26 ms·

A Standard and Clean Series A Term Sheet

623 points by akharris 8y ago

rexreed 8y ago
Curious to know what the "typical" ranges are for some of the bracketed sections: * What are typical / optimal post-money option pool sizes? * What are typical / optimal founder vesting schedules? * What are the usual ratios of lead investor / follow-on investor amounts? It seems that the majority of the Preferred can vote to change the # of directors - wouldn't that offset the initial founder-friendly board setup or am I missing how that vote is used?
- akharris 8y ago
  Ranges we see: Option pools: 10-15% Vesting: If there are new rules here, they are around re- vesting and highly dependent on how long the company has been around. *Ratios: A bit harder to say, but the lead is usually taking a significant majority of the round.
akharris 8y ago
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.
- timhaines 8y ago
  How commonly do you see each of the voting/veto rights you listed negotiated? What are some others that may be listed that you'd deem inappropriate?
  - jasonkwon 8y ago
    Some minor wordsmithing that reflects lawyer and investor /founder preferences happens a fair amount. The veto on company sales breaks founder friendly occasionally (you need a decent amount of leverage). Some examples: 1. It doesn’t exist 2. It only applies to sales that return less than X multiple of investor’s capital invested 3. It only applies to sales where the founders are getting retention packages (from acquirer) that substantially exceed their recent compensation The veto on financings is present almost always. A founder would need rare leverage to get rid of it. On both of these vetoes though there are additional constraints on abusive usage by investors — reputation being the most obvious one.
- sonnyblarney 8y ago
  What are 'standard, broad based weighted average anti-dilution rights' in this context? Surely early investors will be diluted, so what are these peculiar rights referring to?
  - jasonkwon 8y ago
    Good question. The anti-dilution right is an adjustment to the investor's shares that occurs when the company does a down-round. The "broad-based" qualifier is a reference to the most company-friendly version of this because it requires the adjustment to take into account the scale of down-round in terms of dilution. For instance, if you closed a round at $20M post and then sold one share afterwards at $10M post, the adjustment would be negligible. There are other variations of anti-dilution adjustments that would ignore such considerations. The anti-dilution adjustment is generally not something that applies to ordinary course dilution (like employee option grants).
- pbiggar 8y ago
  My reading is that this includes a pre-money option pool (aka the "option pool shuffle": http://venturehacks.com/articles/option-pool-shuffle http://venturehacks.com/articles/option-pool-shuffle), which while standard feels dirty. Any thoughts on this?
  - jasonkwon 8y ago
    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 work with your lawyer to model out how much you own after the round is closed. Is that a good deal or not? If you don't like it, there are multiple ways to increase your post-closing ownership. Moving the option pool into the post-money is one of the hardest ways to accomplish that because you are trying to move the investor up on both valuation and convention.
    - pbiggar 8y ago
      The last 2 rounds I was involved in moved the option pool into the post-money. In one case, the initial price was initally discussed and negotiated with the expectation of a post-money option pool. In the other, there was a term sheet with a post-money option pool so we asked the other term sheets to be rewritten using a post-money option pool (they changed their prices accordingly). 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.
  - pge 8y ago
    One thing I do in all my term sheets that might be a useful addition is to include a summary cap table showing the founders how much they own and our fund owns post-funding. That pre-empts any confusion over the impact of an option pool increase on each party.
- itistru 8y ago
  Question: how did you think about giving pro-rata & information rights in this term sheet? It looks to me that the Other Rights & Matters section grants it to _all_ investors. Is that typical in your experience?
  - jasonkwon 8y ago
    Major investors concept (investor has to have invested at least $X) is often added in the definitives. Longer term sheets just state a threshold dollar amount; shorter ones (like this one) just skip that definition and just add it in the definitives.
    - itistru 8y ago
      I'm no fan of long term sheets, but IMO, this term sheet doesn't just punt that term to definitives; it gives me the expectation that all investors will receive "major investor" rights without dollar or ownership thresholds. Specifically, I feel that way because the "major investor" rights (ROFR, co-sale, pro-rata, info) are are in-line with anti-dilution and registration rights, which are typically afforded (in varying degrees) to smaller investors. Were I an existing investor or angel, the definitives adding a threshold would feel like a retrade of the term sheet. Especially if the intent is to help unfamiliar founders & angels understand what's a "clean" or fair deal, I'd put in a vote that a v2 of this term sheet would clarify the applicability of rights to smaller investors, maybe with some "batteries included" guidance on that point.
- ddebernardy 8y ago
  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.)
  - erichurkman 8y ago
    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.
    - dkoston 8y ago
      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.
  - notyourday 8y ago
    Delaware Court of Chancery, tons of precedent in corporate case law
- anotherfounder 8y ago
  I was under the impression that more and more founders (and even investors) are speaking out against the idea of legal fees paid by the founders. Is that only at the seed stage and acceptable at Series A?
  - jjeaff 8y ago
    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 wasted so much time with these guys and racked up our own legal bills. So we were pretty much at their mercy. If my company is going to pay your legal fees, then they work for me, not you and I will reserve the right to fire them and find someone really cheap instead.
    - cdolan 8y ago
      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 American that giving $1 to a lawyer creates client-attorney privilege. It's amazing that without being sued (and then losing on appeal in court), people are willing to pay out of pocket for a lawyer to actively work against them in what could be one of the most important deals of a founder's life.
      - the_watcher 8y ago
        > 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.
- marvindanig 8y ago
  Do the terms (and fundability) remain same/similar for Delaware PBCs as well?
- sneak 8y ago
  The post refers to the actual resulting contract (100+ pages) that the lawyers generate as a result of these terms. Are there any examples of these for the curious to read? I know it’s out of scope for the post topic but as someone who hasn’t read a term sheet before and is curious, I am also curious about reading a full series A sale contract.
  - itistru 8y ago
    Take a look at the Model Legal documents from the NVCA: https://nvca.org/resources/model-legal-documents/ https://nvca.org/resources/model-legal-documents/ (free to download, requires giving up email) It is typical that the term sheet results in ~5 different contracts: the Stock Purchase Agreement (through which the company actually sells stock), the Investor Rights Agreement, the Voting Agreement, the First Refusal and Co-Sale Agreement, and changes to the company's Certificate of Incorporation. There are also sometimes opinions of counsel and other "ancillary" documents which are just as important but not typically negotiated as they're very standard. It is mind-bogglingly routine that a company pays $30k to "expand" from the term sheet to definitive contracts, and then the VC firm spends an additional $15-30k++ (reimbursed by the company) to review that expansion to make sure the other firm did it right.
