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The Handshake Deal Protocol
- webwright 14y agoThis is great protocol for all discussions/agreements. It's pretty hard for any relationship to break down if there's a shared understanding of expectations. The re-statement/confirmation email is a great weapon against what time+memory do with reality, whether it's in the investment setting, with a partner, with an employee, or, heck, with a friend/spouse.
- PotatoEngineer 14y agoI wouldn't expect most "handshake deals" with a friend/spouse to require that level of formality - unless money is changing hands.
- webwright 14y agoAgreed with the "most" sentiment. But it is worthwhile for anything where a misunderstanding is possible and the consequences of a misunderstanding would be meaningful (to you).
- IgorPartola 14y agoWhen I was first dating the woman who became my wife, we decided to take a vacation together and split the expenses. We worked up a budget and did a pretty good job of sticking to it, until our car had a minor issue and we had some extra expenses (an extra meal at a restaurant, etc.) When we did the numbers at the end of the trip, it turned out that I overpaid by a bit, and she wrote me a check for that amount. When I cashed it a week later, she got very upset with me, because she forgot about it and already slated the money for something else. My response was "well, you gave me a check and I simply cashed it. I would have gladly paid for the extra stuff, if I knew that's what you wanted". Her issue was that something unexpected happened with her money. Long story short, a quick text with "About to cash the vacation check you wrote" would have saved us a fight. OTOH, coming up on 10 years together, so I think it worked out OK.
- cbhl 14y agoI'm curious if something like this would happen today. With PayPal, Venmo, Interac E-mail Money Transfer, and other similar services, I would expect such a transfer (if the other person felt obligated to make one) would be nearly instantaneous.
- IgorPartola 14y agoPayPal for VC's? "OK, I'll invest in your company. Here's $5M!", "Gee, thanks!", meeting over.
- cbhl 14y agoI was referring to the specific case of having a significant other. I think that the protocol as described makes a lot of sense, because paperwork. (Although I think Clerky was supposed to be trying to help out with that?)
- darkarmani 14y ago> she wrote me a check for that amount. When I cashed it a week later, she got very upset with me, because she forgot about it and already slated the money for something else You bastard! She forgot and you cashed it anyway! haha.
- IgorPartola 14y agoMore or less her words, yes.
- pekk 14y agoMoney changes hands every time people marry.
- stavrianos 14y agoHandshake deals are reliant on trust, which friends/spouses usually have in good supply. This protocol is attempting to add enough formality to lower the trust required somewhat (because people have been welching, so enough trust is not always available), without dropping it all the way to zero (which is what a traditional antagonistic/defensive contract is for).
- temphn 14y agoEven more important, especially for men, is to have any woman you are dating express feelings for you via email or text (pictures not necessary). This goes quadruply true if you are dating them at the office. Electronic records are the only way to avoid he said/she said. (Word is this is how Ellen Pao's case against Kleiner is going to unravel).
- deleted 14y ago[deleted]
- jcampbell1 14y agoThis seems completely sound. Is it implicitly understood that all investors get the same terms? I assume that if there is an agreement to invest $100k at $5M cap, then the startup can't go take another $100k at a $4M cap, without giving that same deal to the first investor.
- pg 14y agoThere are cases where that would make sense, e.g. if the second investor was some famous domain expert. That said, it doesn't happen often. The more common case is where the cap rises for later investors. Later investors gripe about that when it happens, but it's justifiable. The earlier investors took more risk. Plus the company actually is more valuable on account of their investment; a company that has raised $1m is at least $1m more valuable than when they started raising money.
- jcampbell1 14y agoIn my scenario, where the second investor isn't a domain expert, but says something like "I will say yes to $xxx at a a lower cap", then does the startup have a moral obligation to give the same deal to the first investor? I think so, but could be convinced otherwise. Maybe this never happens.
- pg 14y agoIt happens. There are investors who are notorious for offering lower caps to startups that have already started raising money. The solution is essentially to route around them. We advise startups to approach such investors last, when they've already raised enough that they feel comfortable saying "take it or leave it." (There was a big kerfuffle a while ago when an email of this type got leaked.) There's another case, though, when the startup has initially raised money at a higher cap than the market will bear. We warn founders about this, but they don't always listen. In that case they give the earlier investors the same lower cap that they negotiate with later investors.
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- 6thSigma 14y agoBrb while I go make an Unofficial YC Handshake Deal Protocol app.
- darxius 14y agoI was just thinking about using the "bump" feature a lot of smartphones have for step 3. The bump would have a message pop up on their screen, to which they would reply yes or no and completing step 4.
- derefr 14y agoI would say, 1. something with a trigger like Bump, 2. which then pops up an Etherpad-style collaboratively-edited text field, 3. with MMO trade-dialog style 3-phase mutual-assent commit, 4. that leads to a copy being saved on both your phones, to a public-but-anonymous URL both parties can cite, and also forwarded to any other parties which either of you please--for example, your lawyers.
