A Standard and Clean Series A Term Sheet • Hacker News Board

Re: A Standard and Clean Series A Term Sheet

#31

Post by chris_va » Mon, Jan 28, 2019, 6:46 PM UTC

adventured wrote: post #27

chris_va wrote: post #20

Earlier quoted context omitted.

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,…

> The venture capitalists in implementing liquidity preferences as a commonality defined it as an us-vs-them fight.

... You'd have to support that argument, because it is not evident.

This is a mutual agreement between two informed parties. You don't have to take those terms, and you are free to offer them more common stock as a risk substitute. I also don't understand why you invoked class warfare here, which really undermines any credibility to your argument.

Re: A Standard and Clean Series A Term Sheet

#32

Post by jasonkwon » Mon, Jan 28, 2019, 6:46 PM UTC

pbiggar wrote: post #14

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/clos…

I think you already answered that question in your post. There would be incrementally more proceeds for the founders and employees in an exit that is flat or below the postmoney valuation of the Series A round. But as you also noted, this stuff doesn't exist in isolation - pull one lever and it results in other changes. In this case, that outcome would probably change how the investors think about the risk-reward and may depress the valuation itself, especially if it's relatively high.

Re: A Standard and Clean Series A Term Sheet

#33

Post by privateSFacct » Mon, Jan 28, 2019, 6:46 PM UTC

rmah wrote: post #21

privateSFacct wrote: post #16

Earlier quoted context omitted.

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 stan…

If you've negotiated many term sheets for Series A with not even a 1x nonparticipating liquidation preference - impressive.

That said, also illogical, why are these investors doing a preferred investment vs common if they don't have a preference?

The only people I've run into who can negotiate nonsense contracts are folks playing with other folks money (family etc). I will say I stay far away from those types of folks. Often crazy, and often have enough money to pursue their flights of fancy, including ungrounded legal theories, a good long distance.

Re: A Standard and Clean Series A Term Sheet

#34

Post by wolco » Mon, Jan 28, 2019, 6:47 PM UTC

ig1 wrote: post #7

As 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, b…

What are some of the fixed in stone parts of a series A that most vc will not move off of?

Re: A Standard and Clean Series A Term Sheet

#35

Post by jasonkwon » Mon, Jan 28, 2019, 6:47 PM UTC

johan_larson wrote: post #29

Is this term sheet descriptive or prescriptive? Are you telling us what standard straight-forward terms are right now, or what they should be right now (and would be, in a slightly better world)?

descriptive, but note the comment about the brackets.

Re: A Standard and Clean Series A Term Sheet

#36

Post by mnemotronic » Mon, Jan 28, 2019, 6:48 PM UTC

I'm a software guy. Most of that sheet is a foreign language to me.

Re: A Standard and Clean Series A Term Sheet

#37

Post by privateSFacct » Mon, Jan 28, 2019, 6:48 PM UTC

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.

Participating preferences are bogus - obviously, as are > 1x in most cases.

This term sheet is nonparticipating 1x. Despite the first comment in this chain, this is actually a very reasonable approach, and preferred stockholder is always going to have a preference - or there would be no point in being preferred.

Re: A Standard and Clean Series A Term Sheet

#38

Post by jasonkwon » Mon, Jan 28, 2019, 6:49 PM UTC

wolco wrote: post #34

ig1 wrote: post #7

As 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, b…

What are some of the fixed in stone parts of a series A that most vc will not move off of?

I wouldn't talk in absolutes because having a ton of negotiating leverage can make everything fair game. But in an run of the mill deal, it's pretty tough to make a VC give up anything that's not in brackets.

Re: A Standard and Clean Series A Term Sheet

#39

Post by motohagiography » Mon, Jan 28, 2019, 6:50 PM UTC

This is so valuable, just to have a reference point to ask, "so I've seen other sheets with X, what's the case for your preference?"

I have neither raised or invested, but do a lot of negotiations and having an external reference for framing discussion creates a lot of value. Seed is still in front of me, but these templates remove a lot of friction.

I was going to not-comment because it was just good news, but in case there was doubt, this is great.

Re: A Standard and Clean Series A Term Sheet

#40

Post by privateSFacct » Mon, Jan 28, 2019, 6:50 PM UTC

anonu wrote: post #25

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.

Over 1x participating preferred I've seen a few times. A TOTAL nontransparent scam in my view.