wasd 8y ago
* What should someone do if they get push back from an investor when asked to this term sheet? * If this term sheet is used, can we avoid the legal costs of a Series A?
- jasonkwon 8y ago
  It’s meant to provide transparency on what good and clean terms are. It won’t generate negotiating leverage for you if you don’t have any, though on the margins it might help you persuade someone that a term is “market.” Most of the legal costs don’t arise from the term sheet. They come from legal diligence and drafting the definitive docs.
- Kpourdeilami 8y ago
  Probably raise from elsewhere. We got a term sheet that included all the bad things mentioned about control in there. They wanted a 2-2-1 board + a whole bunch of protective provisions about requiring their approval for almost anything. Overall wasn't a pleasant experience and we would have saved months of our time had we not bothered working with them. We got very lucky that things didn't work out with them
- cascom 8y ago
  The legal fees come from the definitive agreement not the term sheet.
adventured 8y ago
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 offload even more of their risk onto the founders and early employees. Liquidity preferences should have never become common with start-ups, they should be quite rare. There is no more important territory for founders to be focused on taking back from venture capitalists than that. Liquidity preferences are a routine source of screwing over the founders and early employees. YC could do something tremendous for founders by fighting on their behalf to put that shifted risk back where it should be: with the investor; the founders and employees already shoulder enough risk as it is.
- tptacek 8y ago
  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?
  - adventured 8y ago
    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 norm. I think YC should take the lead in trying to strip liquidity preferences from the industry. They should become non-standard in most term sheets. Ideally they advocate up the chain further by leveraging their considerable influence to water down or eliminate liquidity preference whenever possible. YC has been a founder-friendly venture firm from the beginning, I believe one of the best pro-founder fights for them to pick is to work toward ending the standardization of liquidity preferences. It's currently backwards, liquidity preferences should be rare.
ig1 8y ago
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, bad VCs will often try and put onerous terms into term sheets which can hurt the startup in future fundraising rounds or liquidity events. While there's been a huge increase in transparency at the pre-seed/seed/SAFE fundraising stage, Series A and beyond is still very opaque. Great to see YC extending their work on transparency into the Series A stage!
- wolco 8y ago
  What are some of the fixed in stone parts of a series A that most vc will not move off of?
  - jasonkwon 8y ago
    I wouldn't talk in absolutes because having a ton of negotiating leverage can make everything fair game. But in an run of the mill deal, it's pretty tough to make a VC give up anything that's not in brackets.
    - jjeaff 8y ago
      Ya. If you are blowing up and VCs are knocking down the door to throw money at you, you can write your own ticket. Look at Zuckerberg who was able to do many rounds of funding while maintaining total board voting control.
- akharris 8y ago
  Glad you agree. Looking forward to seeing some (more) term sheets from you!
- 8ytecoder 8y ago
  How do we balance against an orthodoxy setting in? As a startup employee, it was unusual and impossible to ask for ISO options until recently. It's changing now. Why shouldn't there be terms in the agreement that felt perfectly reasonable a few years ago but seems unfair to the founder now? A standard form should be a guidance. It shouldn't become an unquestionable text.
nemo1618 8y ago
Pet peeve of mine: You should never take a raw screenshot of a Word doc, with its red and blue underlines, cursor, etc. Convert it to a PDF first or find a way to turn off the highlighting+cursor.
- seancoleman 8y ago
  Better yet, embed the PDF in an inline iframe so text can be copied, highlighted, etc.
  - akharris 8y ago
    A downloadable version of the doc is linked directly above the image. That does the job nicely, since it allows you to immediately edit.
    - sunsetMurk 8y ago
      newer browsers can actually just embed PDFs natively[0] in an iFrame, but there are more fault-tolerant ways to do it that provide a better ux. Cool note, Google Drive provides an embed code for PDFs[1] which I've found to be useful. Filestack also provides a great API for viewing PDFs in apps/browsers[2] that I use all the time. 0- https://pdfobject.com/static/ https://pdfobject.com/static/ 1- https://alicekeeler.com/2016/06/05/google-drive-embed-pdf/ https://alicekeeler.com/2016/06/05/google-drive-embed-pdf/ 2- https://www.filestack.com/docs/concepts/transform/#document-viewer https://www.filestack.com/docs/concepts/transform/#document-...
- deleted 8y ago
  [deleted]
Lordarminius 8y ago
This may seem like a slightly out-of-place question, but is there any equivalent term sheet for seed funding ?
- akharris 8y ago
  Our safe docs are pretty good for this: https://www.ycombinator.com/documents/#safe https://www.ycombinator.com/documents/#safe.
  - Lordarminius 8y ago
    Thank you.
  - tosh 8y ago
    iirc the SAFE doesn’t cover vesting, information rights and control rights (I guess this is because typically companies that YC invests in are set up with something like Stripe Atlas or similar?) In many European hubs the typical term sheets for seed financing are provided by Angels or seed stage VCs and typically aren’t as founder friendly as in the US. Having more information/a recommended seed term sheet from YCombinator that explicitly covers the above (or references Stripe Atlas) would help. Really appreciate all the documents and context that you are publishing. The impact is vast and goes way beyond the Valley and the immediate YC network.
    - ericd 8y ago
      AFAICT, the norm with SAFEs is that they're very hands off in terms of company operations, at least in SV.
      - tosh 8y ago
        ty for the clarification ericd
anonu 8y ago
This is extremely useful. Most importantly, I am glad that they included examples of what is non-standard. These are the real curveballs that are difficult for first-timers to gauge. whether they are "normal" to have on a term sheet or whether they're getting squeezed without really knowing.
- privateSFacct 8y ago
  Over 1x participating preferred I've seen a few times. A TOTAL nontransparent scam in my view.
johan_larson 8y ago
Is this term sheet descriptive or prescriptive? Are you telling us what standard straight-forward terms are right now, or what they should be right now (and would be, in a slightly better world)?
- jasonkwon 8y ago
  descriptive, but note the comment about the brackets.
mnemotronic 8y ago
I'm a software guy. Most of that sheet is a foreign language to me.
- robhunter 8y ago
  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.
  - vxNsr 8y ago
    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).
    - mhb_eng 8y ago
      Venture Deals by Jason Mendelson and Brad Feld is a good overview. If you want to get more technical, the NVCA publishes a list of their own "standard" documents, which go into depth on some of the standard and non-standard provisions and what they mean, but it's not quite as user friendly.
      - vxNsr 8y ago
        Thanks, I'll take a look.
    - matthewmcg 8y ago
