A Tale of Evil Venture Capital, and a Fair Start-Up

Despite the sweeping views of Queens and Central Park, the conference room in the Midtown Manhattan law offices of Morrison & Foerster was not exactly a theatrical set. But the performance — a mock negotiation by a venture capital firm and an entrepreneur that the law firm staged one recent workday — held the attention of an audience of about 50 lawyers, venture capital managers and business executives.

By BARNABY J. FEDER NY Times

As the play made clear, in the current economy the venture capitalists get the best parts.

The negotiation involved the future of Terrapin Technologies, a fictional business start-up with promising financial software. Having nearly used up the $1 million raised in 2001 by the president and his co-founder and chief technology officer, Terrapin now needed money to finish its product development and hire marketers.

So the entrepreneur, a character called the Founder, and his adviser, Wily Counsel, agreed to yield chunks of control and potential wealth to the managing general partner of the fictitious venture firm, the Capital Gang, and its lawyer, Crafty Counsel, in return for a $4 million investment.

During the negotiations, the Founder, played by Geoffrey W. Smith, managing director at the Ascent Group, a real venture capital firm, won a few concessions. But he went nowhere on some major issues, like the composition of the board or a provision that would annually dilute the founders’ holding by 5 percent.

The entrepreneurs were hardly in the strong negotiating position that entrepreneurs often found themselves in during the 1990’s. "I’m nostalgic for what used to be," said Joseph Bartlett, who played Wily Counsel and who in real life is a partner at Morrison & Foerster.

It became clear that the Founder would be required to get rid of his co-founder. And, while the Capital Gang professed its great admiration for the Founder, Mr. Bartlett stepped out of character to explain that many founding entrepreneurs emerge from such negotiations on very shaky ground.

"If you ask a V.C. what value they add, and you get them after a few drinks, they’ll say, `We replace the C.E.O.,’ " he said. And that, he indicated, does not vary with the economic climate.