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

Re: A Standard and Clean Series A Term Sheet

#61

Post by jasonkwon » Mon, Jan 28, 2019, 7:25 PM UTC

pbiggar wrote: post #44

jasonkwon wrote: post #32

Earlier quoted context omitted.

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…

> 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 Right, I understand the outcome, but why do we want to do that.? What problem is solved by this? I'm trying to extract the benefits so that we can weigh them against the downsides.

I think it just comes down to risk preferences. If you optimize for a higher valuation and give the investor downside protection for that, then you own more of the business and therefore more of the upside. If you choose to better optimize for the downside by taking away investor downside protection, you may end up with a lower valuation, lower ownership of the company and lower upside.

Re: A Standard and Clean Series A Term Sheet

#62

Post by jasonkwon » Mon, Jan 28, 2019, 7:26 PM UTC

kemitche wrote: post #56

rmah wrote: post #19

Earlier quoted context omitted.

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.

Existing employee vesting is generally left alone unless they have something crazy.

Re: A Standard and Clean Series A Term Sheet

#63

Post by akharris » Mon, Jan 28, 2019, 7:27 PM UTC

seancoleman wrote: post #23

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.

A downloadable version of the doc is linked directly above the image. That does the job nicely, since it allows you to immediately edit.

Re: A Standard and Clean Series A Term Sheet

#64

Post by jasonkwon » Mon, Jan 28, 2019, 7:28 PM UTC

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.

You can make arguments like this in negotiations and sometimes they can work. It just depends. As I mentioned elsewhere, this was meant to be more descriptive than prescriptive. Founder vesting/re-vesting is often a negotiation point in a Series A term sheet and the outcomes are varied and fact-dependent enough that it's tough to say that there's a standard here.

Re: A Standard and Clean Series A Term Sheet

#65

Post by jasonkwon » Mon, Jan 28, 2019, 7:30 PM UTC

entity345 wrote: post #60

jasonkwon wrote: post #51

Earlier quoted context omitted.

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).

It can be legally binding.

Re: A Standard and Clean Series A Term Sheet

#66

Post by itistru » Mon, Jan 28, 2019, 7:31 PM UTC

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.

Question: how did you think about giving pro-rata & information rights in this term sheet? It looks to me that the Other Rights & Matters section grants it to _all_ investors. Is that typical in your experience?

Re: A Standard and Clean Series A Term Sheet

#67

Post by rexreed » Mon, Jan 28, 2019, 7:32 PM UTC

Curious to know what the "typical" ranges are for some of the bracketed sections:

* What are typical / optimal post-money option pool sizes?

* What are typical / optimal founder vesting schedules?

* What are the usual ratios of lead investor / follow-on investor amounts?

It seems that the majority of the Preferred can vote to change the # of directors - wouldn't that offset the initial founder-friendly board setup or am I missing how that vote is used?

Re: A Standard and Clean Series A Term Sheet

#68

Post by tptacek » Mon, Jan 28, 2019, 7:33 PM UTC

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…

How does a VC deal without at least a 1x liquidation preference work? The founders have taken $X from investors and control the board. What prevents them from selling the company and pocketing their share of $X? In what way is a 1X liquidation preference unfair?

Re: A Standard and Clean Series A Term Sheet

#69

Post by icedchai » Mon, Jan 28, 2019, 7:33 PM UTC

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…

On the other hand, my options are underwater due to a down round. Some incentive, right?

Re: A Standard and Clean Series A Term Sheet

#70

Post by nlh » Mon, Jan 28, 2019, 7:35 PM UTC

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…

This sucks. Sorry to hear they did that to you and I’m glad you made out ahead of the game.

A company I worked with had the opposite approach — they not only allowed for early exercise, they allowed for immediate exercise of all unvested shares with an 83(b) election (and converted the vesting schedule into a clawback schedule). AND they offered a bonus for the amount of the exercise price.

So in effect, if you had $100k in stock vesting over 4 years, the company would bonus you $100k, you’d then exercise, file an 83(b) election, and you owned Common with a clawback provision.

You of course were liable for the income tax on the $100k, the company was liable for the employer portion of same, and when/if the shares were sold you’d be liable for capital gains accordingly, but overall this seemed like an eminently fair offer to employees and cost the company only the employer portion of the income tax on the bonus.

Everyone loved it and employees felt respected and treated fairly. Why don’t more companies do this?