Over the weekend I had a great opportunity to go flying with Seth Sternberg, CEO of Meebo. Seth is an accomplished pilot who has been flying ever since high school. He’s now the proud owner of a great 4-seater plane that he flies almost every weekend (and often does practice flights at 6a before work.

To get a pilot’s license, Seth and every other pilot need to practice failure. They practice the engine blowing out by cutting out the engine and landing the plane. They practice all sorts of potential mishaps including intentionally diving the plane, spinning, toward the ground and then seeing how they recover (all of these with a trained instructor). Essentially, they try to simulate anything that can go wrong so that they are practiced on how to deal with it when it does.

Practicing for failure saves lives when you are a pilot.

But outside of a few vocations, people rarely practice for failure. That type of thing is rarely practiced in the business world. Occasionally big businesses will have a disaster recovery plan, but it is rarely drilled. And start-ups rarely have time to practice anything … we’re so busy doing. Something like crisis management or planning what will happen if a key member of the team leaves is rare in the world of entrepreneurs.

Or imagine planning for failure in your personal life … like role playing what you would do if your spouse cheated on you. Of course, that’s absolutely absurd, but most people are too busy to even do a fire drill.

In flying, planning for failure is essential for success. Flying with Seth – who is meticulous, calm, collected, studious, and very practiced – is reassuring. And I have no doubt that being a licensed pilot makes Seth a better CEO and allows him to react better in a crisis.

Super congrats to Chris Alden who was named as CEO of Six Apart today. Chris was previously EVP of Six Apart and before that was CEO of Rojo (which Six apart acquired).

Six Apart runs Typepad (which runs this blog), Moveable Type, LiveJournal, and Vox.

According to section 19e of Yahoo’s Terms of Service, a small percentage of Yahoo “users may experience epileptic seizures”. Is this lawyer’s gone crazy???

In case Yahoo deletes this clause, i have reprinted it here in full:

A SMALL PERCENTAGE OF USERS MAY EXPERIENCE EPILEPTIC SEIZURES WHEN EXPOSED TO CERTAIN LIGHT PATTERNS OR BACKGROUNDS ON A COMPUTER SCREEN OR WHILE USING THE SERVICE. CERTAIN CONDITIONS MAY INDUCE PREVIOUSLY UNDETECTED EPILEPTIC SYMPTOMS EVEN IN USERS WHO HAVE NO HISTORY OF PRIOR SEIZURES OR EPILEPSY. IF YOU, OR ANYONE IN YOUR FAMILY, HAVE AN EPILEPTIC CONDITION, CONSULT YOUR PHYSICIAN PRIOR TO USING THE SERVICE. IMMEDIATELY DISCONTINUE USE OF THE SERVICE AND CONSULT YOUR PHYSICIAN IF YOU EXPERIENCE ANY OF THE FOLLOWING SYMPTOMS WHILE USING THE SERVICE: DIZZINESS, ALTERED VISION, EYE OR MUSCLE TWITCHES, LOSS OF AWARENESS, DISORIENTATION, ANY INVOLUNTARY MOVEMENT, OR CONVULSIONS.

(special thanks to Vivek Sodera to pointing this out to me)

when most entrepreneurs get a term sheet from a venture capital firm or a group of angels, they tend to focus on the valuation, share price, liquidation preference, option pool, board member set-up, etc. All of those are really important.

But if you are trying to get the deal done quickly and want to save your company some money, you should also focus on the clause about the legal fees of investor’s counsel. Typically, start-ups have to pay the legal fees of the venture capitalists. This is a great deal for VCs to save some money when they invest in deals.

In the companies I am involved in, I’ve seen a huge range of dollar amounts for the legal fees for investor’s counsel. an angel deal typically is $10k. VC round is likely $20-30k. the longer the company has been around, the larger the amount (because that usually correlates to the more corp governance issues a company has and the less vanilla its structure is).

As an entrepreneur, you should fight hard to reduce this legal fee clause. Here’s why:

First, you want to save your company money.
VCs typically are not great stewards of cash. They typically pay more for everything than an entrepreneur would … they always pay full price. Plus, if you are paying their legal fees, they don’t have enough incentive to haggle with the lawyer over hours billed. I can’t prove this empirically, but my guess is that the ultimate bill from investors counsel is usually within 3% of the cap in the term sheet. So if your clause says you will pay up to $30k to investors counsel, expect to pay at least $29k.

Not to be outdone, your counsel will use investor’s counsel’s fees a barometer for their own fees. Your lawyer will typically charge 150% of investor’s counsel (since they are doing a lot more work). So if you are paying investor’s counsel $30k, you’ll likely pay your own counsel $45k – for a total of $75k. if you are only raising $3.5 MM, you just paid a 2% fee off the top to the lawyers.

Now if you were able to negotiate $20k to investor counsel, you may only pay your own lawyer $30k – for a total of $50k – thereby saving your company $25k for the same deal.

Second, a much more importantly, the time it takes to close your deal will vary on how much you pay your investor’s counsel.
If you cap investor’s counsel’s fees at $30k, they will have a much greater incentive to nit-pick over little items than if you cap them at $10k. my formula is:

Time it takes to go from term sheet to close = 20 days + 1 day for every thousand dollars you spend on investor’s counsel.

You probably can never close a venture deal in less than 20 days (assuming the company has at least some history). And for every thousand dollars you pay investor’s counsel, they essentially can postpone the deal from closing one more day to increase their fees.

This might sound cynical and anti-lawyer. It isn’t meant to be. There is no proof of this theory – only from my own personal observation. And I’m sure this doesn’t apply to ALL lawyers. And it might not apply to YOUR lawyer (who you presumably like and think highly of). But you don’t know the investor’s lawyer and thus should be wary that they might postpone closing to increase fees. Not consciously, of course. But subconsciously, humans tend to go to the right wall boundary.

With this in mind, as an entrepreneur, you should fight to lower investor’s counsel. This, of course, is the one clause YOUR lawyers will almost never advise you on (they’ll probably do a good job on advising you on the other important clauses). Which is why it is so important that you, the founder, spends a lot of time on this.