Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

A Standard and Clean Series A Term Sheet

blog.ycombinator.com

Post reply on HN
Print view View original

51–60 of 172 posts

Re: A Standard and Clean Series A Term Sheet

#51

Post by jasonkwon »

entity345 wrote: post #43

How enforceable is that "No Shop" clause that is said to be binding in the document?

I'm going to answer this question a little differently, because enforceability can also depend on facts and circumstances. Think of the binding / non-binding distinction as more of a social commitment signal. The No Shop means that once the company and investor both sign, they're pledging to work together to figure out this deal along these high level terms for the next 30 days. They've made a commitment to each other. Venture is a relatively small community and going back on your word gets around. Social consequences can be just as bad as legal ones.

Re: A Standard and Clean Series A Term Sheet

#52

Post by adventured »

chris_va wrote: post #31
adventured wrote: post #27

Earlier quoted context omitted.

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…

> This is a mutual agreement between two informed parties.

YC has put so much effort into founder education over the years precisely because that frequently has tended to not be the case. Quite the opposite.

I'm not sure what you're defining as informed here (mutually responsible for understanding what is being signed, sure), however I would point to knowledgeable as the more important term. The problem continues to frequently be that founders and early employees are nowhere near as mutually knowledgeable as their counterpoints in the VC world, who are elite professionals at these deals and do them for a living.

There's a great statement above by @mnemotronic that summarizes the routine imbalance between the two sides: "I'm a software guy. Most of that sheet is a foreign language to me."

I can sympathize, I've been dealing with VCs since the late 1990s and the terms/legal side is still an immense chore.

> I also don't understand why you invoked class warfare here, which really undermines any credibility to your argument.

No it doesn't, because it's not invoking class warfare, it's making a point about the typically dramatic financial condition and personal risk imbalance between the two sides (the personal damage absorbed if things go south). Founders and early employees can easily see their lives ruined if a venture fails, it's a not uncommon outcome, HN sees such stories posted regularly.

Re: A Standard and Clean Series A Term Sheet

#53

Post by akharris »

benmowa wrote: post #49

Very useful, thanks! Is access to financial statements implied? what about requiring audited financials? or is that not common/expense at that stage?

Those are diligence items that aren't typically defined in a term sheet. You'll deal with that directly with the investor, potentially as a condition to close as worked out in the full docs.

Re: A Standard and Clean Series A Term Sheet

#54

Post by ccleve »

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…

Upvoting the parent. The comment is worthwhile and merits discussion. Should not have been downvoted.

The comment that this is a way of reducing investor risk and may yield a higher valuation is well-taken. But founders should not agree to it, because their risk is far, far, far higher than that of the investors.

A founder gets one shot, or maybe two or three shots, in their lifetime. An investor gets many shots across a diversified portfolio. A founder puts their career and their financial future across in this one basket. They put their sanity and their personal happiness in this basket. An investor puts nothing but a small portion of their, or more frequently other people's, wealth in this basket.

Making it less likely that a founder will get a payoff is just stupid. A founder should do everything they can to reduce their risk, even at the cost of a lower valuation.

Re: A Standard and Clean Series A Term Sheet

#55

Post by jasonkwon »

benmowa wrote: post #49

Very useful, thanks! Is access to financial statements implied? what about requiring audited financials? or is that not common/expense at that stage?

Annual and quarterly unaudited is normally implied. Sometimes monthly too. Most good Series A investors understand that audited financials don't make sense this early and their lawyers will draft something like the audit requirement can be waived by the investor in any year, or that audits won't be required until 2-3 years out.

Re: A Standard and Clean Series A Term Sheet

#56

Post by kemitche »

rmah wrote: post #19
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.

The vesting schedule line has 2 sections, 1 for founders (which is bracketed, i.e., needs negotiation) and 1 for other employees.

The rank and file get a standard 4-year, monthly vest, 1 year cliff. The founders presumably get something very different. Existing employees are an unknown.

Re: A Standard and Clean Series A Term Sheet

#57

Post by jasonkwon »

cmart wrote: post #18
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.

probably true

Re: A Standard and Clean Series A Term Sheet

#58

Post by OiNG »

deanmoriarty wrote: post #46

I know this article focuses on founders, but I'd love to see something done in the industry for employees (especially early employees!) as well. One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave…

it is, of course, complete BS that this is the norm.

however, be aware that you can negotiate for early exercise or 10 year expiration prior to joining. even if the startup has never done anything like that prior, they will make it happen if they really want to hire you.

Re: A Standard and Clean Series A Term Sheet

#59

Post by nihonde »

privateSFacct wrote: post #33
rmah wrote: post #21

Earlier quoted context omitted.

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 folk…

Preferred investment can generate a yield and/or can take priority over some but not all other equity. I’m not saying it’s a good deal...just trying to answer your question.

Re: A Standard and Clean Series A Term Sheet

#60

Post by entity345 »

jasonkwon wrote: post #51
entity345 wrote: post #43

How enforceable is that "No Shop" clause that is said to be binding in the document?

I'm going to answer this question a little differently, because enforceability can also depend on facts and circumstances. Think of the binding / non-binding distinction as more of a social commitment signal. The No Shop means that once the company and investor both sign, they're pledging to work together to figure out this deal along these high level terms for the next 30 days. They've made a commitment to each othe…

Well yes... It is a promise.

Your reply suggests that it's not binding ('legally' binding, obviously).

Post reply on HN