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

Re: A Standard and Clean Series A Term Sheet

#161

Post by jasonkwon » Tue, Jan 29, 2019, 9:53 AM UTC

vxNsr wrote: post #126

akharris wrote: post #91

Earlier quoted context omitted.

It doesn't matter where the company raising an A started, it is usually incorporated in Delaware. If the company incorporated elsewhere, it will almost always reincorporate in Delaware prior to raising an institutional round. This isn't true for certain international jurisdictions, but within the US, it is a near certainty.

Right, I just thought it was a funny quirk of our legal system.

Network effects don't just exist in tech.

Delaware has the most developed corporate law and support services for corporate transactions (you can file charters, mergers, etc. within an hour there; good luck doing that in most other states, including CA). Every company that incorporates in Delaware adds further value to every other company that's in Delaware. Each marginal company adds to the Delaware legal corpus and support structure because (1) it ensures Delaware has the greatest variety and largest supply of potentially significant corporate legal cases, which means it has the greatest variety and largest supply of actually adjudicated cases and thus developed and stable law, and (2) it pays Delaware annual fees for those support services. This in turn attracts more companies to incorporate there because of that ever expanding corpus/infrastructure. And so on and so forth.

Re: A Standard and Clean Series A Term Sheet

#162

Post by ig1 » Tue, Jan 29, 2019, 10:27 AM UTC

gowld wrote: post #107

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…

> will often argue against standard terms What's that like? Are you competing with other investors? Or do founders agree to forgo funding because they don't like anything on offer?

Generally from what I've seen in the market founders will typically either come around to accepting the terms or will raise money from non-VC source (corporates, PE funds, etc).

Re: A Standard and Clean Series A Term Sheet

#163

Post by ig1 » Tue, Jan 29, 2019, 10:29 AM UTC

ig1 wrote: post #41

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.

If it's essentially a growth round labelled as an A you can normally negotiate the vesting schedule, but if you're at a standard Series A point, then it's unlikely you'll be able to change it unless you're a super hot deal. It'll likely take 7+ years from a Series A to an exit, if a founder leaves straight after funding and keeps all their equity, that's hugely demoralizing to the rest of the founders. They'll have t…

I realized the above might not have been clear: you can potentially negotiate the length of vesting period, but not the existence of vesting period.

Re: A Standard and Clean Series A Term Sheet

#164

Post by anuraaga » Tue, Jan 29, 2019, 2:03 PM UTC

This is really helpful, thanks a lot! Just wondering, is the template released as Creative Commons or anything similar? I'd like to use it in some teaching material but only if it's intended use.

Re: A Standard and Clean Series A Term Sheet

#165

Post by zeckalpha » Tue, Jan 29, 2019, 2:10 PM UTC

tschellenbach wrote: post #101

The only surprising bit for me was the dividends. Most terms sheets I've seen don't require the 6% dividend. Seems weird.

Noncumulative preferreds aren’t required in the same way as cumulative preferreds.

Re: A Standard and Clean Series A Term Sheet

#166

Post by lmeyerov » Tue, Jan 29, 2019, 3:32 PM UTC

jasonkwon wrote: post #61

pbiggar wrote: post #44

Earlier quoted context omitted.

> 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.

Ya... Preference means higher valuations means more cash. So employees can get less diluted (upside), higher salary (downside), and bigger team (derisking=both). Removing will lose those.

Removing preference may seem like it more strongly aligns existing team during critical events... But that'd get priced in to the above, say by 80% based on today's preferred vs common. Ouch!

Todays push to 1x participating vs higher in older days is great. I do agree about misalignment during some critical events..

Re: A Standard and Clean Series A Term Sheet

#167

Post by dkoston » Tue, Jan 29, 2019, 3:39 PM UTC

erichurkman wrote: post #104

ddebernardy wrote: post #100

Earlier quoted context omitted.

Why Delaware? I'm like, I grok it's a fan favorite and all for various reasons, but for those who aren't savvy about it, why Delaware? (And ideally: why not Delaware? Given that the gist of the criticism about it is that it hugely favors the investors over the founders and the employees.)