      This book is pretty good and reasonably up to date: https://www.amazon.com/Entrepreneurs-Guide-Business-Law-4th/dp/0538466464/ref=sr_1_1?s=books&ie=UTF8&qid=1548709331&sr=1-1&keywords=dauchy+business+law https://www.amazon.com/Entrepreneurs-Guide-Business-Law-4th/... We used an older edition as a textbook in a Venture Capital seminar back when I was in law school.
motohagiography 8y ago
This is so valuable, just to have a reference point to ask, "so I've seen other sheets with X, what's the case for your preference?" I have neither raised or invested, but do a lot of negotiations and having an external reference for framing discussion creates a lot of value. Seed is still in front of me, but these templates remove a lot of friction. I was going to not-comment because it was just good news, but in case there was doubt, this is great.
entity345 8y ago
How enforceable is that "No Shop" clause that is said to be binding in the document?
- jasonkwon 8y ago
  I'm going to answer this question a little differently, because enforceability can also depend on facts and circumstances. Think of the binding / non-binding distinction as more of a social commitment signal. The No Shop means that once the company and investor both sign, they're pledging to work together to figure out this deal along these high level terms for the next 30 days. They've made a commitment to each other. Venture is a relatively small community and going back on your word gets around. Social consequences can be just as bad as legal ones.
  - entity345 8y ago
    Well yes... It is a promise. Your reply suggests that it's not binding ('legally' binding, obviously).
    - jasonkwon 8y ago
      It can be legally binding.
      - entity345 8y ago
        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.
        sethbannon 8y ago
        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-billionaire-sued-by-sequoia-after-funding-deal-goes-awry https://www.bloomberg.com/news/articles/2018-04-25/crypto-bi...
deanmoriarty 8y ago
I know this article focuses on founders, but I'd love to see something done in the industry for employees (especially early employees!) as well. One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave (4+ years, I was very early) all my equity was vested, and buying it required spending ~250k (USD!) between cost of exercising and AMT taxes, all while the company shares were illiquid as ever. The company had no interest in helping me, despite me asking for an extension to the option expiration, they were too bitter that I was leaving and creating significant "damage" to the business. It was incredibly painful and I felt very cheated and stupid for agreeing to those terms in the first place (actually faced some deep depression and anger against the world for a few months because of this, and thought about going to therapy), but what did I do in the end? I paid out the money. Yes, I wrote a check to my employer for 60k, and another check to the IRS for 190k, depleting my non-emergency savings (and this is from a very frugal person, who never even spent more than 8k on a car, car being my biggest expense ever). There were funds who would lend me the money, but wanted 50%+ of the proceeds, and if the company goes under you're still on the hook for a taxable event when the loan is forgiven. Luckily AMT for ISO exercise can be slowly (very slowly) recouped in future tax years (and the new tax law made it a bit easier by increasing the deduction and the phaseout limits), but I still had to waste so much of my after tax money just to leave with what I matured over the years. And that money is now sitting in the government pockets for years, producing me no interest and losing value with inflation until I recoup all of it. Fortunately, a year after I bought those shares one of the investors contacted me and bought some of my equity, so I was able to recoup all what I originally put in (and then some). But it's simply insane, and I am still in the hole for all that AMT that I will recoup in ~10 years, no less. Other coworkers who left and didn't have the money to come up with the exercise and tax liability, simply lost them, justifying to themselves "well, they're probably not going to be worth anything anyway" (which could be totally true even after paying thousands to exercise them!). It's a plain insult to startup employees. I wish all startup employees would rebel against this and refused to accept any startup offer unless there was early exercise paid by the company upon joining, or option expiration window of 10+ years. I, for one, know that will never __ever__ join another startup again for this reason.
mhb_eng 8y ago
One potential modification would be to add some language to the No Shop clause to allow the lead investor to approve any other conversations about the round. This can be helpful when the Series A round is larger, as the diligence by separate investors can proceed in parallel.
benmowa 8y ago
Very useful, thanks! Is access to financial statements implied? what about requiring audited financials? or is that not common/expense at that stage?
- akharris 8y ago
  Those are diligence items that aren't typically defined in a term sheet. You'll deal with that directly with the investor, potentially as a condition to close as worked out in the full docs.
- jasonkwon 8y ago
  Annual and quarterly unaudited is normally implied. Sometimes monthly too. Most good Series A investors understand that audited financials don't make sense this early and their lawyers will draft something like the audit requirement can be waived by the investor in any year, or that audits won't be required until 2-3 years out.
auvi 8y ago
are there any good book with lots of examples of term sheet/valuation math for startups?
- patio11 8y ago
  Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, Brad Feld.
  - auvi 8y ago
    great, i’ll get the book. thanks!
vxNsr 8y ago
I love this line: Company: [_______], A Delaware Corporation. Because no one is gonna incorp anywhere else. Despite 90% of SV companies starting in California.
- akharris 8y ago
  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.
  - vxNsr 8y ago
    Right, I just thought it was a funny quirk of our legal system.
    - jasonkwon 8y ago
      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.
tschellenbach 8y ago
The only surprising bit for me was the dividends. Most terms sheets I've seen don't require the 6% dividend. Seems weird.
- pedalpete 8y ago
  I was surprised by the % being included as I figured that would be decided by the board at the time a divindend is approved. I have no idea why a % which would be defined before knowing the details of the companies financial situation. I wonder if this is more of a protection against the board deciding on a dividend when it is in the best interest in the near term for the company to keep money in the bank. So defining 6% might mean "this company has so much cash that they can return a 6% dividend without harming the long-term potential". Perhaps if you aren't able to return 6%, you aren't ready to return a dividend at all?
  - Hongwei 8y ago
    Am also confused by this (and hoping this comment would get some love!)
  - hobbyjogger 8y ago
    The dividend provision just says that the common won't get a dividend unless the preferred has already received their 6% (per year). It doesn't mean that you couldn't issue the preferred a smaller dividend--that would just count toward the 6% but still wouldn't allow the common to get a dividend until the remainder is paid out to the preferred. It's relatively rare for venture backed startups to issue ordinary course dividends anyway (for the reason you stated, funding development/growth is typically seen as a better use of company cash to try to get to a big exit or IPO, etc.).
    - jasonkwon 8y ago
      Yes, this.
- zeckalpha 8y ago
  Noncumulative preferreds aren’t required in the same way as cumulative preferreds.
olliepop 8y ago
We're closing our seed round this week - this is such a good reference, especially because I have a technical background. Is anybody able to shed some light on the key differences between a seed term sheet and this Series A term sheet?