- nekgrim 14y agoWe live in social days. Add a FB/Twitter sharing "Just got an investissement from X"/"Just invested in Y"
- wiredfool 14y agoIt has to be confirmed, so wait till it gets retweeted/liked a few times, and not on an orphaned platform.
- nym 14y agoBuild in SHA256 signing and you have something rock solid.
- derefr 14y agoI would say it would be "easier" (in a way) to just back each of the "assent" phases (you agree, they confirm, you confirm) with an equivalent (automatic in-the-background) GPG signing. Then, what gets sent around is your signature of their signature of your signature of the final plaintext. :)
- deleted 14y ago[deleted]
- ritchiea 14y agoThis is not uncommon. Google's NYC headquarters is in Chelsea and many of their employees live nearby. Just a few blocks away are the New York City Housing Authority's Chelsea Houses which provide low income housing for over 1000 residents. Google and the Chelsea Houses are just blocks away, far less than 30 minutes, and yet are totally different worlds.
- ramirez60 14y agoI'll bite. Your comment doesn't say anything...what are you talking about? What is your world? Why is it different? If you want to throw a comment it in, it would be a lot more useful to have some context and reason...
- deleted 14y ago[deleted]
- rlpb 14y agoA handshake is generally not taken to be a legally binding contract in itself. An email might be. So it might be worth making it clear in the emails that you don't intend them to be legally binding.
- Dylan16807 14y agoA handshake sure sounds like a gesture used to signify that a deal has been negotiated to the satisfaction of both parties. Why would it not be a contract?
- rlpb 14y agoYou might argue later that the clear intention was to not form a legally binding contract; that you were merely accepting the general terms, for the specifics to be agreed on later, and still had the option to refuse to go ahead at that point. On the other hand, you might argue later that you did intend it to be legally binding. Both arguments would be valid and your intent and what a reasonable man would assume would have to be decided on later by a court. pg's article reads to me as if the intention is for it to not be legally binding, when he says "The actual transaction comes later, when documents are signed and money changes hands." The existence of this article might change the view of the courts. So to avoid doubt later, you should make it absolutely clear what you intend. You can form a contract with a handshake if you intend to, as it has been pointed out. But only if you intended it. So why not save yourself some future legal expenses by making it clear what you both intend? http://en.wikipedia.org/wiki/Intention_to_be_legally_bound http://en.wikipedia.org/wiki/Intention_to_be_legally_bound
- Dylan16807 14y agoIt's tricky, true. Ideally, I would like it to be binding based on their current understanding of the company. If something major and unexpected comes up in research then they can cancel, but only then. This proposal says to give all the important details of the investment up front specifically to try to avoid disagreement on specifics.
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- Uhhrrr 14y agoYou should probably clarify that this is not intended a legal contract and violations will be dealt with socially (if that is indeed what you intend).
- jcampbell1 14y agoWhat? How is this not a legal contract? All the elements are there.
- jessaustin 14y agoThey've left out the most important part: paying lawyers thousands of dollars!
- legutierr 14y agoBut might that not be a problem? Some deals must get hung up on the documentation, no? Or perhaps more reasonably, a disagreement over the materiality of something discovered in due-diligence? This can't be a promise to invest X at Y valuation no matter what, which it might be if it were treated as a legal contract.
- argonaut 14y agoI think the point you're missing is that an oral contract is legally binding. So even handshake deals are legally binding. The only thing preventing a startup from suing a VC that reneges is 1) the startup/founder's reputation and 2) the difficulty of proving your case. The legal system only prefers written contracts because it's easier to prove in court.
- legutierr 14y agoI totally agree with you technically, but on a de-facto basis the difficulty of proving a handshake deal is why they are effectively treated not as legal agreements but social commitments, hence Uhhrrr's comment for a clarification of this protocol. If these "handshake" emails are enough to constitute a legally binding commitment, then the power in this relationship slides dramatically in the favor of the investment target. This might not be a problem generally, but like I wrote above, it is not inconceivable that due-diligence would turn up a real problem, especially if the investment target itself is run by shady people. There are any number of reasonable circumstances short of fraud that would make an investor consider that the initial presentation made by a company was misleading enough to require a modification or withdrawal of the original offer. Wouldn't an attempt to modify the offer put the investor in a position to get sued, especially if it was relied upon by the company? This protocol sounds like a great idea, but the vagueness of a verbal commitment has some value (keeping a dispute out of the legal system) that is being sacrificed in exchange for clarity.
