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This 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 ab

by tc 14y ago

This 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 ago
Thanks 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.
- driverdan 14y ago
  Not necessarily. In New York state for example, it's required that any contract worth $500 or more be written. Oral contracts over $500 aren't enforceable.
  - caw 14y ago
    Still, you've got proof with this that someone is at least less than honorable, even if you can't legally force anything to happen.
  - 001sky 14y ago
    Right. And under CA law...
  - praptak 14y ago
    You could make a similar reservation about written contracts, as the scale of formality goes even higher. Some kinds of contracts require a notary and the worst ones might even require a priest or a rabbi :)
  - pdonis 14y ago
    Doesn't an email count as written? I'm pretty sure there's case law on that. (Not sure about a text message, though.)
johnrob 14y ago
This might be by design. I think all investors probably realize the legal ramifications. The net effect of this could be to sniff out the ones who don't make good on their handshakes, since the ones who do probably won't mind putting terms in an email.
larrys 14y ago
"This protocol causes a valid and enforceable contract to be formed." Don't agree but if that were the case it would be a good reason not to use it. Details matter and this protocol doesn't have enough details (nor can it) that I would ever use it to form an legally binding agreement. I already to a version of this with other types of investing (email back and forth essentially or sometimes a text) and the underlying assumption is that it is always subject to a formal contract which needs to be signed.
- rscale 14y ago
  It's likely that other casual agreements that you don't think of as contracts are also contracts. I'm not a lawyer, I'm a guy who took a business law class during undergrad, but my prof drilled it into my head that a contract consists of offer, acceptance, consideration, capacity, and legality. It can be on a napkin, it can be verbal, it can be in a text message, so long as those elements are present. The difference between an offer and preliminary negotiations is the intent to contract, and language can be used to provide evidence on either side of this one. "Would you take $100k with a $5MM cap" is negotiating language, while "I'll give you $100k with a $5MM cap" is an offer. Again, not a lawyer, but this "handshake protocol" appears to create valid contracts.
  - logn 14y ago
    At the very least it makes people accountable and open to shaming if they don't follow through. And in a small community word would spread about who breaks their deals. Also I think PG should make this into a small mobile app. Every VC is going to add some wiggle text to his boiler plate.
    - larrys 14y ago
      "makes people accountable and open to shaming if they don't follow through" And what exactly might be the method of shaming? A blog post? A central repository of shame? It's not like there is going to be some ebay type feedback system on investors that will take into account investors failing to live up to their promises. New entrepreneurs are hatched everyday. The "reputation" that an investor earns will have to be etched pretty clearly for them to find that info and believe it's ubiquity.
brandall10 14y ago
Having a light shined on activity that pollutes an environment based on trust IME is a better disincentive than fear of legal threat, esp. considering the power disparity between the parties.
FlukeATX 14y ago
Though this does follow the qualities of a contract, it's important to note that oral agreements only get you so far in many jurisdictions and particularly have an upper limit on the value, around the order of $500. So while its great this is an explicit and clear conversation, I don't think you can say that it is assuring unenforceable agreements aren't made.
- jarrett 14y ago
  There is a written component to the protocol: The follow up email/text. "This is to confirm you're in for X." "Yes."
  - comrade_ogilvy 14y ago
    I do wonder what happens without step 4 occurring.
    - quantumhobbit 14y ago
      I wondered this too. How long could an investor wait before sending the "Yes" and have it still considered valid? Could the investor not reply for a few weeks or months and only send the "Yes" once the startup is growing and worth more than the initial deal's valuation? I think there needs to be an explicit timer between step 3 and 4. Something on the scale of a few hours or at most a few days.
      - dangrossman 14y ago
        > Where no time is specified in the offer, the offeree has a reasonable period of time to accept the offer. After a reasonable period of time expires, the offeree's power to make a contract by accepting the offer "lapses". ... When a seller purports to accept an offer after it has lapsed by the expiration of time, the seller's acceptance is merely a counteroffer and does not create a contract unless that counteroffer is accepted by the buyer. -- Anderson's Business Law, Formation of Contracts: Offer and Acceptance: Lapse of Time
    - 14y ago
jarrett 14y ago
There is much to be decided about any investment deal beyond what is contemplated in the protocol. For some examples: http://mashable.com/2011/05/27/term-sheet-startup-investing/ http://mashable.com/2011/05/27/term-sheet-startup-investing/ Just as a thought experiment, let's imagine what would happen if you tried to enforce this handshake deal (complete with email confirmation per steps 3 and 4). How would the courts decide all the issues that would normally have been negotiated and agreed to in a terms sheet?
- mjn 14y ago
  Courts have some leeway in what remedies to use, precisely for some of those pragmatic reasons. One remedy for a contract breach is for a court to issue an injunction ordering performance of the contract. As you note there are some practical problems with a court ordering VCs to invest on the basis of this kind of agreement. But another remedy is for the court to just award monetary damages (how to calculate damages for nonperformance of a contract is a whole other can of worms, but it's something courts do).
devinmontgomery 14y ago
Some background on what makes a contract from Nolo (http://www.nolo.com/dictionary/contract-term.html http://www.nolo.com/dictionary/contract-term.html): "A legally binding agreement involving two or more people or businesses (called parties) that sets forth what the parties will or will not do. Most contracts that can be carried out within one year can be either oral or written. Major exceptions include contracts involving the ownership of real estate and commercial contracts for goods worth $500 or more, which must be in writing to be enforceable. (See: statute of frauds) A contract is formed when competent parties -- usually adults of sound mind or business entities -- mutually agree to provide each other some benefit (called consideration), such as a promise to pay money in exchange for a promise to deliver specified goods or services or the actual delivery of those goods and services. A contract normally requires one party to make a reasonably detailed offer to do something -- including, typically, the price, time for performance, and other essential terms and conditions -- and the other to accept without significant change. For example, if I offer to sell you ten roses for $10 to be delivered next Thursday and you say "It's a deal," we've made a valid contract. On the other hand, if one party fails to offer something of benefit to the other, there is no contract. For example, if Maria promises to fix Josh's car, there is no contract unless Josh promises something in return for Maria's services."
swampthing 14y ago
Taken literally - yea. But you can fix it pretty easily just by adding the standard "this is nonbinding" language that all term sheets have. That's a little inelegant though. Probably what would be best is just to have a page defining the protocol (and clarifying that it is nonbinding) and have people link to it in their handshake email.
- tomp 14y ago
  What's the point in making a non-binding agreement? Isn't it easier to just not make one?
  - swampthing 14y ago
    The same as with this handshake deal - it formalizes a level of commitment that the community recognizes as one that you should not back out of under normal circumstances (e.g. if the other side is being perfectly reasonable). You don't want the handshake deal to force people to invest no matter how unreasonable the company ends up being in the paperwork they send over.
  - michaelt 14y ago
    Same reason you might get engaged prior to getting married?
jcampbell1 14y ago
While I agree this is a legal contract, more importantly, I think this is pg setting expectations for both founders and investors. I speculate that the underlying motivation is that YC partners are spending too much time on handshakes that have gone wrong, rather than helping building businesses.

