91–100 of 172 posts
I love this line: Company: [_______], A Delaware Corporation. Because no one is gonna incorp anywhere else. Despite 90% of SV companies starting in California.
This isn't true for certain international jurisdictions, but within the US, it is a near certainty.
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…
Bad preferences happen when Founders are overoptimistic or focused on optics (like a postmoney of $1.00B). Even the standard 1x/nonparticipating reflects a mismatch in optimism. Few founders would accept the valuations that would come with an all-common investment, so it's rarely discussed. Yes employees suffer along with the founders when bad preferences are chosen. But that's still the founders fault, not the inves…
My obvious point is that founders and employees should conspire whenever possible - acting in their shared interest - to eliminate investor-favorable liquidity preferences as a common part of start-up term sheets.
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Are you starting a (venture-scale) company? Learning this language is critical. Are you working for a startup? Becoming more familiar with this language is helpful - you can figure out whether the founders/executives know what they're doing or not. Are you working for a large company? Learning this language will not provide much benefit for you IMO.
If the answer to either of the first two questions is yes, where would I go to learn the jargon? (I do know about google, I'm just hoping there's a good resource that has everything so I don't need to search individual terms).
Earlier quoted context omitted.
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?
The broader point is that investors should eat the same dog food as the founders and early employees, including when it comes to common shares and no liquidity preferences. The fairness point you asked about includes removing preferred shares, you're splitting it as though I was only talking narrowly about an issue of a 1x preference. I fundamentally disagree with start-up investors receiving preferred shares as a no…
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Ok... So how would you enforce it? It does not seem to form a contract. I realise that this is mostly US law and that my limited knowledge relates to British law. So with that in mind, my understanding is that a simple promise is basically not legally enforceable.
It can be enforced with a lawsuit like this, when an investor doesn't care as much about their reputation with founders: https://www.bloomberg.com/news/articles/2018-04-25/crypto-bi...
It's quite obvious that a legal dispute may be settled in court. We do not know the details of the case you quoted so it's difficult to comment.
I'm asking specifically about the template that is posted here because it looks like a simple promise and, as mentioned, these have no value in many jurisdictions. I suppose I'm asking how it works in Delaware, basically.
I suspect that the first reply I got is actually it...
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?
For example, if the founders take $1M in funding on a $2M post-money valuation, then end up losing $1M to excessive payroll costs to insiders and sell the remnants of the company for the pre-money valuation, the investors are out half their money without a liquidation preference. In short, the liquidation preference means that any losses come out of founder equity first, rather than the new cash infused in the business. This is important because the founders control the company and can choose to take courses of action that impoverish the company at their personal benefit.
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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?
We send people that link all the time to help them understand option pools. The main point of that post is to make it clear to founders that when an investor is saying they'll invest $X to get 20%, the dilution is more than 20% because of the impact of the pool. I think if the pool is not part of the premoney, investors just adjust the valuation to compensate. Just focus on the final output. Take the term sheet and w…
I'll note that in every case where someone has asked for X pre-money, they have asked for less than X in the post-money. That's why I consider that term to be dirty - it's purely a means of obscuring the real valuation, and has nothing to do with employee ownership.
Earlier quoted context omitted.
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?
Well, selling the company for the post-money valuation will give the investors their $X back. The thing that the liquidation preference works is preventing certain types of control fraud. For example, if the founders take $1M in funding on a $2M post-money valuation, then end up losing $1M to excessive payroll costs to insiders and sell the remnants of the company for the pre-money valuation, the investors are out ha…
Earlier quoted context omitted.
Are you starting a (venture-scale) company? Learning this language is critical. Are you working for a startup? Becoming more familiar with this language is helpful - you can figure out whether the founders/executives know what they're doing or not. Are you working for a large company? Learning this language will not provide much benefit for you IMO.
If the answer to either of the first two questions is yes, where would I go to learn the jargon? (I do know about google, I'm just hoping there's a good resource that has everything so I don't need to search individual terms).
We used an older edition as a textbook in a Venture Capital seminar back when I was in law school.
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.