- IgorPartola 14y agoSo I've wondered this for a while. Contracts are of course important, but if the only way you can trust the other party is through a contract and don't feel secure without one, can you really be sure that you won't get screwed over because of a hole in the contract? Seems to be that in reality a contract is only as good as the word of the person behind it, and if you wouldn't simply take them on their word, you might reconsider doing business with them altogether. This protocol highlights that you don't need 50 pages of documentation to agree on something and I like it because of that.
- pc86 14y agoThat's why you have your attorney look at the contract thoroughly. It's not about distrusting anyone, it's about making sure you're as protected as you can be. Truthfully, a contract is only as good as your attorney is.
- deleted 14y ago[deleted]
- ChuckMcM 14y agoOh I like this a lot. That adds a lot of clarity around what can be a very tumultuous time for a young company. I've personally been burned by the "We would like to come in but we don't want to lead." line. I treat such statements as polite "no thank you"s now.
- brador 14y agoThey also arise when punishment for breaking the promise is high. Tight network, word gets around.
- monsterix 14y agoSplendid. Was expecting something of this sort after Harj Taggar's post "We'll be circling back" [1]. Hope the protocol does good of what it intends to: i.e not letting VCs hide behind a VC way of saying no. However from a situation standpoint, this kind of indicates beginning of incoming processes in VC funding. Bureaucracy. Like it happens in big boy industry. Seems a bit detrimental but probably dishonest and noob VCs asked for it. [1] http://paulgraham.com/circling.html http://paulgraham.com/circling.html
- omegant 14y agoTime for a deal protocol app?
- Jabbles 14y agoSurely there's a huge opportunity for the market of VCs to favour those that move quickly: Bring an accountant to the startup demo day to look over the books of ones you find impressive, a lawyer on call to prepare a (i.e. tweak a standard) contract and a free coupon for a same-day courier service for the founders to return it once they've consulted their lawyer and signed. Then an instant money transfer. Obviously, this puts an awful lot of power in the hands of the investor that actually attends the demo day. Those VCs (and their backers) willing to do so will face the usual risk/reward tradeoff.
- timjahn 14y agoI think this would only work if the VCs had been regularly paying attention to the company long before Demo Day, and had done their research. I don't think they'd want to invest immediately after seeing the company for the first time.
- eli 14y agoI would want a potential investor to spend a little more time on due diligence than that. Also, does the lawyer work for free? Don't you want to do some of your own research on the investor? This just sounds utterly bonkers.
- akama 14y agoI agree, It is just as important to trust the investor as it is to trust the startup.
- Jabbles 14y agoI don't think many people turned down Yuri Milner's offer. They may feel differently about a bigger, later stage offer, but they may have to trade that off with how quickly they want to start spending money. Would the speed and organisation of a VC impress you?
- eli 14y agoAt the risk of sounding contrarian, yeah I would be very, very skeptical of taking money from someone who is ready to invest after first meeting me a few hours ago. You're likely stuck with this person for the lifetime of your young company.
- _jss 14y agoI could really use some advice on this, actually. It's very serendipitous to see this posted. What if you have a handshake deal and the other person abruptly disappears? I'm incurring all costs of operation, they've gone back and not completed anything they've said they would and now don't even reply to emails?
- crapshoot101 14y agoHonestly? Given what you've described, they aren't interested and it isn't happening.
- _jss 14y agoMy concern is centered around the "What ifs" that happen in the future. What if my site starts to take off? What if it doesn't, but is a lifestyle business? Then he decides he wants back in! I don't want him to come in later and demand anything from me, since he's abandoned me and prior to that at least 90% of his initial promises went unfulfilled.
- mhartl 14y agoI continue to be impressed at how cleverly Y Combinator hacks investing. What a breath of fresh air!
- deleted 14y ago[deleted]
- kirse 14y agoWhy not do something creative like have the investor sign a dollar bill (of any denomination) and give it to the founders? Every founder comes prepared with some cash in their wallet, and then when you confirm a deal the founders ask the investors to sign the dollar bill with a Sharpie/pen. On it would be some sort of short-hand for the deal valuation... Cash is more ubiquitous than phones - even impromptu, it's highly likely one person will have a cash on them - plus you don't have to deal with sharing emails, phone signal, phone battery, waiting for that text/email message to come through, blah-dee-blah. And then you can frame it and do all sorts of other creative/cutesy stuff. If YC made it a tradition to do a "signed cash" deal as a way of indicating the confirmation of a deal, it'd make for a cool way of looking back at all the great (or not-so-great) investments... sort of like that whole "my first dollar" thing some people do.
- rthomas6 14y ago>Cash is more ubiquitous than phones Are you sure? Right now I have a phone but I don't have any cash.
- zheng 14y agoUnless I'm explicitly buying something with cash, I'm almost always in the state of no cash, but with my phone.
- wuest 14y agoThe last time I had cash on my person, it was because I was traveling, and wanted some on hand. I haven't carried cash, as a rule, in almost a decade.