zxcvvcxz 8y ago
Question: do investors usually vest at the same rate as founders, or at all? E.g. if they put in 1M for 25%, do they legally receive the 25% of shares right away? What's typical here? In terms of investor vesting relative to the founders.
- patio11 8y ago
  Investors don't vest and (to a first approximation) can't be fired. (They can constructively "quit", by refusing to answer your emails, but they keep all their equity and you keep all their money.) The question of whether they "legally receive the shares right away" can be a bit more nuanced, particularly in e.g. a transaction for a SAFE or convertible note.
- mrnobody_67 8y ago
  Founders vest, VCs dont.
rsweeney21 8y ago
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 like that." I've found the Y Combinator resources to be some of the most valuable resources out there for startup founders. Do yourself a favor and familiarize yourself with what is available. It could help you not get fired from your startup.
- thedudeabides5 8y ago
  Yeah, thanks guys!
- xodast 8y ago
  Could you link to some of these resources , their start up school doesn't really include documents such as this.
  - allenleein 8y ago
    Here you go: https://www.ycombinator.com/resources/ https://www.ycombinator.com/resources/
- ascar 8y ago
  What's a 2-2-1 structure and how did it result in you getting fired? Edit: just saw it's in the article > The way in which founders most often lose control at the Series A is with a 2-2-1 board structure, i.e. 2 founders, 2 investors and an independent board member. The loss of board control is most significant because it means the founders can be fired from their own company.
- icedchai 8y ago
  At least you made to series A. I know guys who didn't make it through a seed round without loss of control.
mixmastamyk 8y ago
Does anyone have a link to a great intro on VC for dummies? I keep seeing these kind of posts but not the big picture in blog form. Maybe a thousand words or two, not too detailed.
logicallee 8y ago
Could someone here talk more about the "no shop" clause, which seems 100% geared toward giving a buyer better than a competitive price. But, the document says it is the only term that is legally binding! How is "nothing in this document is legally binding and the buyer doesn't have to buy, EXCEPT for the term that the seller may not talk to any other buyers in any way." What kind of sense does that make? Would you "accept" an offer to sell your car that says it isn't binding in any way except that you may not talk to anyone else about selling your car to them, for the next 30 days? Also since it says it is "legally binding" what are the remedies? What is the history of such a term? Why would founders agree to it and actually follow it?
andys627 8y ago
For real estate, your state’s realtor organization will have standard purchase forms available with a quick google search. With these, a title insurance company, and home inspector, you can easily do a private party real estate deal where everybody has reasonable insurance.
acjohnson55 8y ago
Do "A Standard And Clean Employee Equity Offer" next! Seriously.
- tanitall 8y ago
  I concur. Do you concur?
- deleted 8y ago
  [deleted]
HoyaSaxa 8y ago
This term sheet template is very investor friendly primarily because of the lack of detail. The Company has very little leverage after a term sheet is signed especially given a standard no-shop provision. You want to reduce the number of items that need to be negotiated later in the process as much as possible. This not only reduces the likelihood of having to agree to a less than favorable term that was not addressed in the term sheet, but also reduces legal costs (which the Company is paying). The post does make note of this: > Some great investors still send longer term sheets, but this has more to do with their preference for going a bit deeper into the details at this stage, rather than deferring this until the definitive documents. The definitive documents are derived from the term sheet and are the much longer (100+ pages) binding contracts that everyone signs and closes on. It’s common to negotiate a few additional points at this stage, though deviation from anything explicitly addressed in the term sheet is definitely re-trading. Also, in a few places, this term sheet refers to certain terms as being “standard.” That may seem vague and circular, but term sheets frequently do describe certain terms that way. What that really means is that there’s an accepted practice of what appears in the docs for these terms among the lawyers who specialize in startups and venture deals, so make sure your lawyer (and the investor’s lawyer) fit that description.
- logicallee 8y ago
  >especially given a standard no-shop provision. Why is the no-shop provision standard, especially given that this document says it's the only binding term? What's going on here? I'd like to understand it a bit more.
- agmiklas 8y ago
  Agreed. A founder should assume any ambiguity in a term sheet will be resolved in the investors favor (since you're very unlikely to walk away from a deal after signed). I preferred more comprehensive term sheets so that we could pin everything down while the investor was still in "courting mode". Something we did in our later financings was to (very politely) provide an interested investor with a fairly comprehensive (~7 pages) template term sheet that had blanks for the major economic terms, but otherwise fully specified all the details of the proposed deal. This kept things from drifting off "founder friendly" after signing and had the added bonus of making offers easier to compare.
wtvanhest 8y ago
I thought the original SAFE was on casetext.com. Too bad this wasn't loaded there as well.
55555 8y ago
Can someone please help me understand what common re-vesting schedules are for founders? Like, if I raise seed money, surely I'll have to agree to a reasonable 4-year vesting schedule. But then if I raise a series A, B, and C, do I have to agree to new vesting schedules at each raise? Will I then not fully vest until 4 years after my series C? Do I lose all my vested shares at each raise? On the one hand re-vesting seems unfair to me, but on the other hand if I were to give someone 20 million dollars I wouldn't want them to quit the next day. Also, sometimes you hear about founders being fired by their board. In this case, are they getting fully vested or are they just leaving with the equity they had vested at that point in time?
- jasonkwon 8y ago
  Re-vesting schedules are all over the map. Some amount of re-vesting is often required at Series A, but it largely has to do with how vested the founders already are. If for example they've been working on the company for only a year, the existing vesting schedule will probably be left alone. On the other hand, if they've been working on the company for multiple years and are close to fully vested at Series A, it's almost guaranteed that the Series A investor will ask the founder to re-vest some amount of shares (for the reason you describe). Re-vesting generally does not show up again after the Series A. If you get fired before you fully vest, whether you leave with the equity you have or all your equity is something you can negotiate as part of the vesting terms.
  - 55555 8y ago
    Thanks Jason
yayaa 8y ago
Can someone please explain each clause in layman’s terms. Thanks. Trying to learn the lingo of VC.
naveenspark 8y ago
Founders should invest time and effort to ask for more board seats. The YC doc is a good start but if you follow this to the letter you may lose control in your B or C when the B and C investor also want board seats. Also it’s important to keep in mind that there is no “standard.” Everything is always negotiable.
taherchhabra 8y ago
Is there any similar resource and guidance for seed/angel, thanks
dewafont 8y ago
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anuraaga 8y ago
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.

