Bad Terms(aaronkharris.com)
aaronkharris.com
Bad Terms
http://www.aaronkharris.com/bad-terms
5 comments
I've definitely seen this. I've done a lot of financings in the Valley and have been on the board with companies that did so in New York. The NY investors seemed much more transactional whereas the Valley investors seemed to play a longer game.
Which isn't to say the valley folks are necessarily your friends!
Which isn't to say the valley folks are necessarily your friends!
Tech investment barely exists outside of Silicon Valley, and when it does, the terms are horrible. In my former city, many companies still ended up flying out and courting investors in San Francisco because the local scene was so bad for it (even though we had several local "startup accelerator" and incubation programs).
I also just think VC terms are bad in general, and I think their intentionally exploitative nature prevents a lot of good things from happening.
I also just think VC terms are bad in general, and I think their intentionally exploitative nature prevents a lot of good things from happening.
SV is the dominant market for funding. NYC is credible but still not ideal (and some of the best NYC firms do a lot of investments outside NYC). It's a power law distribution...SFBA, then NYC and London a lot lower down, then a long way down with a few places (LA, Seattle, Israel, Beijing/Shanghai for Chinese companies, etc.) punctuating the cliff. And indeed, the terms I've seen from non-SFBA investors are invariably far shittier than anything from SF...valuations are sometimes comparable, but lots of stupid hair on non-SFBA deals, and the bad non-SFBA investors are way way worse than the bad-SFBA investors.
VC terms have gotten less bad over the past 15y, at least among the best firms.
VC terms have gotten less bad over the past 15y, at least among the best firms.
Not sure that's entirely accurate: http://www.citylab.com/tech/2016/01/the-rise-of-global-start...
While SF and SJ lead the pack, it's far from a power law distribution. To be fair, much of the venture deals in Boston / San Diego are life sciences / biotech, and that does you relatively little good if you're a software startup.
Totally agree about terms though. Non valley investors tend to target much lower valuations and stipulate weird conditions. This is partly a function of outsized outcomes being fairly rare in tier 2 and tier 3 markets though, so it's not exactly irrational for investors to assume a lower EV for a startup and price it accordingly.
What you really lose is this honest-keeping function that you get when there's sufficient competition for deals. Fear of being excluded or seen as "unfriendly" to founders tends to keep potential bad actors in line, which reduces some of the deal hair and benefits the overall ecosystem.
While SF and SJ lead the pack, it's far from a power law distribution. To be fair, much of the venture deals in Boston / San Diego are life sciences / biotech, and that does you relatively little good if you're a software startup.
Totally agree about terms though. Non valley investors tend to target much lower valuations and stipulate weird conditions. This is partly a function of outsized outcomes being fairly rare in tier 2 and tier 3 markets though, so it's not exactly irrational for investors to assume a lower EV for a startup and price it accordingly.
What you really lose is this honest-keeping function that you get when there's sufficient competition for deals. Fear of being excluded or seen as "unfriendly" to founders tends to keep potential bad actors in line, which reduces some of the deal hair and benefits the overall ecosystem.
Parent comment is incredibly knowledgeable and informative. spot-on. cookiecaper, what do you think a good solution is?
A good solution to the issue of bad local investment scenes, or a good solution to the issue of exploitative "terms" on VC deals in general? I put terms in quotes because I'm using it broadly, referring more to the cultural expectations that come with accepting VC money than something that's necessarily an explicit, contractual element of the deal.
All of the above. What do you think solves all of these problems? (You also allude to what's being missed with "prevents a lot of good things from happening".) Can you give me your comprehensive platform or idea of a solution? You have a great understanding of multiple areas of the problem.
You're either being sarcastic or have me confused for someone else, but I'm not sure which. I guess the first.
Why do you say that?
Literally my comment is based on your comments:
1) "Tech investment barely exists outside of Silicon Valley, and when it does, the terms are horrible. In my former city, many companies still ended up flying out and courting investors in San Francisco because the local scene was so bad for it (even though we had several local "startup accelerator" and incubation programs). I also just think VC terms are bad in general, and I think their intentionally exploitative nature prevents a lot of good things from happening."
Which is incredibly packed with completely correct information. It shows a very deep level of understanding of the situation. You don't elaborate on "prevents a lot of good things from happening" but there are actually volumes behind those 8 words as well.
2) Looking at your immediate posting history, I find your suggestion on Twitter being forced by "open[ing] up computer access and intellectual property laws so that the content stream can be combed over by anyone who is interested in doing so, with or without Twitter's permission" (I hadn't seen it before I came to my previous conclusion about your level of insight) extremely sage. In fact, it reminds me of the philosophy behind "FRAND" (Fair, Reasonable and Non-Discriminatory) requirements to license. It's extremely reasonable. (Despite currently being greyed-out due to downvotes.)
3) your pithy response
>>tinalumfoil 1 day ago
>>Being a founder (or co-founder or startup employee) means taking a decade out of your life for low pay and financial instability for the chance of having stake in a successful company. If you're not wealthy you're not in a position to be a founder in the first place. reply
>cookiecaper 1 day ago
>Someone should really inform the college kids who keep applying to incubators like YC... reply
shows a deep understanding.
4) you have 10570 karma and have been a HN user for 2797 days - 7 years.
5) I agree technically with your recent comment history on slack.
6) actually I've looked through a bit more, all of your comments are fantastic, including the ones on VC.
I don't know what else I can say. I don't have you confused for anyone: I came to my own personal conclusion based on your comments which I read.