- a3_nm 14y agoI'm not in the valley, but I have the opposite policy: I systematically use cash unless it is not possible to do so. (It's better for privacy.)
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- a_c_s 14y agoThere is no verification of a verbal handshake deal. This protocol is more about clarity than being bulletproof.
- quizotic 14y agoThe databaser in me wonders about the applicability of a two-phase commit protocol. Suppose PG/YC (s/PG/{FW or BF or ...}) acted in the role of a transaction coordinator. Instead of sending confirmation messages directly to each other, the parties would send their confirmations to the coordinator. Like an escrow agent, the coordinator would wait until all parties had confirmed and then send agreement notifications to all. This might allow investors to commit with contingencies, such as requiring other investors or a minimum investment greater than their own investment.
- OnyeaboAduba 14y agogreat idea would add alot of extra work on the plates of yc mentors tho
- notatoad 14y agoTotally unrelated to the topic at hand, but what is PG's obsession with tiny fonts? this article is set in 8.5pt font - can anybody read that? at 10pt HN itself is almost as bad.
- samstave 14y agoWell, you know the old saying: "It's not the size of your font, but the quality of your content..."
- pg 14y agoScreen resolutions have been increasing.
- koko775 14y agoBut people's eyesight declines. My dad now puts his 27" iMac at 1024x768 because website font sizes are typically too small for him now.
- pmjordan 14y agoHave you configured his iMac to run in HiDPI mode, using the "Quartz Debug" tool? (free download in the "Graphics Tools for Xcode" bundle from Apple's developer area) That at least increases the sharpness of the text, rather than the plain interpolation you get by changing resolution, which is quite blurry. I've set up my grandfather-in-law's iMac that way, it helps a lot!
- koko775 14y agoI'm aware of it, but I don't think it's perfect, at least not for one of the older versions of OS X which his computer runs. Moot point, anyway, he doesn't want me messing with the way he has his display set up.
- msellout 14y agoYou don't use your browser's zoom feature?
- kayge 14y agoInteresting timing. A similar post landed in my inbox this morning, from the blog of a VC in NYC: http://www.avc.com/a_vc/2013/03/doing-business-on-a-handshake.html http://www.avc.com/a_vc/2013/03/doing-business-on-a-handshak...
- dsr_ 14y agoNot coincidental, given that pg thanks Fred Wilson (avc.com) for feedback/input at the bottom of the handshake protocol page.
- tc 14y agoThis protocol causes a valid and enforceable contract to be formed. In fact, the constraints imposed by the protocol are almost exactly what you might learn about contracts in the first year of law school. A contract is composed of a 1) reasonably specific offer, 2) acceptance of that offer, and 3) some consideration between the parties. By forbidding vague offers, PG is assuring that obviously questionable or unenforceable agreements aren't made. The consideration in this case is the startup reserving space in its round for the investor. As far as steps 3 and 4, documenting the agreement is obviously valuable, but the contract is formed at the end of step 2 [2]. Now, it does seem unlikely that anyone would try to enforce this in court, in the same way that few are going to start a legal case over someone backing out on a term sheet, but if you could show damages based on your reliance on the other party's performance, you would in theory have a case. Interestingly, it seems that either PG et al. must have aligned this protocol with the constraints of contract law, or in trying to achieve their ends, they independently reinvented the contract formation protocol that has been with us for at least hundreds of years. -- Edit #1: Regarding the questions along the lines of, "this can't be a contract because there are many other terms to address," a contract can always be longer. If you don't address a term in a contract a court will try to divine the intent of the parties, or look at industry norms, or use defaults established by statute law, and try to do something reasonable. A valid contract isn't dependent on covering every possible, or even every usual, term. The fact that one party reasonably relied on the agreement and was thereby harmed by the other party's non-performance is often going to be sufficient. [2] (edit): By reducing the contract to writing, even just one sentence in an email (steps 3 & 4), you would fulfill many statutory requirements for written agreements on certain kinds of transactions. Edit #3: To be clear, I believe the contractual nature of this protocol is a feature, not a bug. You really do want the elements of a contract regardless of whether this is going to be enforced by a court, a person's own conscience, reputation networks, or public shaming.
- argonaut 14y agoThanks you. A lot of people commenting on this thread don't seem to realize that oral contracts are just as legally valid as written contracts (as long as all the elements of a contact are present), email records notwithstanding.
- samstave 14y agoNot to try too hard here; but is there an opportunity to have an app that one could click a button, and have a confirmation email sent to both parties, but also have the data captured (anonymously, if preferred) so that the volume/type/frequency of deals could be looked at? Maybe even a YC sponsored app - as part of an industry barometer/metric. Keep the thing SUPER simple so that its "select offer" enter email addresses, hit "confirm"
- davidw 14y agoQuite an impressive list of "thanks for reading this". Will we see some of them publicize and affirm their commitment to the "handshake protocol"? That would lend a lot of weight and credence to the idea.