Delaware Court of Chancery is like a standards body for anything else: it's a set of well known, public rules. Every major law firm has extensive experience in it. Every major investor's law firm has extensive experience in it. It doesn't use juries, it uses judges. Cases can move very quickly. The Chancery is well-funded, and the judges have deep experience in corporate law.

To follow on to eric's comment, there are two major aspects of the law:

- what is written as law

- how courts rule

The most important aspect is "how courts rule". This is because law is open to interpretation by those ruling on it.

The main upside of using judges instead of juries is that precedent is real. In a jury trial, you are relying on a random group of people to choose the outcome. In a trial ruled by a judge, you can reasonably expect that judge to rule in a similar fashion as they have on similar cases or based on precedent of previous cases.

Having a more predictable outcome that eliminates the "wild card" aspect of juries allows your representation to give you better legal advice as they can study how the courts have ruled in the past and give advice that will likely put you on the correct side of the law.

Re: A Standard and Clean Series A Term Sheet

#168

Post by icedchai » Tue, Jan 29, 2019, 4:14 PM UTC

rsweeney21 wrote: post #123

Former founder here. I wish I had had this when I was raising my series A. I lost control of the board at my series A when the VC said that a 2-2-1 structure would be better for everyone. 13 months later, I was fired from the company I had started. The risks are real. Had I known what a standard, clean series A term sheet looked like, I could have just pointed to this term sheet on ycombinator.com and said - "Make it…

At least you made to series A. I know guys who didn't make it through a seed round without loss of control.

Re: A Standard and Clean Series A Term Sheet

#169

Post by the_watcher » Tue, Jan 29, 2019, 5:10 PM UTC

cdolan wrote: post #147

jjeaff wrote: post #122

Earlier quoted context omitted.

To me it is totally unreasonable. We had a series A investor that required that. Their attorneys poked around and argued about every little thing and charged us $1200 an hour. They even had a $50k cap in the documents which they asked the VC to raise once they saw they were going to be able to exceed. The VC of course agreed because it wasn't his money and then proceeded to pressure us to accept it. We had already wa…

If my company is going to pay your legal fees, then they work for me, not you [sic] and I will reserve the right to fire them This the most logical comment on this thread. I can't believe people accept paying a VC's legal bills during a negotiation. VC's are in the business of doing deals, and have their own legal retainers to work on those deals - not to mention a fan favorite movie "My Cousin Vinny" teaches every A…

> not to mention a fan favorite movie "My Cousin Vinny" teaches every American that giving $1 to a lawyer creates client-attorney privilege.

Yes, but in this case, you aren't paying the lawyers, you're paying the bills that the lawyer is charging their clients, the VC. Essentially, it's a reimbursement where you are paying for the VC's A/C privilege.

Re: A Standard and Clean Series A Term Sheet

#170

Post by nlh » Tue, Jan 29, 2019, 7:04 PM UTC

lostdog wrote: post #137

nlh wrote: post #70

Earlier quoted context omitted.

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 $…

What a great step in the right direction! The $40k+ you could owe in taxes is still a problem. Perhaps the company could give you an open-ended loan of the $100k (that you paid back if you returned the stock, or after a good exit).

Agreed, but: I think that might cross the line into what a loan actually is vs. what income actually is (or at least the IRS might have something to say about it).

I know the $40k in taxes sucks, but if you step back and think about it, it's actually quite "fair" (ignoring fundamental arguments about whether taxes are fair heh ;).

You are receiving $100k in stock options/stock. That will grow over time. I think it's fair to be taxed on that stock as income (since it is income! you're being given an asset) and then, later, be taxed on the gain of of that asset (if there is a gain). If you leave the company, they'll have the option to buy back any clawed-back stock, so you could even end up ahead (let's say you vest 50% then leave, so company pays you $50k for the unvested/clawed-back stock -- then you're actually ahead of the game by $10k net of taxes).