by tc 14y ago

argonaut 14y ago

Thanks 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.

driverdan 14y ago
Not necessarily. In New York state for example, it's required that any contract worth $500 or more be written. Oral contracts over $500 aren't enforceable.
- caw 14y ago
  Still, you've got proof with this that someone is at least less than honorable, even if you can't legally force anything to happen.
- 001sky 14y ago
  Right. And under CA law...
- praptak 14y ago
  You could make a similar reservation about written contracts, as the scale of formality goes even higher. Some kinds of contracts require a notary and the worst ones might even require a priest or a rabbi :)
- pdonis 14y ago
  Doesn't an email count as written? I'm pretty sure there's case law on that. (Not sure about a text message, though.)

johnrob 14y ago

This might be by design. I think all investors probably realize the legal ramifications. The net effect of this could be to sniff out the ones who don't make good on their handshakes, since the ones who do probably won't mind putting terms in an email.

larrys 14y ago

"This protocol causes a valid and enforceable contract to be formed." Don't agree but if that were the case it would be a good reason not to use it. Details matter and this protocol doesn't have enough details (nor can it) that I would ever use it to form an legally binding agreement. I already to a version of this with other types of investing (email back and forth essentially or sometimes a text) and the underlying assumption is that it is always subject to a formal contract which needs to be signed.

rscale 14y ago
It's likely that other casual agreements that you don't think of as contracts are also contracts. I'm not a lawyer, I'm a guy who took a business law class during undergrad, but my prof drilled it into my head that a contract consists of offer, acceptance, consideration, capacity, and legality. It can be on a napkin, it can be verbal, it can be in a text message, so long as those elements are present. The difference between an offer and preliminary negotiations is the intent to contract, and language can be used to provide evidence on either side of this one. "Would you take $100k with a $5MM cap" is negotiating language, while "I'll give you $100k with a $5MM cap" is an offer. Again, not a lawyer, but this "handshake protocol" appears to create valid contracts.
- logn 14y ago
  At the very least it makes people accountable and open to shaming if they don't follow through. And in a small community word would spread about who breaks their deals. Also I think PG should make this into a small mobile app. Every VC is going to add some wiggle text to his boiler plate.
  - larrys 14y ago
    "makes people accountable and open to shaming if they don't follow through" And what exactly might be the method of shaming? A blog post? A central repository of shame? It's not like there is going to be some ebay type feedback system on investors that will take into account investors failing to live up to their promises. New entrepreneurs are hatched everyday. The "reputation" that an investor earns will have to be etched pretty clearly for them to find that info and believe it's ubiquity.

brandall10 14y ago

Having a light shined on activity that pollutes an environment based on trust IME is a better disincentive than fear of legal threat, esp. considering the power disparity between the parties.