- larrys 14y ago"Sam Altman, Marc Andreessen, Paul Buchheit, Ron Conway, Ronny Conway, Chris Dixon, Ben Horowitz, Ash Patel, Geoff Ralston, Joshua Schachter, Harj Taggar, Albert Wenger, and Fred Wilson for reading drafts of this." So we can assume that the VC's named in the above have agreed to this protocol and will be using it?
- nwenzel 14y agoI saw the same thing. PG is pretty consistent with that tagline. So presumably the VCs knew it would be there. If those VCs didn't want to give the appearance of agreement, they probably would have asked to have their names witheld. PG also specifically mentions VC "noobs" as being a motivation for this protocol. I would think that experienced VCs would be in favor of such a protocol so that "dishonest" or noob VCs wouldn't disrupt a potential deal or increase the cost of the deal with disingenuous offers.
- apalmer 14y agoThis doesn't make sense to me. Fundamentally, you either have a signed legal contract, or you 'just' have a verbal agreement aka handshake deal. The problem that this supposedly solves, is that verbal agreements are non binding and leave wiggle room. If you cant trust the other party, the only recourse is the full legal contract. If you can trust the party then the handshake and the intention is enough. Further more even handshake deals made by trustworthy agents with the best intentions sometimes fall apart before the full legal contract is signed. This will never go away. Bottomline, handshake deals work in situations where the reputation of the individuals with each other is more valuable than the benefit of breaking a given handshake deal. Its just game theory really. Further if the protocol did get buy in and become widespread, it will eventually reach a point where there are true legal ramifications for breaking a handshake deal. At which point everyone will (and should) refuse to make these deals for the same reason no one signs million dollar contracts without having the lawyers review the details.
- larrys 14y agoAgree in general but note that it allows the investors who agree to use this framework the ability to put FUD into the minds of founders who deal with investors who don't. Especially with startups with so many newly minted noobies coming on board every day who don't have any history or business knowledge they will soon might accept that this is the way "business has always been done".
- karamazov 14y agoVerbal contracts are fuzzy. They rely on reputation, and an investor's reputation won't take a substantial hit from a "he-said she-said" situation. Having the agreement recorded in writing might not be legally enforceable, but it makes it clear that there was a concrete agreement in the first place.
- icegreentea 14y agoAs pointed out elsewhere in the thread, verbal agreements that contain all the other aspects of a valid (for example written) contract is infact every bit as binding as a written version providing you can prove it occurred. You can do this all sorts of ways - witnesses for examples. The wiggle room that enters verbal agreements are typically not the result of it being a verbal agreement, but that verbal agreements are typically more concise than written agreements, and therefore lack the specificity and breathe. In summary, a concept of a legal contract is largely abstracted away from the medium it is expressed it. The medium only effects the ease at which you can prove that your version of the contract is infact the version that both parties agreed to.
- mikeash 14y agoI don't understand why this would be called a "handshake deal" when the last two (and most important) steps involve e-mail. Call it an "e-mail deal" or "e-mail contract" and a lot of the mystique just sort of floats away. Now it's obvious why you need to call it off if either party doesn't want to send an e-mail, it's obvious that the handshake itself isn't enough, etc.
- mercurialshark 14y agoHoly fuck, y combinator is on the bar exam.
- JOnAgain 14y ago>> Finally, it isn't possible to add conditions to a handshake deal. For example, there is no way for an investor to use this protocol to offer, as some investors try to do, to invest if other people will—e.g. to say that they'll invest as part of a larger round if you can find a lead. I disagree with this statement -- specifically about having a lead. As an angel, I would use this condition because I wouldn't invest without a lead institutional investor. What they bring to the table is: a) diligence during the investment period b) lawyers that know what they're doing c) taking a seat on the board I feel these add material value to a deal (when it's the right lead, there can be bad ones). I hope I'm adding value, both with money and with advice / monitorship / whatever, but I'm not going to in a positon to look after legal, finance, or accounting issues, I'm probably not going to insist on auditing books, I am probably not interested in a board seat, etc. etc. There are definitely angels and institutions who invest largely on social proof. But there are real reasons to want a "real lead". I will probably never invest in a party round unless it's really a friends and family round. I will say "$X with $Y cap, but only with a lead". As a "small time" investor, I am not willing to set or negotiate the valuation. I am not going to judge based on who else you get or who your lead is but I do want there to be a lead.
- ohazi 14y agoThis is a perfectly reasonable attitude. If your constraints don't allow you to make a handshake deal until later (when a lead is found), then you shouldn't be making a handshake deal until then.