623 points by akharris 8y ago

Curious to know what the "typical" ranges are for some of the bracketed sections: * What are typical / optimal post-money option pool sizes? * What are typical / optimal founder vesting schedules? * What are the usual ratios of lead investor / follow-on investor amounts? It seems that the majority of the Preferred can vote to change the # of directors - wouldn't that offset the initial founder-friendly board setup or am I missing how that vote is used?

akharris 8y ago
Ranges we see: Option pools: 10-15% Vesting: If there are new rules here, they are around re- vesting and highly dependent on how long the company has been around. *Ratios: A bit harder to say, but the lead is usually taking a significant majority of the round.

akharris 8y ago

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.

timhaines 8y ago
How commonly do you see each of the voting/veto rights you listed negotiated? What are some others that may be listed that you'd deem inappropriate?
- jasonkwon 8y ago
  Some minor wordsmithing that reflects lawyer and investor /founder preferences happens a fair amount. The veto on company sales breaks founder friendly occasionally (you need a decent amount of leverage). Some examples: 1. It doesn’t exist 2. It only applies to sales that return less than X multiple of investor’s capital invested 3. It only applies to sales where the founders are getting retention packages (from acquirer) that substantially exceed their recent compensation The veto on financings is present almost always. A founder would need rare leverage to get rid of it. On both of these vetoes though there are additional constraints on abusive usage by investors — reputation being the most obvious one.
sonnyblarney 8y ago
What are 'standard, broad based weighted average anti-dilution rights' in this context? Surely early investors will be diluted, so what are these peculiar rights referring to?
- jasonkwon 8y ago
  Good question. The anti-dilution right is an adjustment to the investor's shares that occurs when the company does a down-round. The "broad-based" qualifier is a reference to the most company-friendly version of this because it requires the adjustment to take into account the scale of down-round in terms of dilution. For instance, if you closed a round at $20M post and then sold one share afterwards at $10M post, the adjustment would be negligible. There are other variations of anti-dilution adjustments that would ignore such considerations. The anti-dilution adjustment is generally not something that applies to ordinary course dilution (like employee option grants).
pbiggar 8y ago
My reading is that this includes a pre-money option pool (aka the "option pool shuffle": http://venturehacks.com/articles/option-pool-shuffle http://venturehacks.com/articles/option-pool-shuffle), which while standard feels dirty. Any thoughts on this?
- jasonkwon 8y ago
  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 work with your lawyer to model out how much you own after the round is closed. Is that a good deal or not? If you don't like it, there are multiple ways to increase your post-closing ownership. Moving the option pool into the post-money is one of the hardest ways to accomplish that because you are trying to move the investor up on both valuation and convention.
  - pbiggar 8y ago
    The last 2 rounds I was involved in moved the option pool into the post-money. In one case, the initial price was initally discussed and negotiated with the expectation of a post-money option pool. In the other, there was a term sheet with a post-money option pool so we asked the other term sheets to be rewritten using a post-money option pool (they changed their prices accordingly). 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.
- pge 8y ago
  One thing I do in all my term sheets that might be a useful addition is to include a summary cap table showing the founders how much they own and our fund owns post-funding. That pre-empts any confusion over the impact of an option pool increase on each party.
itistru 8y ago
Question: how did you think about giving pro-rata & information rights in this term sheet? It looks to me that the Other Rights & Matters section grants it to _all_ investors. Is that typical in your experience?
- jasonkwon 8y ago
  Major investors concept (investor has to have invested at least $X) is often added in the definitives. Longer term sheets just state a threshold dollar amount; shorter ones (like this one) just skip that definition and just add it in the definitives.
  - itistru 8y ago
    I'm no fan of long term sheets, but IMO, this term sheet doesn't just punt that term to definitives; it gives me the expectation that all investors will receive "major investor" rights without dollar or ownership thresholds. Specifically, I feel that way because the "major investor" rights (ROFR, co-sale, pro-rata, info) are are in-line with anti-dilution and registration rights, which are typically afforded (in varying degrees) to smaller investors. Were I an existing investor or angel, the definitives adding a threshold would feel like a retrade of the term sheet. Especially if the intent is to help unfamiliar founders & angels understand what's a "clean" or fair deal, I'd put in a vote that a v2 of this term sheet would clarify the applicability of rights to smaller investors, maybe with some "batteries included" guidance on that point.
ddebernardy 8y ago
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.)
- erichurkman 8y ago
  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.
  - dkoston 8y ago
    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.
- notyourday 8y ago
  Delaware Court of Chancery, tons of precedent in corporate case law
anotherfounder 8y ago
I was under the impression that more and more founders (and even investors) are speaking out against the idea of legal fees paid by the founders. Is that only at the seed stage and acceptable at Series A?
- jjeaff 8y ago
  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 wasted so much time with these guys and racked up our own legal bills. So we were pretty much at their mercy. If my company is going to pay your legal fees, then they work for me, not you and I will reserve the right to fire them and find someone really cheap instead.
  - cdolan 8y ago
    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 American that giving $1 to a lawyer creates client-attorney privilege. It's amazing that without being sued (and then losing on appeal in court), people are willing to pay out of pocket for a lawyer to actively work against them in what could be one of the most important deals of a founder's life.
    - the_watcher 8y ago
      > 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.
marvindanig 8y ago
Do the terms (and fundability) remain same/similar for Delaware PBCs as well?
sneak 8y ago
The post refers to the actual resulting contract (100+ pages) that the lawyers generate as a result of these terms. Are there any examples of these for the curious to read? I know it’s out of scope for the post topic but as someone who hasn’t read a term sheet before and is curious, I am also curious about reading a full series A sale contract.
- itistru 8y ago
  Take a look at the Model Legal documents from the NVCA: https://nvca.org/resources/model-legal-documents/ https://nvca.org/resources/model-legal-documents/ (free to download, requires giving up email) It is typical that the term sheet results in ~5 different contracts: the Stock Purchase Agreement (through which the company actually sells stock), the Investor Rights Agreement, the Voting Agreement, the First Refusal and Co-Sale Agreement, and changes to the company's Certificate of Incorporation. There are also sometimes opinions of counsel and other "ancillary" documents which are just as important but not typically negotiated as they're very standard. It is mind-bogglingly routine that a company pays $30k to "expand" from the term sheet to definitive contracts, and then the VC firm spends an additional $15-30k++ (reimbursed by the company) to review that expansion to make sure the other firm did it right.

