A Standard and Clean Series A Term Sheet
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A Standard and Clean Series A Term Sheet
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Re: A Standard and Clean Series A Term Sheet
#2Jason and I are happy to answer any questions people have about this document: why we included the terms we did, how to think about using, etc.
Re: A Standard and Clean Series A Term Sheet
#3* What should someone do if they get push back from an investor when asked to this term sheet?
* If this term sheet is used, can we avoid the legal costs of a Series A?
Re: A Standard and Clean Series A Term Sheet
#4Jason and I are happy to answer any questions people have about this document: why we included the terms we did, how to think about using, etc.
How commonly do you see each of the voting/veto rights you listed negotiated? What are some others that may be listed that you'd deem inappropriate?
Re: A Standard and Clean Series A Term Sheet
#5* What should someone do if they get push back from an investor when asked to this term sheet? * If this term sheet is used, can we avoid the legal costs of a Series A?
It’s meant to provide transparency on what good and clean terms are. It won’t generate negotiating leverage for you if you don’t have any, though on the margins it might help you persuade someone that a term is “market.”
Most of the legal costs don’t arise from the term sheet. They come from legal diligence and drafting the definitive docs.
Re: A Standard and Clean Series A Term Sheet
#6Now switch the preferred shares to common shares and eliminate all liquidation preferences and you'd have something closer to a fair term sheet template.
No young start-up should ever agree to preferred shares or any liquidity preferences. This is the next great battle for founders to win over venture investors. To push that risk back onto the investors where it should be instead of allowing the investors to unduly offload even more of their risk onto the founders and early employees.
Liquidity preferences should have never become common with start-ups, they should be quite rare. There is no more important territory for founders to be focused on taking back from venture capitalists than that. Liquidity preferences are a routine source of screwing over the founders and early employees. YC could do something tremendous for founders by fighting on their behalf to put that shifted risk back where it should be: with the investor; the founders and employees already shoulder enough risk as it is.
Re: A Standard and Clean Series A Term Sheet
#7As a Series A investor who invests in startups outside of the Valley, it's hugely useful to have something like this (independent of us) that we can point to as to what's normal, especially for founders who don't necessarily have the network to help them.
Founder's (and lawyers) who've never seen a term sheet before will often argue against standard terms (which no mainstream VC would move on) and on the flip-side, bad VCs will often try and put onerous terms into term sheets which can hurt the startup in future fundraising rounds or liquidity events.
While there's been a huge increase in transparency at the pre-seed/seed/SAFE fundraising stage, Series A and beyond is still very opaque.
Great to see YC extending their work on transparency into the Series A stage!
Re: A Standard and Clean Series A Term Sheet
#8Jason and I are happy to answer any questions people have about this document: why we included the terms we did, how to think about using, etc.
How commonly do you see each of the voting/veto rights you listed negotiated? What are some others that may be listed that you'd deem inappropriate?
Some minor wordsmithing that reflects lawyer and investor /founder preferences happens a fair amount.
The veto on company sales breaks founder friendly occasionally (you need a decent amount of leverage). Some examples:
1. It doesn’t exist 2. It only applies to sales that return less than X multiple of investor’s capital invested 3. It only applies to sales where the founders are getting retention packages (from acquirer) that substantially exceed their recent compensation
The veto on financings is present almost always. A founder would need rare leverage to get rid of it.
On both of these vetoes though there are additional constraints on abusive usage by investors — reputation being the most obvious one.
Re: A Standard and Clean Series A Term Sheet
#9Jason and I are happy to answer any questions people have about this document: why we included the terms we did, how to think about using, etc.
What are 'standard, broad based weighted average anti-dilution rights' in this context?
Surely early investors will be diluted, so what are these peculiar rights referring to?
Re: A Standard and Clean Series A Term Sheet
#10Jason and I are happy to answer any questions people have about this document: why we included the terms we did, how to think about using, etc.
What are 'standard, broad based weighted average anti-dilution rights' in this context? Surely early investors will be diluted, so what are these peculiar rights referring to?
Good question. The anti-dilution right is an adjustment to the investor's shares that occurs when the company does a down-round. The "broad-based" qualifier is a reference to the most company-friendly version of this because it requires the adjustment to take into account the scale of down-round in terms of dilution. For instance, if you closed a round at $20M post and then sold one share afterwards at $10M post, the adjustment would be negligible. There are other variations of anti-dilution adjustments that would ignore such considerations.
The anti-dilution adjustment is generally not something that applies to ordinary course dilution (like employee option grants).