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What exactly would constitute founder-friendly seed / series A terms in the area of future investor participation rights? Are we literally saying any right of f
by abalone 10y ago
What exactly would constitute founder-friendly seed / series A terms in the area of future investor participation rights? Are we literally saying any right of first refusal is onerous, or is it just the multiple that gave Lightspeed up to 50% of the next round (which sounds like a 2-2.5X multiple)?
Sam Altman has a right of first refusal provision in his "founder-friendly term sheet". At least I think he does.. he doesn't call it a ROFR, preferring the plainer language of "investor participation rights". But it's there and even the multiple is left as an open variable.[1]
So are @sama's terms actually spat-worthy?
[1] http://blog.samaltman.com/a-founder-friendly-term-sheet http://blog.samaltman.com/a-founder-friendly-term-sheet
- nikcub 10y agoThat's just a prorata right so that investors can maintain their holding in future rounds
- abalone 10y agoIsn't that a ROFR? Please explain the difference.
- argonaut 10y agoPro rata is just ROFR with a 1x multiple, yes, so it seems it was the particular multiple (anything greater than strictly proportional) that was onerous.
- libertymcateer 10y ago> Pro rata is just ROFR with a 1x multiple, This is incorrect. See my comment above.
- libertymcateer 10y agoA right of first refusal is the right to purchase the shares offered by a company to someone else. So if VentureBros wanted to invest $10M in TheGuild, and TheGuild's old VC, ImpossibleIndustries, had a ROFR, ImpossibleIndustries could block VentureBros and buy the same shares for $10M. Pro-rata participation rights means that if you sell shares to a third party, the rightsholder gets to purchase more stock from the company in order to maintain their percentage share so that they are not diluted. So if ImpossibleIndustries owned 10% of TheGuild, and VentureBros then invested $10M and got a certain percentage of TheGuild, ImpossibleIndustries would have the right to buy more stock of TheGuild in order to ensure that, after the transaction, ImpossibleIndustries still had 10% of the total shares of the TheGuild.
- harlanlewis 10y agoI am only very slightly disappointed you didn't find a way to work ConjecturalTechnologies into this.
- libertymcateer 10y agoNext time. I will be posting more about this sort of thing in the future (I am a lawyer who codes, and it is amazing how frequently tech people get law wrong and vice versa) - I will likely stick with Venture Bros examples. Go team Venture.
- libertymcateer 10y agoNo, this is wrong. There are both participation and ROFR. It is clearly labeled as such. This is a fairly favorable founder term sheet. I negotiate startup investment fairly often - this is a decidedly equitable offer.
- nikcub 10y agoThere's nothing wrong about what I said - that investor can't block a future round. These terms are pretty common in the valley, to think thy suddenly give investors a right to refuse other investors in future rounds is frankly ridiculous The terms Jeremy had with Snap were different, and they didn't get in the way of the entrepreneur in any case since he agreed to move out of the way (his reputation is worth more than follow-on rounds one snap) That's the best protection entrepreneurs have - investors build their business on their rep. No good or reputable investor is going to burn that for a single term
- libertymcateer 10y ago> There's nothing wrong about what I said You said that @sama's term sheet didn't have a rofr, just participation rights. That is incorrect. It has both. > that investor can't block a future round. This is expressly what a right of first refusal, or ROFR, is. To be precise: they can prevent the next purchaser from coming in, though they can only do so by making the purchase themselves. If they cannot afford to, they cannot block. The round will, itself, proceed, but not necessarily with the outside investors. > to think thy suddenly give investors a right to refuse other investors in future rounds is frankly ridiculous They 100%, unequivocally, absolutely do. This is the central, core purpose of a ROFR. It happens quite often. Btw, I checked out your profile. I very much respect your work.
- libertymcateer 10y ago@sama's terms are fairly equitable. I am a corporate lawyer with a substantial practice in startups and software (I also code in node, and used to work in LAMP and ANSI C way back in the day). I do a fair number of startup investment rounds. These are reasonable terms. They don't bend over backwards for the company, they are not a land-grab by the investor. Are there 50 other ways from Sunday to also have equitable terms? Yes - every deal is different, which is why you need a lawyer, and depending on the context, different terms can be equitable. In general, though, this is pretty "content-neutral." Note: I am not your lawyer. If you need a lawyer - get a lawyer. But yes, my handle is my actual name (so you can look me up to see that I am not just an armchair IANAL). As far as I know, I am the only lawyer named Liberty around.
- MegaButts 10y ago> As far as I know, I am the only lawyer named Liberty around. I love this.
- libertymcateer 10y ago> MegaButts I love this.
- hilem 10y agoSo is @abalone correct in thinking its just the multiple in Snap's case that made the situation onerous then?
- libertymcateer 10y ago