In SV fundraising deals, going back on a handshake is considered pretty bad behavior. Investors stand to lose many future deals if they break one without a darn good reason. Discovering a serious misrepresentation is such a reason, but seeing a better deal elsewhere is not.

The point of handshake deals is to give everyone time to get the details right, without the pressure of having the deal stolen. Forcing parties to rush through the details damages the whole ecosystem, so everyone is motivated to encourage everyone else to respect handshake deals.

That happened to us and on this VC firm's maiden round. They offered no reason except that they reconsidered. Wasted months of our time.

Our attorney (from Fenwick & West) told us the same, that it would damage the VCs reputation and that this was pretty much unheard of for them.

But I never heard another thing about it and that VC firm seems to not be having too much trouble filling out their rounds.

I did not know this raising my last round, but it was legit. The money was as good as wired.

A handshake deal is a contract. Breaking that contract (and the law) just because it's hard to prove in court is at the depth of depravity.

Just FYI, handshake deals can be valid contracts if certain requirements are met. For one thing, there needs to be enough specificity around the material deal points. Even if you have a written contract but you haven't agreed on the material deal points (for fundraising, this would be things like valuation, type of shares, number of shares/percent of company) then you don't have a valid contract.

There are some things that are on the fence in terms of materiality. For example, is the valuation pre- or post-money? Is there an option pool set aside?

Lastly, there are some types of agreements that cannot be done just on a handshake — there has to be a written agreement in order to be enforceable. IIRC from my law school days, this includes the sale of real estate and a contract that, by its terms, cannot be completed in a year. The latter excludes things that are known to take more than a year, like building a skyscraper. It would include "pet-sit my dog for 13 months while I'm vacationing", for example.

That's a bid mind boggling for me. Let's say we have a contract. You break it. So I'm not happy, I suppose I take you to the court.

And there, something is enforced that is not the law but where you are lawfully obliged to a sanction afterwards ?

I don't really understand why you'd say that ? Isn't the law kind of saying "you shall not break contracts" ? And if it's not, what's the point of a contract ?

My comment was typed quickly and was pretty non-specific, so I'm sorry about that and I probably deserved the downvotes. However, I maintain that under most people's understanding of the terms "breaking a contract" and "illegal", breaking a contract is not illegal.

Regarding "breaking a contract": Contracts often stipulate penalties for non-performance of terms within them. For example, you contract with me to rent my house for 5 years. The contract stipulates that if you leave early, I am entitled to keep the deposit. In common language, people will refer to leaving early as "breaking the contract", but there is nothing illegal about doing so.

Regarding "illegal": If the contract does not specify some penalty for non-performance of a clause, or it does specify one but you somehow avoid the penalty, then it would become a matter for the courts, but importantly, it would be a civil court, not a criminal court. You have not broken a law, you have broken a contract, and the civil courts will determine how this situation will be made right.

Well, I thank you for replying, it makes things clearer !

A handshake agreement could very well be a valid, binding contract if certain conditions are met. I would be very cautious about backing out of such an agreement without talking to a lawyer. (And it's a pretty bad look to go back on your word, even when you're legally in the clear.)

That's not really correct - you just have to promise to exchange something. If you and I shake on a deal to buy your car for $100, that can certainly be legally binding if we intended it to be so.

Usually, though, handshake deals mean "these are the commercial terms, let's go draw up the contract", which isn't legally binding. In many places, though, they're respected by convention and protected by reputation.

This is wrong.

A valid contract requires consideration. That's one of the conditions I was referring to. A handshake and a deposit, for instance, could result in losing a lot more than just the deposit. However, not all consideration is monetary, which is why it helps to consult an expert.

I am not a lawyer, either. Just an engineer with the minimum legal training required for licensure, which is basically, "know when you should ask for help."

This is right, but misleading. Consideration isn't the big question in this thread. It's whether or not a verbal agreement can be binding.

In some cases it can be, but a mere agreement to agree is not binding.

The biggest takehome is 'consult with legal before making promises or representations to counterparties".

Edited this a few times to keep it as short as possible without being misleading.

As someone who buys and sells a lot of equipment and machine tools having someone sell to someone else after you have a deal is far more infuriating than getting "oh but I would have paid 20% more" after you sealed a deal.