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The Handshake Deal Protocol

ycombinator.com

171–180 of 237 posts

Re: The Handshake Deal Protocol

#171
YC has helped shape many ways in which modern startups do business and I could see this protocol adding to this by setting minimum expectations for defining who is truly "in" on a funding round before the binding documentation is done.

I see it as a remote risk that any such exchange would be treated as a legally binding contract. Too many essential terms would be missing, as for example in the case of a bridge note such things as time to maturity, interest rate, size of equity raise triggering mandatory conversion, etc. While the otherwise missing essential terms might be supplied by a term sheet used by the startup as a basis of discussion, such term sheets invariably make clear that they do not become legally binding until definitive documents are signed. To say, then, that one is "in" on such a term sheet would signify no more than what one signifies by actually signing it: that is, the investor becomes morally bound to negotiate in good faith until the documentation is prepared and signed and also morally bound to participate when such documentation is prepared in good faith and along customary lines. Of course, beyond the legal hurdles, there is the not insignificant issue of how either an investor or a startup would be treated in a tight-knit community such as YC if the person becomes known as being "sue happy." Could such lawsuits ever come about? Yes, and there may be unusual cases where the parties had had a true meeting of the minds, or where one party relied to his detriment on the other's statements and conduct such that a court might find an enforceable contract, but the practical risk of this happening would be near zero for almost all such cases - enough so, I think, that it may be effectively disregarded.

What the protocol does do is help prevent misunderstandings, inadvertent outcomes, and the occasional deliberately weasly overreaching that can occur with informal verbal exchanges. It says to the investor: do I really have a commitment from you such that, should you back out, your reputation will take a hit? It says to the startup: pin your investors down to the point where you can't be double-dealt but also make sure the commitment you think you have is real and not a product of your own wishful thinking.

I can see this working beautifully as a first step within YC. Beyond that, it will work as people come to terms with its existence and see it as useful. For its purpose, it is really an elegant solution to a knotty problem and therefore worthwhile.

Re: The Handshake Deal Protocol

#172
Dishonest men live at all levels.

This doesn't solve the original problem: What you suggest won't solve the issue of investors taking advantage of startups or the other way around. They will simply play another looser version of the handshake as you want it to exist. Anyone that is eager enough will get into this space before they are ready and be subject to the same sharks.

But not every investors is bad, for if they were they would earn an untrustworthy reputation.

The handshake deal first started as a way to avoid legal or financial promises. By giving the handshake such rules, you are diminishing it's intrinsic value as a "safety zone" for both parties to freely communicate. But of course, this shared information can be used to one of the parties advantage over the other.

Now, as another step towards building confidence in the investor/startup relationship, this is a great idea. It refines, offers some support, and starts communication between the parties on a smaller scale.

Re: The Handshake Deal Protocol

#173

Earlier quoted context omitted.

There is a written component to the protocol: The follow up email/text. "This is to confirm you're in for X." "Yes."

I do wonder what happens without step 4 occurring.

I wondered this too. How long could an investor wait before sending the "Yes" and have it still considered valid? Could the investor not reply for a few weeks or months and only send the "Yes" once the startup is growing and worth more than the initial deal's valuation?

I think there needs to be an explicit timer between step 3 and 4. Something on the scale of a few hours or at most a few days.

Re: The Handshake Deal Protocol

#174
To avoid confusion I personally think it also makes to be able to define the applicable standard as part of the protocol.

'$100k at a $5 million cap on standard YC terms'

Where standard YC terms refers to an existing terms template or you could refer to another set of standard terms by name.

Explicit Doctype

Re: The Handshake Deal Protocol

#175

Seems like a good idea. One issue-- What if the investor doesn't immediately respond to the e-mail? Wouldn't that be sort of like the "partial yes" free option from the article, where they could wait until terms are (or are not) more favorable but still have a seemingly valid claim on an initial agreement? Perhaps there should be a time limit, or the start-up can have the option of sending a second e-mail withdrawing…

I think in that case, the expectation is that you (as a founder) have no obligation to "keep a place in line" for them. If they never responded, you can consider it a "no."

When is the investor considered to have "stepped out of line"? an hour, a few days, a week or more? What happens if the investor doesn't reply, the startup assumes the no reply is a no, and weeks later the investor sends an out of context "yes" hoping to cash in on the terms of the earlier deal?

I know this sounds like a petty concern for a "handshake deal" but the startup's e-mail at step 3 creates a paper trail that an unscrupulous investor could abuse.

Re: The Handshake Deal Protocol

#176

Earlier quoted context omitted.

There is a written component to the protocol: The follow up email/text. "This is to confirm you're in for X." "Yes."

I do wonder what happens without step 4 occurring.

Legally, that's murky. There's still the oral agreement. Others have suggested that the oral agreement would be unenforceable due to the statute of frauds. But I don't think it actually applies here. So I think the oral agreement might, in principle, be enforceable. Being practically enforceable is another matter.

That being said, it appears the intention of the protocol is not to recommend a set of best practices for forming legal agreements, but rather to establish some community norms. I think the assumption is that anyone who violates the community norms will suffer a loss of reputation.

In that light, the analysis becomes easier. If step 3 happens and the investor subsequently goes quiet--failing to deliver a "yes" or "no"--then the investor has violated the community norms. (Even a "no" might be considered poor form following the oral deal, but it's certainly better than ambiguous silence.) Presumably, some community self-policing happens at this point, and if the investor remains obstinate, then word spreads and the investor is shut out of future deals.

Re: The Handshake Deal Protocol

#177
post #32

Why not do something creative like have the investor sign a dollar bill (of any denomination) and give it to the founders? Every founder comes prepared with some cash in their wallet, and then when you confirm a deal the founders ask the investors to sign the dollar bill with a Sharpie/pen. On it would be some sort of short-hand for the deal valuation... Cash is more ubiquitous than phones - even impromptu, it's high…

>Cash is more ubiquitous than phones Are you sure? Right now I have a phone but I don't have any cash.

Yep, here in NZ I never have cash and make electronic payments for everything (even $1 convenience transactions).

Re: The Handshake Deal Protocol

#178
Doesn't this encourage rushing complex decisions? Aren't handshake deals best suited for inherently simple transactions? Diamonds were mentioned, futures traders (in the old school pits) are another.

In other words, does this solve the wrong problem? If venture deals were as simple as diamonds, would such a proposal exist?

I'm no VC, but it seems like it's easy to get a contractual "meeting of the minds" when you're talking about simple things, and this does nothing to simplify things unless you have standard paperwork to go along with it. Are those details not the main destabilizing influence? (this could very well not be the case - as I said, I'm no VC).

Re: The Handshake Deal Protocol

#180

Earlier quoted context omitted.

Thanks you. A lot of people commenting on this thread don't seem to realize that oral contracts are just as legally valid as written contracts (as long as all the elements of a contact are present), email records notwithstanding.

Not necessarily. In New York state for example, it's required that any contract worth $500 or more be written. Oral contracts over $500 aren't enforceable.

You could make a similar reservation about written contracts, as the scale of formality goes even higher. Some kinds of contracts require a notary and the worst ones might even require a priest or a rabbi :)
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