3 ms·

Passion Capital Plain English Term Sheet [pdf]

16 points by rokhayakebe 11y ago

nivertech 11y ago
Do they really invest in common shares?
- chrisduesing 11y ago
  The document includes a 1x preference, anti-dilution, board seat, etc. Aren't those fundamentally the things that make their shares different than common? Can you disentangle the name 'preferred' from the added rights over common shares?
  - zekevermillion 11y ago
    That's a good point. In Delaware, liquidation preference would have to be accomplished through a preferred stock designation. Not sure what English law is, though. The terms might make more sense, both legally and culturally, from that perspective. This could possibly explain why commenters who know these guys are giving good reviews, while US-based commenters steeped in SV culture find this document strange.
- sjtgraham 11y ago
  Yes.
davidu 11y ago
This is worse than a legal term sheet in my opinion. The language is new, and using plain english instead of "Legal" english creates grey areas. Is this pre- or post-money? The language around the board seat, which is a critical aspect of building and operating your company, so cavalier as to not be worth including. If you can't sort that out in the term sheet, you have no business moving forward on a financing. The language around re-vesting is also highly ambiguous, and unclear. Gosh, I would run away from this. If you want something in english, you can nail it in a few paragraphs, but this isn't it. This is a step backwards. And for what it's worth, most term sheets are pretty easily read even in legal language that is well-used and well-worn (ie, tried and true).
- sjtgraham 11y ago
  Having known all three partners myself for 5 years I am pretty confident they're just trying to be founder friendly. IMO it is intended to give a 30,000 ft view of the general terms and it clearly says it's bilaterally non-binding; so if you breached the no-shop clause and they smacked you with their legal bill you could technically tell them to take a hike. The sheet refers to their "standard legal document" being the actual deal document so you can assume things are less ambiguous there.
  - rokhayakebe 11y ago
    I do not know these guys but I also thought the reason they have it was to be as clear as possible. I thought that was commendable. Unfortunately you cannot share anything anymore without it being negatively criticized.
logicallee 11y ago
This is so patronizing, like it's being explained to a sixteen year-old. Also, how is are these "terms": "Board of Directors We think you should control your board, but we generally like to have a seat too. We don’t take board control. Sometimes it makes sense for us just to have a less formal observer, non-voting seat." If this is a term sheet, then what terms were just stated? 1) investor gets a board seat 2) investor gets a board seat if founders offer one, which they generally accept. 3) investor gets an option on a board seat. 4) investor gets an option on an observer, non-voting seat. 5) 4&5. It's like saying "We generally like to invest at a valuation of $1M-$2M, but smaller - or occasionally larger - deals occasionally make sense." Well those are some great terms there. The section on Exclusivity is directly negated by the section Non-binding Effect. I guess it's only non-binding on them! "If you decide to switch to another investor in that period and it's not because we've done anything wrong, then we might charge you for our costs." But it's totally non-binding, yo. The section on Important Decisions directly contradicts what was stated about board control, since presumably as the first investors they would be majority investors and have to approve the listed decisions. All in all this simply seems like an executive summary of a term sheet. And really, completing a Founder's Questionnaire is a condition for close? This is so incredibly patronizing. It would make anyone want to move to Silicon Valley and get treated with respect. Founders aren't children.
pbiggar 11y ago
I like what they're going for, but I'm not sure it really works. - Some of the terms, as noted by others here, are ambiguous (board seat esp). - Some of the terms are IMO founder unfriendly (option pool - though I recognize it's still "normal" to have that in a term sheet; reverse vesting; OMG _monthly_ financials!), and reading the "nice" language gives me the impression of someone trying to fuck me over, even if they're not trying to do it any more so than normal. - this makes it harder to compare to other term sheets, which typically use similar language to each other. That makes it harder to spot things you don't agree on. It's also harder to read for people with experience reading such term sheets (eg other founders who are helping you, lawyers). I would recommend instead giving a "normal" term sheet and including the glossary and explanation alongside it instead. I think that would be well received.
pbiggar 11y ago
> If you decide to switch to another investor in that period and it's not because we've done anything wrong, then we might charge you for our costs. There's a weird effect when you actually put a price on something which is usually just enforced by a social contract. There was a story about the kids playschool which charged parents $3 if they were late to pick up the kid: it caused more parents to be late. They weighed the costs ("$3 isnt that much") whereas before they would just have had wilting looks and having to be really sorry. Breaking a term sheet is pretty shitty. If it changed from "pretty shitty" to "this will cost you $5k", that might change the calculus a bit, especially since I can objectively value the latter and compare it to another deal on the table. (FYI: the terms say the investor is paid costs, but the entrepreneur doesnt get the same deal if the investor pulls out. Also, for someone with a large fund investing lots of money, demanding your costs be paid by the relatively much poorer startup is a tiny bit shitty and feels punitive.)

