But might that not be a problem? Some deals must get hung up on the documentation, no? Or perhaps more reasonably, a disagreement over the materiality of something discovered in due-diligence? This can't be a promise to invest X at Y valuation no matter what, which it might be if it were treated as a legal contract.
I think the point you're missing is that an oral contract is legally binding. So even handshake deals are legally binding. The only thing preventing a startup from suing a VC that reneges is 1) the startup/founder's reputation and 2) the difficulty of proving your case. The legal system only prefers written contracts because it's easier to prove in court.
I totally agree with you technically, but on a de-facto basis the difficulty of proving a handshake deal is why they are effectively treated not as legal agreements but social commitments, hence Uhhrrr's comment for a clarification of this protocol.
If these "handshake" emails are enough to constitute a legally binding commitment, then the power in this relationship slides dramatically in the favor of the investment target. This might not be a problem generally, but like I wrote above, it is not inconceivable that due-diligence would turn up a real problem, especially if the investment target itself is run by shady people.
There are any number of reasonable circumstances short of fraud that would make an investor consider that the initial presentation made by a company was misleading enough to require a modification or withdrawal of the original offer. Wouldn't an attempt to modify the offer put the investor in a position to get sued, especially if it was relied upon by the company?
This protocol sounds like a great idea, but the vagueness of a verbal commitment has some value (keeping a dispute out of the legal system) that is being sacrificed in exchange for clarity.
> This can't be a promise to invest X at Y valuation no matter what, which it might be if it were treated as a legal contract.
Legal contracts don't work they way you think. If there is a discrepancy between what is offered and reality, the contract can fail, or the courts can find a reasonable interpretation, or both parties can agree to change the contract (most common). This happens in due diligence all the time.
Thanks for your response. Can you help me understand what would happen under this protocol were an investor to pull out because of something that is discovered in due diligence? Or if the proposed modification were not to be acceptable to the company seeking investment? I would imagine in that case that any dispute would be over whether the discrepancy was material enough to justify the modification or withdrawal.
Either way, though, there is a clear difference between this and a verbal agreement in that if the parties cannot reach a reasonable compromise, a dispute around a verbal agreement will most likely (although not always) be dropped, and an email exchange such as this would provide a greater opportunity to litigate.
From my point of view, one primary rational of having a written contract is to reduce the likelihood of litigation. With that in mind, a verbal agreement seems perhaps a better option than an email-based protocol, in a weird sort of way.