- hkmurakami 14y agoThis is fantastic. Like putting more leverage and negotiating power to engineers (who have traditionally been marginalized by the suits), providing more knowledge and leverage to founders and taking away grey-zone-hand-waving-smoke-and-mirrors wiggle room from the comparatively powerful party (the VCs) can only be positive in bringing about parity in the relationship.
- nym 14y agoWhy not have both parties sign a contract digitally with crypto? https://itunes.apple.com/us/app/opengp/id414003727?mt=8 https://itunes.apple.com/us/app/opengp/id414003727?mt=8
- nym 14y agoIn fact, you could make everyone who attends register by signing a message- that way everyone at your event would be ready (and have a public key registered with YC) to sign any contract digitally. Welcome to the future.
- jwhitlark 14y agoI really like this idea. But "handshake deal" is too ambiguous. pg couldn't have proposed it without sounding crass, but I think it should be called a... "YC handshake"
- 3pt14159 14y agoThe idea here is good, but the execution leaves far too much room for the startup founder or the investor to get screwed. In contract law any ambiguities are judged against the person that wrote the contract. Since the startup founder wrote "This is to confirm you're in for $100k at a $5 million cap." This is the contract that they have offered. Why bother making things so formal and binding when everyone knows that things still need to be dotted and signed. My main concern is that this is forcing contracts onto normal negotiation. Maybe if the wording was changed to "strongly interested in" so that you can still publicly shame repeat offenders, without having the contract being formed when there are still other things to consider.
- danenania 14y agoIt seems like the point here is that 'normal negotiation' is flawed. If you're really planning to invest (or accept investment), you're going to be filling out a large and thorough contract fairly soon anyway. What's the harm in starting out with a mini-contract, unless you want an option to weasel out? If there are other things to consider that prevent you from doing this, then you shouldn't be verbally making those same commitments. There's still room to say "strongly interested" or whatever instead, but you shouldn't expect your place in line to be saved if others say "definitely" and follow the protocol.
- OnyeaboAduba 14y agoIm confused what other things are there to consider if you say your in for a certain amount you should have no problem having that put in writing right?
- tomasien 14y agoNot having money is fine, thinking you have money when you don't will kill you. It's amazing to me that even after having a company utterly destroyed by broken promises from handshake deals that I still trust them, but I do EVERY SINGLE TIME! I'm going to use this protocol for the next few and see how it works out.
- pjscott 14y agoThis sounds very simiar to the medieval merchant law: a non-state-affiliated system of lightweight customs for helping people trust each other in business transactions. http://en.wikipedia.org/wiki/Lex_mercatoria http://en.wikipedia.org/wiki/Lex_mercatoria
- thrush 14y agoI think that there needs to be some "time-cap" associated with the handshake protocol. If I don't hear back from step 4 within 24 hours or some other agreed time, I feel it'd be safe to assume the deal is off.
- jgross206 14y agoSeems like a good idea. One issue-- What if the investor doesn't immediately respond to the e-mail? Wouldn't that be sort of like the "partial yes" free option from the article, where they could wait until terms are (or are not) more favorable but still have a seemingly valid claim on an initial agreement? Perhaps there should be a time limit, or the start-up can have the option of sending a second e-mail withdrawing the initial one?
- redblacktree 14y agoI think in that case, the expectation is that you (as a founder) have no obligation to "keep a place in line" for them. If they never responded, you can consider it a "no."
- quantumhobbit 14y agoWhen is the investor considered to have "stepped out of line"? an hour, a few days, a week or more? What happens if the investor doesn't reply, the startup assumes the no reply is a no, and weeks later the investor sends an out of context "yes" hoping to cash in on the terms of the earlier deal? I know this sounds like a petty concern for a "handshake deal" but the startup's e-mail at step 3 creates a paper trail that an unscrupulous investor could abuse.
- jermaink 14y agopilots call this cockpit-tower protocol a "closed-loop communication".
- matthuggins 14y agoThere should be some time limitation mentioned in step 3. Otherwise, there's nothing to stop step 4 from occurring several months later, which ideally would nullify the deal.
- shin_lao 14y agoThe protocol is flawed at step 4. The investor should reply "I confirm I'm in for <offer> for <startup>" otherwise the investor could say it said yes to the wrong text message/mail, and that's it's all a misunderstanding yada yada yada Hard to do that if you have to answer something explicit.
- kaliblack 14y ago"Yes" is sufficient. Remember that this purpose is to formalize a usually in-person handshake deal. Even out of that context, claiming "oh I signed the wrong paper" won't fly.
- shin_lao 14y agoIn a restaurant crowded with founders and investors I think it's easy to say "I said yes to the wrong sms"... Otherwise a malicious founder could overhear a conversation and send a sms at the right time to have a yes "proof"... My main point is that it doesn't hurt to be explicit when confusion is possible.
