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This is a really superb and thoughtful piece on the funding process. The only issue I would take is with the idea that funding terms will become standardized an
by grellas 16y ago
This is a really superb and thoughtful piece on the funding process. The only issue I would take is with the idea that funding terms will become standardized and the process routine. While, even as a lawyer, I would actually love to see this happen (we prosper right along with our startup clients and no one benefits from the waste that occurs with funding games), I have not seen this happen even as all sorts of standardized documents are now widely available to facilitate it. It can and does occur if the investors want to settle for terms protecting their basic interests but giving them no special advantages (what I call vanilla terms). That said, only the friendliest of investors will do this, and by "friendly," I mean in relation to the founders, and this usually means only friends and family or perhaps an individual angel or two that has a long history with one or more of the founders and wants above all other things to help promote the founders' interests. The rest of the angels, and most certainly the institutional ones (so-called "super angels") continue routinely to press for special advantages of one type or other. With special advantages come special terms and with this comes lawyer review, back-and-forth negotiations, and the like. In this sense, absent a huge shift in the balance of power toward founders, I don't see purely standardized documentation and routine processing becoming the order of the day anytime soon. Others may differ, and I may be wrong, but that's how I see this based on considerable day-to-day experience in this field. That said (for what it is worth), this is a brilliant essay that concisely encapsulates the important trends one will encounter in early-stage startup funding, and it should be widely disseminated to all who might have an interest in this field.
- donaldc 16y agoAs the amounts invested in early stages get smaller, and some of the Series A rounds are replaced by angel rounds, there will be an economic incentive to move toward more standardized terms for these early rounds. The less money being invested at a given stage, the more conspicuous the lawyer fees for special terms will be.
- peripitea 16y agoHow valuable are these non-vanilla terms to investors? Presumably you can get anyone to commit to vanilla terms for the right price. Then it's just a question of making big investors care less about these terms (e.g. by repeatedly demonstrating that investments can succeed without them), or taking more investments from people who put a lower premium on the terms (e.g. super angels).
- grellas 16y agoA thoughtful analysis by a knowledgeable lawyer (Yokum Taku of WSGR) of various seed-stage terms and their use in standardized sets of financing documents appears here: http://www.startupcompanylawyer.com/2010/03/14/how-do-the-sample-series-seed-financing-documents-differ-from-typical-series-a-financing-documents/ http://www.startupcompanylawyer.com/2010/03/14/how-do-the-sa.... As appears from his useful chart comparing the various standard sets, investors (and lawyers) just have different ideas of what they regard as important for different types of investments. Jason Mendelson, a well-known lawyer-turned-VC, took this further in a piece entitled "Why There Will Never Be a Standard Set of Seed Documents" (http://www.jasonmendelson.com/wp/archives/2010/03/why-there-will-never-be-a-standard-set-of-seed-documents-a-k-a-why-brad-feld-will-fail.php http://www.jasonmendelson.com/wp/archives/2010/03/why-there-...), in which he gets into more details about how people differ on what protections and terms to seek when making early-stage investments.
- chris123 16y agoWith respect to this this article, what would be helpful would be some links to actual convertible notes with caps and other provisions mentioned in his piece. Anybody have anything to share with the community?
- terra_t 16y agoI like the part at the end where he says that "employers are the main competitor to angel investors" -- that could be the beginning of a whole new essay...