wasd 8y ago

* What should someone do if they get push back from an investor when asked to this term sheet? * If this term sheet is used, can we avoid the legal costs of a Series A?

jasonkwon 8y ago
It’s meant to provide transparency on what good and clean terms are. It won’t generate negotiating leverage for you if you don’t have any, though on the margins it might help you persuade someone that a term is “market.” Most of the legal costs don’t arise from the term sheet. They come from legal diligence and drafting the definitive docs.
Kpourdeilami 8y ago
Probably raise from elsewhere. We got a term sheet that included all the bad things mentioned about control in there. They wanted a 2-2-1 board + a whole bunch of protective provisions about requiring their approval for almost anything. Overall wasn't a pleasant experience and we would have saved months of our time had we not bothered working with them. We got very lucky that things didn't work out with them
cascom 8y ago
The legal fees come from the definitive agreement not the term sheet.

adventured 8y ago

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 offload even more of their risk onto the founders and early employees. Liquidity preferences should have never become common with start-ups, they should be quite rare. There is no more important territory for founders to be focused on taking back from venture capitalists than that. Liquidity preferences are a routine source of screwing over the founders and early employees. YC could do something tremendous for founders by fighting on their behalf to put that shifted risk back where it should be: with the investor; the founders and employees already shoulder enough risk as it is.

tptacek 8y ago
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?
- adventured 8y ago
  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 norm. I think YC should take the lead in trying to strip liquidity preferences from the industry. They should become non-standard in most term sheets. Ideally they advocate up the chain further by leveraging their considerable influence to water down or eliminate liquidity preference whenever possible. YC has been a founder-friendly venture firm from the beginning, I believe one of the best pro-founder fights for them to pick is to work toward ending the standardization of liquidity preferences. It's currently backwards, liquidity preferences should be rare.

ig1 8y ago

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, bad VCs will often try and put onerous terms into term sheets which can hurt the startup in future fundraising rounds or liquidity events. While there's been a huge increase in transparency at the pre-seed/seed/SAFE fundraising stage, Series A and beyond is still very opaque. Great to see YC extending their work on transparency into the Series A stage!

wolco 8y ago
What are some of the fixed in stone parts of a series A that most vc will not move off of?
- jasonkwon 8y ago
  I wouldn't talk in absolutes because having a ton of negotiating leverage can make everything fair game. But in an run of the mill deal, it's pretty tough to make a VC give up anything that's not in brackets.
  - jjeaff 8y ago
    Ya. If you are blowing up and VCs are knocking down the door to throw money at you, you can write your own ticket. Look at Zuckerberg who was able to do many rounds of funding while maintaining total board voting control.
akharris 8y ago
Glad you agree. Looking forward to seeing some (more) term sheets from you!
8ytecoder 8y ago
How do we balance against an orthodoxy setting in? As a startup employee, it was unusual and impossible to ask for ISO options until recently. It's changing now. Why shouldn't there be terms in the agreement that felt perfectly reasonable a few years ago but seems unfair to the founder now? A standard form should be a guidance. It shouldn't become an unquestionable text.

nemo1618 8y ago

Pet peeve of mine: You should never take a raw screenshot of a Word doc, with its red and blue underlines, cursor, etc. Convert it to a PDF first or find a way to turn off the highlighting+cursor.

seancoleman 8y ago
Better yet, embed the PDF in an inline iframe so text can be copied, highlighted, etc.
- akharris 8y ago
  A downloadable version of the doc is linked directly above the image. That does the job nicely, since it allows you to immediately edit.
  - sunsetMurk 8y ago
    newer browsers can actually just embed PDFs natively[0] in an iFrame, but there are more fault-tolerant ways to do it that provide a better ux. Cool note, Google Drive provides an embed code for PDFs[1] which I've found to be useful. Filestack also provides a great API for viewing PDFs in apps/browsers[2] that I use all the time. 0- https://pdfobject.com/static/ https://pdfobject.com/static/ 1- https://alicekeeler.com/2016/06/05/google-drive-embed-pdf/ https://alicekeeler.com/2016/06/05/google-drive-embed-pdf/ 2- https://www.filestack.com/docs/concepts/transform/#document-viewer https://www.filestack.com/docs/concepts/transform/#document-...
deleted 8y ago
[deleted]

Lordarminius 8y ago

This may seem like a slightly out-of-place question, but is there any equivalent term sheet for seed funding ?

akharris 8y ago
Our safe docs are pretty good for this: https://www.ycombinator.com/documents/#safe https://www.ycombinator.com/documents/#safe.
- Lordarminius 8y ago
  Thank you.
- tosh 8y ago
  iirc the SAFE doesn’t cover vesting, information rights and control rights (I guess this is because typically companies that YC invests in are set up with something like Stripe Atlas or similar?) In many European hubs the typical term sheets for seed financing are provided by Angels or seed stage VCs and typically aren’t as founder friendly as in the US. Having more information/a recommended seed term sheet from YCombinator that explicitly covers the above (or references Stripe Atlas) would help. Really appreciate all the documents and context that you are publishing. The impact is vast and goes way beyond the Valley and the immediate YC network.
  - ericd 8y ago
    AFAICT, the norm with SAFEs is that they're very hands off in terms of company operations, at least in SV.
    - tosh 8y ago
      ty for the clarification ericd

anonu 8y ago

This is extremely useful. Most importantly, I am glad that they included examples of what is non-standard. These are the real curveballs that are difficult for first-timers to gauge. whether they are "normal" to have on a term sheet or whether they're getting squeezed without really knowing.

privateSFacct 8y ago
Over 1x participating preferred I've seen a few times. A TOTAL nontransparent scam in my view.

johan_larson 8y ago

Is this term sheet descriptive or prescriptive? Are you telling us what standard straight-forward terms are right now, or what they should be right now (and would be, in a slightly better world)?

jasonkwon 8y ago
descriptive, but note the comment about the brackets.

mnemotronic 8y ago

I'm a software guy. Most of that sheet is a foreign language to me.