16 points by rokhayakebe 11y ago

nivertech 11y ago

Do they really invest in common shares?

chrisduesing 11y ago
The document includes a 1x preference, anti-dilution, board seat, etc. Aren't those fundamentally the things that make their shares different than common? Can you disentangle the name 'preferred' from the added rights over common shares?
- zekevermillion 11y ago
  That's a good point. In Delaware, liquidation preference would have to be accomplished through a preferred stock designation. Not sure what English law is, though. The terms might make more sense, both legally and culturally, from that perspective. This could possibly explain why commenters who know these guys are giving good reviews, while US-based commenters steeped in SV culture find this document strange.
sjtgraham 11y ago
Yes.

davidu 11y ago

This is worse than a legal term sheet in my opinion. The language is new, and using plain english instead of "Legal" english creates grey areas. Is this pre- or post-money? The language around the board seat, which is a critical aspect of building and operating your company, so cavalier as to not be worth including. If you can't sort that out in the term sheet, you have no business moving forward on a financing. The language around re-vesting is also highly ambiguous, and unclear. Gosh, I would run away from this. If you want something in english, you can nail it in a few paragraphs, but this isn't it. This is a step backwards. And for what it's worth, most term sheets are pretty easily read even in legal language that is well-used and well-worn (ie, tried and true).

sjtgraham 11y ago
Having known all three partners myself for 5 years I am pretty confident they're just trying to be founder friendly. IMO it is intended to give a 30,000 ft view of the general terms and it clearly says it's bilaterally non-binding; so if you breached the no-shop clause and they smacked you with their legal bill you could technically tell them to take a hike. The sheet refers to their "standard legal document" being the actual deal document so you can assume things are less ambiguous there.
- rokhayakebe 11y ago
  I do not know these guys but I also thought the reason they have it was to be as clear as possible. I thought that was commendable. Unfortunately you cannot share anything anymore without it being negatively criticized.

logicallee 11y ago

This is so patronizing, like it's being explained to a sixteen year-old. Also, how is are these "terms": "Board of Directors We think you should control your board, but we generally like to have a seat too. We don’t take board control. Sometimes it makes sense for us just to have a less formal observer, non-voting seat." If this is a term sheet, then what terms were just stated? 1) investor gets a board seat 2) investor gets a board seat if founders offer one, which they generally accept. 3) investor gets an option on a board seat. 4) investor gets an option on an observer, non-voting seat. 5) 4&5. It's like saying "We generally like to invest at a valuation of $1M-$2M, but smaller - or occasionally larger - deals occasionally make sense." Well those are some great terms there. The section on Exclusivity is directly negated by the section Non-binding Effect. I guess it's only non-binding on them! "If you decide to switch to another investor in that period and it's not because we've done anything wrong, then we might charge you for our costs." But it's totally non-binding, yo. The section on Important Decisions directly contradicts what was stated about board control, since presumably as the first investors they would be majority investors and have to approve the listed decisions. All in all this simply seems like an executive summary of a term sheet. And really, completing a Founder's Questionnaire is a condition for close? This is so incredibly patronizing. It would make anyone want to move to Silicon Valley and get treated with respect. Founders aren't children.

pbiggar 11y ago

I like what they're going for, but I'm not sure it really works. - Some of the terms, as noted by others here, are ambiguous (board seat esp). - Some of the terms are IMO founder unfriendly (option pool - though I recognize it's still "normal" to have that in a term sheet; reverse vesting; OMG _monthly_ financials!), and reading the "nice" language gives me the impression of someone trying to fuck me over, even if they're not trying to do it any more so than normal. - this makes it harder to compare to other term sheets, which typically use similar language to each other. That makes it harder to spot things you don't agree on. It's also harder to read for people with experience reading such term sheets (eg other founders who are helping you, lawyers). I would recommend instead giving a "normal" term sheet and including the glossary and explanation alongside it instead. I think that would be well received.

pbiggar 11y ago

> If you decide to switch to another investor in that period and it's not because we've done anything wrong, then we might charge you for our costs. There's a weird effect when you actually put a price on something which is usually just enforced by a social contract. There was a story about the kids playschool which charged parents $3 if they were late to pick up the kid: it caused more parents to be late. They weighed the costs ("$3 isnt that much") whereas before they would just have had wilting looks and having to be really sorry. Breaking a term sheet is pretty shitty. If it changed from "pretty shitty" to "this will cost you $5k", that might change the calculus a bit, especially since I can objectively value the latter and compare it to another deal on the table. (FYI: the terms say the investor is paid costs, but the entrepreneur doesnt get the same deal if the investor pulls out. Also, for someone with a large fund investing lots of money, demanding your costs be paid by the relatively much poorer startup is a tiny bit shitty and feels punitive.)