- jamieb 14y agoIn fact this doesn't solve the problem of investors who wait and see. If they wait a week, and things look good, they can come back and say "we have this legally binding email that says we're in". Startup comes back and says "well we didn't get your response so as per PG's handshake protocol you're not in." To which their lawyer replies "what is this handshake protocol you speak of?" Seriously, though, isn't this whole thing giving everyone flashback of interview questions involving philosophers sending stone tablets to each other trying to verify whether the other one got it or not?
- joallard 14y agoReplies are usually embedded in email.
- deleted 14y ago[deleted]
- whatsup 14y agothis is a smart idea
- bgmasters 14y agoOne thing to note is that the CA statute of frauds renders certain kinds of oral contracts invalid, unless there is some memorandum of the oral contract is in writing. One such contract, as outlined in CA Civil Code Section 1624(a)(7) is: > A contract, promise, undertaking, or commitment to loan money or to grant or extend credit, in an amount greater than one hundred thousand dollars ($100,000), not primarily for personal, family, or household purposes, made by a person engaged in the business of lending or arranging for the lending of money or extending credit. This wouldn't seem to apply to equity financings, but I suspect it applies to debt financings. If that's right, an actual "handshake deal" is not legally enforceable absent the kind of e-mail memorialization that PG is talking about. Of course, a "handshake deal" starts to look a lot like a simple written contract if a handshake alone cannot a deal make.
- jconley 14y agoNice! A simple 2PC [1] for deals! [1] http://en.wikipedia.org/wiki/Two-phase_commit_protocol http://en.wikipedia.org/wiki/Two-phase_commit_protocol
- 001sky 14y agoThe startup sends the investor an email or text message saying "This is to confirm you're in for <offer>." The investor replies yes. == This not a handshake deal, de-facto or de jure. Therefore, this is a terrible, misleading article. A/k/a why god invented lawyers. [0] The Handshake Deal Protocol (ycombinator.com).
- preinheimer 14y agoStep 4 needs to be: The investor replies with Yes within 96 hours. Otherwise it's the equivalent of having one party execute a contract, and the other party just sit on the contract to wait for more information. Either executing if it's clearly beneficial, or ignoring if it's not.
- ghshephard 14y agoIf this is a handshake deal - then doesn't the investor reply yes immediately? It would be nice if those who are more knowledgeable than I would weigh in and indicate whether these things happen in real-time. I.E. The "Handshake" deal takes place within the space of a few minutes. g.
- preinheimer 14y agoThe conversation seems to happen in real time, then flips over to email for a written record. Without a defined expiry it's not clear what happens if the investor says "yes" two months later after the startup receives some fantastic press.
- dd000 14y agoIs this done before or after due diligence?
- grellas 14y agoYC has helped shape many ways in which modern startups do business and I could see this protocol adding to this by setting minimum expectations for defining who is truly "in" on a funding round before the binding documentation is done. I see it as a remote risk that any such exchange would be treated as a legally binding contract. Too many essential terms would be missing, as for example in the case of a bridge note such things as time to maturity, interest rate, size of equity raise triggering mandatory conversion, etc. While the otherwise missing essential terms might be supplied by a term sheet used by the startup as a basis of discussion, such term sheets invariably make clear that they do not become legally binding until definitive documents are signed. To say, then, that one is "in" on such a term sheet would signify no more than what one signifies by actually signing it: that is, the investor becomes morally bound to negotiate in good faith until the documentation is prepared and signed and also morally bound to participate when such documentation is prepared in good faith and along customary lines. Of course, beyond the legal hurdles, there is the not insignificant issue of how either an investor or a startup would be treated in a tight-knit community such as YC if the person becomes known as being "sue happy." Could such lawsuits ever come about? Yes, and there may be unusual cases where the parties had had a true meeting of the minds, or where one party relied to his detriment on the other's statements and conduct such that a court might find an enforceable contract, but the practical risk of this happening would be near zero for almost all such cases - enough so, I think, that it may be effectively disregarded. What the protocol does do is help prevent misunderstandings, inadvertent outcomes, and the occasional deliberately weasly overreaching that can occur with informal verbal exchanges. It says to the investor: do I really have a commitment from you such that, should you back out, your reputation will take a hit? It says to the startup: pin your investors down to the point where you can't be double-dealt but also make sure the commitment you think you have is real and not a product of your own wishful thinking. I can see this working beautifully as a first step within YC. Beyond that, it will work as people come to terms with its existence and see it as useful. For its purpose, it is really an elegant solution to a knotty problem and therefore worthwhile.