FlukeATX 14y ago

Though this does follow the qualities of a contract, it's important to note that oral agreements only get you so far in many jurisdictions and particularly have an upper limit on the value, around the order of $500. So while its great this is an explicit and clear conversation, I don't think you can say that it is assuring unenforceable agreements aren't made.

jarrett 14y ago
There is a written component to the protocol: The follow up email/text. "This is to confirm you're in for X." "Yes."
- comrade_ogilvy 14y ago
  I do wonder what happens without step 4 occurring.
  - quantumhobbit 14y ago
    I wondered this too. How long could an investor wait before sending the "Yes" and have it still considered valid? Could the investor not reply for a few weeks or months and only send the "Yes" once the startup is growing and worth more than the initial deal's valuation? I think there needs to be an explicit timer between step 3 and 4. Something on the scale of a few hours or at most a few days.
    - dangrossman 14y ago
      > Where no time is specified in the offer, the offeree has a reasonable period of time to accept the offer. After a reasonable period of time expires, the offeree's power to make a contract by accepting the offer "lapses". ... When a seller purports to accept an offer after it has lapsed by the expiration of time, the seller's acceptance is merely a counteroffer and does not create a contract unless that counteroffer is accepted by the buyer. -- Anderson's Business Law, Formation of Contracts: Offer and Acceptance: Lapse of Time
  - 14y ago

jarrett 14y ago

There is much to be decided about any investment deal beyond what is contemplated in the protocol. For some examples: http://mashable.com/2011/05/27/term-sheet-startup-investing/ http://mashable.com/2011/05/27/term-sheet-startup-investing/ Just as a thought experiment, let's imagine what would happen if you tried to enforce this handshake deal (complete with email confirmation per steps 3 and 4). How would the courts decide all the issues that would normally have been negotiated and agreed to in a terms sheet?

mjn 14y ago
Courts have some leeway in what remedies to use, precisely for some of those pragmatic reasons. One remedy for a contract breach is for a court to issue an injunction ordering performance of the contract. As you note there are some practical problems with a court ordering VCs to invest on the basis of this kind of agreement. But another remedy is for the court to just award monetary damages (how to calculate damages for nonperformance of a contract is a whole other can of worms, but it's something courts do).

devinmontgomery 14y ago

Some background on what makes a contract from Nolo (http://www.nolo.com/dictionary/contract-term.html http://www.nolo.com/dictionary/contract-term.html): "A legally binding agreement involving two or more people or businesses (called parties) that sets forth what the parties will or will not do. Most contracts that can be carried out within one year can be either oral or written. Major exceptions include contracts involving the ownership of real estate and commercial contracts for goods worth $500 or more, which must be in writing to be enforceable. (See: statute of frauds) A contract is formed when competent parties -- usually adults of sound mind or business entities -- mutually agree to provide each other some benefit (called consideration), such as a promise to pay money in exchange for a promise to deliver specified goods or services or the actual delivery of those goods and services. A contract normally requires one party to make a reasonably detailed offer to do something -- including, typically, the price, time for performance, and other essential terms and conditions -- and the other to accept without significant change. For example, if I offer to sell you ten roses for $10 to be delivered next Thursday and you say "It's a deal," we've made a valid contract. On the other hand, if one party fails to offer something of benefit to the other, there is no contract. For example, if Maria promises to fix Josh's car, there is no contract unless Josh promises something in return for Maria's services."

swampthing 14y ago

Taken literally - yea. But you can fix it pretty easily just by adding the standard "this is nonbinding" language that all term sheets have. That's a little inelegant though. Probably what would be best is just to have a page defining the protocol (and clarifying that it is nonbinding) and have people link to it in their handshake email.

tomp 14y ago
What's the point in making a non-binding agreement? Isn't it easier to just not make one?
- swampthing 14y ago
  The same as with this handshake deal - it formalizes a level of commitment that the community recognizes as one that you should not back out of under normal circumstances (e.g. if the other side is being perfectly reasonable). You don't want the handshake deal to force people to invest no matter how unreasonable the company ends up being in the paperwork they send over.
- michaelt 14y ago
  Same reason you might get engaged prior to getting married?

jcampbell1 14y ago

While I agree this is a legal contract, more importantly, I think this is pg setting expectations for both founders and investors. I speculate that the underlying motivation is that YC partners are spending too much time on handshakes that have gone wrong, rather than helping building businesses.