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A Standard and Clean Series A Term Sheet

blog.ycombinator.com

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Re: A Standard and Clean Series A Term Sheet

#11

Post by foobiekr »

adventured wrote: post #6

Now 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 o…

Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any way other than spectacular success.

It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.

Re: A Standard and Clean Series A Term Sheet

#12

Post by pbiggar »

akharris wrote: post #2

Jason 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.

My reading is that this includes a pre-money option pool (aka the "option pool shuffle": http://venturehacks.com/articles/option-pool-shuffle), which while standard feels dirty.

Any thoughts on this?

Re: A Standard and Clean Series A Term Sheet

#13

Post by adventured »

foobiekr wrote: post #11
adventured wrote: post #6

Now 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 o…

Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any way other than spectacular success. It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.

I agree, I don't expect any shift against preferred shares (although I'll always advocate that direction). I do think ground can be reclaimed on the liquidity preferences. That particular area in VC today is so frequently egregious I don't think it would be very difficult to rapidly improve it.

Re: A Standard and Clean Series A Term Sheet

#14

Post by pbiggar »

adventured wrote: post #6

Now 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 o…

I'm a founder and have never been an investor. I feel there are many things that could be improved, but I don't feel that moving investors to preferred is one of them.

My sense is that investors take a risk and that preferred protects them from a lot of downside of that risk. If they didn't have that protection, they'd need to do way way more work to protect against the risk, making it harder for startups to get/close their funding rounds.

Also, since investors price the risk in, you'd end up having to give investors more upside in the success case, which is a thing I'd personally prefer not to do.

What do you think are the upsides of investors having common stock only?

Re: A Standard and Clean Series A Term Sheet

#15

Post by sonnyblarney »

foobiekr wrote: post #11
adventured wrote: post #6

Now 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 o…

Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any way other than spectacular success. It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.

1x preference I think has meaning and it's reasonable.

Basically, the VC's are 'getting their money back first' - after all, they put the money in.

So if they put $1M in and the company sells for $1M ... should they only get $200K back? Or their $1M? Is the question.

Arguments can be made either way, but a 1x preference I think is something quite fundamentally different from multiples of preference.

Re: A Standard and Clean Series A Term Sheet

#16

Post by privateSFacct »

adventured wrote: post #6

Now 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 o…

Downvotes are because

1) This is a standard series A term sheet

2) This is a 1x non-participating liquidation preference.

Plenty of folks sign term sheets with MUCH WORSE preferences. Participating 1.5x etc.

This preference simply says, investor gets their money back if invested on a preferred basis during Series A.

That's where the real problems often come, participating preferred at 1x+. This is not one of those term sheets.

3) Fair is what is available in the market that is not misleading. A 1x nonparticipating preference is much more logical than many other approaches, so is easier to understand. And yes, if you take 20M from a Series A funder and sell for $22M, you are basically going to get $0.

Re: A Standard and Clean Series A Term Sheet

#17

Post by jasonkwon »

foobiekr wrote: post #11
adventured wrote: post #6

Now 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 o…

Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any way other than spectacular success. It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.

Yeah excessive preferences do exactly this. But it's not the preference mechanism as much as what the preference does in relation to business value. Assuming liquidation preferences are 1x, what it means is that the company needs to build value that is well in excess of the amount that's been raised. The reason people end up surprised is that the amount raised is not always transparent, nor is the value of the business.

Re: A Standard and Clean Series A Term Sheet

#18

Post by cmart »

adventured wrote: post #6

Now 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 o…

Liquidity preferences are also critical in allowing companies to grant employee stock options at valuations substantially below what the Series A investors pay. If liquidity preference disappear, the IRS will likely take a much closer look at low strike prices on options.

Re: A Standard and Clean Series A Term Sheet

#19

Post by rmah »

adventured wrote: post #6

Now 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 o…

And remove/edit the vesting schedule. A vesting schedule of this sort may be reasonable for YC, but is unreasonable in some other cases. Many founds have already invested their life savings (and more) and years of work without pay. They should not lose their existing shares.

Re: A Standard and Clean Series A Term Sheet

#20

Post by chris_va »

adventured wrote: post #6

Now 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 o…

I'm not sure why you framed this as an us-vs-them fight.

Hypothetically, each investor has some internal valuation for your startup, and is willing to take risk. Giving those investors preferred shares reduces that risk, which means you can theoretically get more money while giving up less of the company. Obviously you trade that for the downsides of having preferred shareholders, but that's a choice for the founders.

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