gets to an exit, you will see exactly how dramatically a few percent or a participation can affect you. This is even more true if you assume a modestly successful exit (as opposed to a big score).

So, fight the battle with everything you’ve got, because in the end it matters.