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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

#21

Post by rmah »

privateSFacct wrote: post #16
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 te…

There's no such thing as "standard". "This is a standard contract" is something lawyers say to get you to agree to things you may not have otherwise agreed to.

I'm not saying this flippantly. I've negotiated many contracts over the decades and I've heard "this is standard" dozens of times, but it's always negotiable.

Note, I'm not saying the agreement presented is fair or not. That's situational. Just that "it's standard" is irrelevant.

Re: A Standard and Clean Series A Term Sheet

#23

Post by seancoleman »

nemo1618 wrote: post #22

Pet peeve of mine: You should never take a raw screenshot of a Word doc, with its red and blue underlines, cursor, etc. Convert it to a PDF first or find a way to turn off the highlighting+cursor.

Better yet, embed the PDF in an inline iframe so text can be copied, highlighted, etc.

Re: A Standard and Clean Series A Term Sheet

#25

Post by anonu »

This is extremely useful. Most importantly, I am glad that they included examples of what is non-standard. These are the real curveballs that are difficult for first-timers to gauge. whether they are "normal" to have on a term sheet or whether they're getting squeezed without really knowing.

Re: A Standard and Clean Series A Term Sheet

#27

Post by adventured »

chris_va wrote: post #20
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…

The venture capitalists in implementing liquidity preferences as a commonality defined it as an us-vs-them fight. It's an aggressive risk shift onto people - the founders and employees - that are far more vulnerable in the start-up building process than the very wealthy capital class that makes up most of the VC world and its institutional money.

Overwhelmingly the VCs are not your pals. They are there to make money, you should deal with them accordingly. In the best case scenario they're business partners, that's it. They don't feel bad about liquidity preferences and how that benefits them. Founders should never feel bad about fighting for the best terms they can get, the VCs will do exactly the same thing when they can - it's a core part of their job.

I would take the premise a step further actually. Potential early employees should always avoid joining start-ups that have liquidity preferences that could meaningfully negatively impact their own outcome (the worse the potential impact, the greater the aversion should be). When the liquidity preference hatchet comes down, the non-founder employees typically get smashed particularly hard.

Another great way to kill off liquidity preferences, is to create a competitive incentive related to employees and starve liquidity preference start-ups of talent. Start-ups should begin touting the lack of onerous liquidity preferences as a notable recruiting point re compensation packages.

Re: A Standard and Clean Series A Term Sheet

#30

Post by tosh »

akharris wrote: post #26
Lordarminius wrote: post #24

This may seem like a slightly out-of-place question, but is there any equivalent term sheet for seed funding ?

Our safe docs are pretty good for this: https://www.ycombinator.com/documents/#safe .

iirc the SAFE doesn’t cover vesting, information rights and control rights (I guess this is because typically companies that YC invests in are set up with something like Stripe Atlas or similar?)

In many European hubs the typical term sheets for seed financing are provided by Angels or seed stage VCs and typically aren’t as founder friendly as in the US.

Having more information/a recommended seed term sheet from YCombinator that explicitly covers the above (or references Stripe Atlas) would help.

Really appreciate all the documents and context that you are publishing. The impact is vast and goes way beyond the Valley and the immediate YC network.

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