robhunter 8y ago
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.
- vxNsr 8y ago
  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).
  - mhb_eng 8y ago
    Venture Deals by Jason Mendelson and Brad Feld is a good overview. If you want to get more technical, the NVCA publishes a list of their own "standard" documents, which go into depth on some of the standard and non-standard provisions and what they mean, but it's not quite as user friendly.
    - vxNsr 8y ago
      Thanks, I'll take a look.
  - matthewmcg 8y ago
    This book is pretty good and reasonably up to date: https://www.amazon.com/Entrepreneurs-Guide-Business-Law-4th/dp/0538466464/ref=sr_1_1?s=books&ie=UTF8&qid=1548709331&sr=1-1&keywords=dauchy+business+law https://www.amazon.com/Entrepreneurs-Guide-Business-Law-4th/... We used an older edition as a textbook in a Venture Capital seminar back when I was in law school.

motohagiography 8y ago

This is so valuable, just to have a reference point to ask, "so I've seen other sheets with X, what's the case for your preference?" I have neither raised or invested, but do a lot of negotiations and having an external reference for framing discussion creates a lot of value. Seed is still in front of me, but these templates remove a lot of friction. I was going to not-comment because it was just good news, but in case there was doubt, this is great.

entity345 8y ago

How enforceable is that "No Shop" clause that is said to be binding in the document?

jasonkwon 8y ago
I'm going to answer this question a little differently, because enforceability can also depend on facts and circumstances. Think of the binding / non-binding distinction as more of a social commitment signal. The No Shop means that once the company and investor both sign, they're pledging to work together to figure out this deal along these high level terms for the next 30 days. They've made a commitment to each other. Venture is a relatively small community and going back on your word gets around. Social consequences can be just as bad as legal ones.
- entity345 8y ago
  Well yes... It is a promise. Your reply suggests that it's not binding ('legally' binding, obviously).
  - jasonkwon 8y ago
    It can be legally binding.
    - entity345 8y ago
      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.
      - sethbannon 8y ago
        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-billionaire-sued-by-sequoia-after-funding-deal-goes-awry https://www.bloomberg.com/news/articles/2018-04-25/crypto-bi...

deanmoriarty 8y ago

I know this article focuses on founders, but I'd love to see something done in the industry for employees (especially early employees!) as well. One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave (4+ years, I was very early) all my equity was vested, and buying it required spending ~250k (USD!) between cost of exercising and AMT taxes, all while the company shares were illiquid as ever. The company had no interest in helping me, despite me asking for an extension to the option expiration, they were too bitter that I was leaving and creating significant "damage" to the business. It was incredibly painful and I felt very cheated and stupid for agreeing to those terms in the first place (actually faced some deep depression and anger against the world for a few months because of this, and thought about going to therapy), but what did I do in the end? I paid out the money. Yes, I wrote a check to my employer for 60k, and another check to the IRS for 190k, depleting my non-emergency savings (and this is from a very frugal person, who never even spent more than 8k on a car, car being my biggest expense ever). There were funds who would lend me the money, but wanted 50%+ of the proceeds, and if the company goes under you're still on the hook for a taxable event when the loan is forgiven. Luckily AMT for ISO exercise can be slowly (very slowly) recouped in future tax years (and the new tax law made it a bit easier by increasing the deduction and the phaseout limits), but I still had to waste so much of my after tax money just to leave with what I matured over the years. And that money is now sitting in the government pockets for years, producing me no interest and losing value with inflation until I recoup all of it. Fortunately, a year after I bought those shares one of the investors contacted me and bought some of my equity, so I was able to recoup all what I originally put in (and then some). But it's simply insane, and I am still in the hole for all that AMT that I will recoup in ~10 years, no less. Other coworkers who left and didn't have the money to come up with the exercise and tax liability, simply lost them, justifying to themselves "well, they're probably not going to be worth anything anyway" (which could be totally true even after paying thousands to exercise them!). It's a plain insult to startup employees. I wish all startup employees would rebel against this and refused to accept any startup offer unless there was early exercise paid by the company upon joining, or option expiration window of 10+ years. I, for one, know that will never __ever__ join another startup again for this reason.

mhb_eng 8y ago

One potential modification would be to add some language to the No Shop clause to allow the lead investor to approve any other conversations about the round. This can be helpful when the Series A round is larger, as the diligence by separate investors can proceed in parallel.

benmowa 8y ago

Very useful, thanks! Is access to financial statements implied? what about requiring audited financials? or is that not common/expense at that stage?

akharris 8y ago
Those are diligence items that aren't typically defined in a term sheet. You'll deal with that directly with the investor, potentially as a condition to close as worked out in the full docs.
jasonkwon 8y ago
Annual and quarterly unaudited is normally implied. Sometimes monthly too. Most good Series A investors understand that audited financials don't make sense this early and their lawyers will draft something like the audit requirement can be waived by the investor in any year, or that audits won't be required until 2-3 years out.

auvi 8y ago

are there any good book with lots of examples of term sheet/valuation math for startups?

patio11 8y ago
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, Brad Feld.
- auvi 8y ago
  great, i’ll get the book. thanks!

vxNsr 8y ago

I love this line: Company: [_______], A Delaware Corporation. Because no one is gonna incorp anywhere else. Despite 90% of SV companies starting in California.

akharris 8y ago
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.
- vxNsr 8y ago
  Right, I just thought it was a funny quirk of our legal system.
  - jasonkwon 8y ago
    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.

tschellenbach 8y ago

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

pedalpete 8y ago
I was surprised by the % being included as I figured that would be decided by the board at the time a divindend is approved. I have no idea why a % which would be defined before knowing the details of the companies financial situation. I wonder if this is more of a protection against the board deciding on a dividend when it is in the best interest in the near term for the company to keep money in the bank. So defining 6% might mean "this company has so much cash that they can return a 6% dividend without harming the long-term potential". Perhaps if you aren't able to return 6%, you aren't ready to return a dividend at all?
- Hongwei 8y ago
  Am also confused by this (and hoping this comment would get some love!)
- hobbyjogger 8y ago
  The dividend provision just says that the common won't get a dividend unless the preferred has already received their 6% (per year). It doesn't mean that you couldn't issue the preferred a smaller dividend--that would just count toward the 6% but still wouldn't allow the common to get a dividend until the remainder is paid out to the preferred. It's relatively rare for venture backed startups to issue ordinary course dividends anyway (for the reason you stated, funding development/growth is typically seen as a better use of company cash to try to get to a big exit or IPO, etc.).
  - jasonkwon 8y ago
    Yes, this.
zeckalpha 8y ago
Noncumulative preferreds aren’t required in the same way as cumulative preferreds.