- washedup 14y agoDishonest men live at all levels. This doesn't solve the original problem: What you suggest won't solve the issue of investors taking advantage of startups or the other way around. They will simply play another looser version of the handshake as you want it to exist. Anyone that is eager enough will get into this space before they are ready and be subject to the same sharks. But not every investors is bad, for if they were they would earn an untrustworthy reputation. The handshake deal first started as a way to avoid legal or financial promises. By giving the handshake such rules, you are diminishing it's intrinsic value as a "safety zone" for both parties to freely communicate. But of course, this shared information can be used to one of the parties advantage over the other. Now, as another step towards building confidence in the investor/startup relationship, this is a great idea. It refines, offers some support, and starts communication between the parties on a smaller scale.
- evolve2k 14y agoTo avoid confusion I personally think it also makes to be able to define the applicable standard as part of the protocol. '$100k at a $5 million cap on standard YC terms' Where standard YC terms refers to an existing terms template or you could refer to another set of standard terms by name. Explicit Doctype
- damoncali 14y agoDoesn't this encourage rushing complex decisions? Aren't handshake deals best suited for inherently simple transactions? Diamonds were mentioned, futures traders (in the old school pits) are another. In other words, does this solve the wrong problem? If venture deals were as simple as diamonds, would such a proposal exist? I'm no VC, but it seems like it's easy to get a contractual "meeting of the minds" when you're talking about simple things, and this does nothing to simplify things unless you have standard paperwork to go along with it. Are those details not the main destabilizing influence? (this could very well not be the case - as I said, I'm no VC).
- CurtMonash 14y agoI found the acknowledgements interesting -- folks who've read this and presumably not vomited all over it include Messrs. Andreesen, Horowitz, & Conway.
- CurtMonash 14y agoI am baffled by the idea that this is a binding contract. You agree to a loan without specifying an interest rate -- how is that a done deal??
- coopdog 14y agoI smell an app Google Glass (or even a simple voice recorder in an app designed for the purpose) would also be great to reduce the friction of having to type something into a phone while talking to an investor.
- ichirotherager 14y agoWhere I come from, you ask a man if he wants to grab a BEER. Much more productive conversations that way :)
- johnthebeloved 14y agoOf course, there's always the "Johnny Lingo Method" of negotiation and deal making: http://nobudgetbudget.com/be-a-master-negotiator-with-the-johnny-lingo-method/ http://nobudgetbudget.com/be-a-master-negotiator-with-the-jo...
- aganek 14y agoI like this proposal very much. On the other hand, it reminds me of a quote by Sam Goldwyn... "A spoken contract isn't worth the paper it's written on."
- caf 14y agoGiven that messages without guaranteed delivery will tend to be used for step 4, isn't this protocol susceptible to the Two-Generals problem?
- jasalo 14y agoI made this website inspired in the Handshake Deal Protocol: www.hdplist.com for both investors and startups to use it.
- amix 14y agoNot being in SV and not following the SV way of building companies I really don't understand the rush, especially for something as important as picking the right investors. This would be like picking your wife on the first date and doing a handshake on it... Why not go for a more slow and more thoughtful route? As I see it great companies are not built in days, but years of hard, concentrated and thoughtful work and decisions.
- saurik 14y agoThere are laws surrounding what is and is not a valid agreement. This website claims to somehow set a "standard" that would define when "if and only if" an agreement had occurred, but they do not have the right to just unilaterally do that. Even when dealing with people themselves, unless they can demonstrate that the other person had seen this website and known its contents ahead of time (and that thereby the contents of this website were to be taken as part of the overall oral agreement), the fact that they publish this website doesn't change what is or is not an agreement.
- jholman 14y agoI think this protocol has a flaw, in a corner case. In the seventh paragraph, PG explicitly points out that it's in the interest of duplicitous investors to delay commitment while retaining the ability to retroactively commit. Delay between stages 3 and 4 gives investors that power, and isn't explicit. The twelfth paragraph does address this ("both parties will usually have mobile devices... ordinarily [send messages] in person... suspicious if the other is unwilling to"). However, as it acknowledges, only USUALLY. Mobile devices get forgotten, or they run out of battery, or founders might be really crazy frugal. It seems obvious that the fix is for Step 3 to include an expiry date/time, to be agreed upon just prior to step 1. If only there were a discipline that had already studied things like this... http://en.wikipedia.org/wiki/Consensus_%28computer_science%29 http://en.wikipedia.org/wiki/Consensus_%28computer_science%2...
- dlss 14y agoThis should be the top comment. One of the explicit reasons for the protocol isn't met by the protocol.
- hahahanononono 14y agoSo...What happens when the VC hires a few hookers to close really bad deals for startups?
- deleted 14y ago[deleted]
- ronaldx 14y agoStartups should think carefully about any source of bias behind Paul Graham's advice, and whether or not following pg's advice blindly is in their best interest. Since the startup gave their (legally-binding) confirmation first, the entrepreneur may be able to stake a legal claim whenever they later choose to do so - or not.