olliepop 8y ago

We're closing our seed round this week - this is such a good reference, especially because I have a technical background. Is anybody able to shed some light on the key differences between a seed term sheet and this Series A term sheet?

zxcvvcxz 8y ago

Question: do investors usually vest at the same rate as founders, or at all? E.g. if they put in 1M for 25%, do they legally receive the 25% of shares right away? What's typical here? In terms of investor vesting relative to the founders.

patio11 8y ago
Investors don't vest and (to a first approximation) can't be fired. (They can constructively "quit", by refusing to answer your emails, but they keep all their equity and you keep all their money.) The question of whether they "legally receive the shares right away" can be a bit more nuanced, particularly in e.g. a transaction for a SAFE or convertible note.
mrnobody_67 8y ago
Founders vest, VCs dont.

rsweeney21 8y ago

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 like that." I've found the Y Combinator resources to be some of the most valuable resources out there for startup founders. Do yourself a favor and familiarize yourself with what is available. It could help you not get fired from your startup.

thedudeabides5 8y ago
Yeah, thanks guys!
xodast 8y ago
Could you link to some of these resources , their start up school doesn't really include documents such as this.
- allenleein 8y ago
  Here you go: https://www.ycombinator.com/resources/ https://www.ycombinator.com/resources/
ascar 8y ago
What's a 2-2-1 structure and how did it result in you getting fired? Edit: just saw it's in the article > The way in which founders most often lose control at the Series A is with a 2-2-1 board structure, i.e. 2 founders, 2 investors and an independent board member. The loss of board control is most significant because it means the founders can be fired from their own company.
icedchai 8y ago
At least you made to series A. I know guys who didn't make it through a seed round without loss of control.

mixmastamyk 8y ago

Does anyone have a link to a great intro on VC for dummies? I keep seeing these kind of posts but not the big picture in blog form. Maybe a thousand words or two, not too detailed.

logicallee 8y ago

Could someone here talk more about the "no shop" clause, which seems 100% geared toward giving a buyer better than a competitive price. But, the document says it is the only term that is legally binding! How is "nothing in this document is legally binding and the buyer doesn't have to buy, EXCEPT for the term that the seller may not talk to any other buyers in any way." What kind of sense does that make? Would you "accept" an offer to sell your car that says it isn't binding in any way except that you may not talk to anyone else about selling your car to them, for the next 30 days? Also since it says it is "legally binding" what are the remedies? What is the history of such a term? Why would founders agree to it and actually follow it?

andys627 8y ago

For real estate, your state’s realtor organization will have standard purchase forms available with a quick google search. With these, a title insurance company, and home inspector, you can easily do a private party real estate deal where everybody has reasonable insurance.

acjohnson55 8y ago

Do "A Standard And Clean Employee Equity Offer" next! Seriously.

tanitall 8y ago
I concur. Do you concur?
deleted 8y ago
[deleted]

HoyaSaxa 8y ago

This term sheet template is very investor friendly primarily because of the lack of detail. The Company has very little leverage after a term sheet is signed especially given a standard no-shop provision. You want to reduce the number of items that need to be negotiated later in the process as much as possible. This not only reduces the likelihood of having to agree to a less than favorable term that was not addressed in the term sheet, but also reduces legal costs (which the Company is paying). The post does make note of this: > Some great investors still send longer term sheets, but this has more to do with their preference for going a bit deeper into the details at this stage, rather than deferring this until the definitive documents. The definitive documents are derived from the term sheet and are the much longer (100+ pages) binding contracts that everyone signs and closes on. It’s common to negotiate a few additional points at this stage, though deviation from anything explicitly addressed in the term sheet is definitely re-trading. Also, in a few places, this term sheet refers to certain terms as being “standard.” That may seem vague and circular, but term sheets frequently do describe certain terms that way. What that really means is that there’s an accepted practice of what appears in the docs for these terms among the lawyers who specialize in startups and venture deals, so make sure your lawyer (and the investor’s lawyer) fit that description.

logicallee 8y ago
>especially given a standard no-shop provision. Why is the no-shop provision standard, especially given that this document says it's the only binding term? What's going on here? I'd like to understand it a bit more.
agmiklas 8y ago
Agreed. A founder should assume any ambiguity in a term sheet will be resolved in the investors favor (since you're very unlikely to walk away from a deal after signed). I preferred more comprehensive term sheets so that we could pin everything down while the investor was still in "courting mode". Something we did in our later financings was to (very politely) provide an interested investor with a fairly comprehensive (~7 pages) template term sheet that had blanks for the major economic terms, but otherwise fully specified all the details of the proposed deal. This kept things from drifting off "founder friendly" after signing and had the added bonus of making offers easier to compare.

wtvanhest 8y ago

I thought the original SAFE was on casetext.com. Too bad this wasn't loaded there as well.

55555 8y ago

Can someone please help me understand what common re-vesting schedules are for founders? Like, if I raise seed money, surely I'll have to agree to a reasonable 4-year vesting schedule. But then if I raise a series A, B, and C, do I have to agree to new vesting schedules at each raise? Will I then not fully vest until 4 years after my series C? Do I lose all my vested shares at each raise? On the one hand re-vesting seems unfair to me, but on the other hand if I were to give someone 20 million dollars I wouldn't want them to quit the next day. Also, sometimes you hear about founders being fired by their board. In this case, are they getting fully vested or are they just leaving with the equity they had vested at that point in time?

jasonkwon 8y ago
Re-vesting schedules are all over the map. Some amount of re-vesting is often required at Series A, but it largely has to do with how vested the founders already are. If for example they've been working on the company for only a year, the existing vesting schedule will probably be left alone. On the other hand, if they've been working on the company for multiple years and are close to fully vested at Series A, it's almost guaranteed that the Series A investor will ask the founder to re-vest some amount of shares (for the reason you describe). Re-vesting generally does not show up again after the Series A. If you get fired before you fully vest, whether you leave with the equity you have or all your equity is something you can negotiate as part of the vesting terms.
- 55555 8y ago
  Thanks Jason

yayaa 8y ago

Can someone please explain each clause in layman’s terms. Thanks. Trying to learn the lingo of VC.

naveenspark 8y ago

Founders should invest time and effort to ask for more board seats. The YC doc is a good start but if you follow this to the letter you may lose control in your B or C when the B and C investor also want board seats. Also it’s important to keep in mind that there is no “standard.” Everything is always negotiable.

taherchhabra 8y ago

Is there any similar resource and guidance for seed/angel, thanks

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anuraaga 8y ago

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.