If you don't want to reply to your question publicly, since I see your insightful comments are routinely downvoted, you can email me at the email listed in my profile.
Not sure how much more I have to flatter you to get your insights. There's nothing sarcastic about anything in this post - you know how insightful you are and what you do and don't know about.
Anyway my request was:
>What do you think solves all of these problems? (You also allude to what's being missed with "prevents a lot of good things from happening".) Can you give me your comprehensive platform or idea of a solution? You have a great understanding of multiple areas of the problem.
with respect to VC's not spreading out. if you have no thoughts whatsoever, that is fine. just because someone can identify a problem doesn't mean that person can see a solution. I'm just curious what you think.
Literally my comment is based on your comments:
1) "Tech investment barely exists outside of Silicon Valley, and when it does, the terms are horrible. In my former city, many companies still ended up flying out and courting investors in San Francisco because the local scene was so bad for it (even though we had several local "startup accelerator" and incubation programs). I also just think VC terms are bad in general, and I think their intentionally exploitative nature prevents a lot of good things from happening."
Which is incredibly packed with completely correct information. It shows a very deep level of understanding of the situation. You don't elaborate on "prevents a lot of good things from happening" but there are actually volumes behind those 8 words as well.
2) Looking at your immediate posting history, I find your suggestion on Twitter being forced by "open[ing] up computer access and intellectual property laws so that the content stream can be combed over by anyone who is interested in doing so, with or without Twitter's permission" (I hadn't seen it before I came to my previous conclusion about your level of insight) extremely sage. In fact, it reminds me of the philosophy behind "FRAND" (Fair, Reasonable and Non-Discriminatory) requirements to license. It's extremely reasonable. (Despite currently being greyed-out due to downvotes.)
3) your pithy response
>>tinalumfoil 1 day ago
>>Being a founder (or co-founder or startup employee) means taking a decade out of your life for low pay and financial instability for the chance of having stake in a successful company. If you're not wealthy you're not in a position to be a founder in the first place. reply
>cookiecaper 1 day ago
>Someone should really inform the college kids who keep applying to incubators like YC... reply
shows a deep understanding.
4) you have 10570 karma and have been a HN user for 2797 days - 7 years.
5) I agree technically with your recent comment history on slack.
6) actually I've looked through a bit more, all of your comments are fantastic, including the ones on VC.
I don't know what else I can say. I don't have you confused for anyone: I came to my own personal conclusion based on your comments which I read.
If you don't want to reply to your question publicly, since I see your insightful comments are routinely downvoted, you can email me at the email listed in my profile.
Not sure how much more I have to flatter you to get your insights. There's nothing sarcastic about anything in this post - you know how insightful you are and what you do and don't know about.
Anyway my request was:
>What do you think solves all of these problems? (You also allude to what's being missed with "prevents a lot of good things from happening".) Can you give me your comprehensive platform or idea of a solution? You have a great understanding of multiple areas of the problem.
with respect to VC's not spreading out. if you have no thoughts whatsoever, that is fine. just because someone can identify a problem doesn't mean that person can see a solution. I'm just curious what you think.
A good post. Especially this point:
"Get a lawyer that understands startups. It's important to find someone with experience. Not only can a good lawyer explain what's going on with terms of your agreement, he/she can tell you if those terms are standard."
I would also add parties need their own lawyer. Founders, investors, and the company are all different entities with different interests. If you have multiple founders, it is wise for each to have separate counsel. I've seen too many instances where there is a law firm for the company/one founder, and a law firm for investors, but the other founders just kind of "go along" because they think their interests are aligned with founder #1, when that may or may not be the case.
"Get a lawyer that understands startups. It's important to find someone with experience. Not only can a good lawyer explain what's going on with terms of your agreement, he/she can tell you if those terms are standard."
I would also add parties need their own lawyer. Founders, investors, and the company are all different entities with different interests. If you have multiple founders, it is wise for each to have separate counsel. I've seen too many instances where there is a law firm for the company/one founder, and a law firm for investors, but the other founders just kind of "go along" because they think their interests are aligned with founder #1, when that may or may not be the case.
Absolutely. There are several good points in that quote. I've seen the cap tables of startups that used lawyers who clearly hadn't worked with startups before. It was not pretty, and once it was a key factor in deciding not to invest, since the required cleanup would have been extensive.
Another great point is about recognizing whether the terms are standard. One thing people consistently forget to do is check for the "dog that didn't bark." It's not uncommon for investors (or entrepreneurs) to propose a term sheet that completely omits a standard section. If they had instead proposed something in their favor on that subject, then the other side would have certainly objected. However, if the other side is inexperienced, then they don't see anything objectionable!
Another great point is about recognizing whether the terms are standard. One thing people consistently forget to do is check for the "dog that didn't bark." It's not uncommon for investors (or entrepreneurs) to propose a term sheet that completely omits a standard section. If they had instead proposed something in their favor on that subject, then the other side would have certainly objected. However, if the other side is inexperienced, then they don't see anything objectionable!
I apologize if this comes off a bit glib, but sometimes this sort of advice makes me think the steps to founding a startup begin with:
1) Be wealthy
2) Don't be not wealthy
1) Be wealthy
2) Don't be not wealthy
Being a founder (or co-founder or startup employee) means taking a decade out of your life for low pay and financial instability for the chance of having stake in a successful company. If you're not wealthy you're not in a position to be a founder in the first place.
Someone should really inform the college kids who keep applying to incubators like YC...
There's a big difference in the safety net of someone who went to a high level US college, and someone who had to get a job during high school to help pay the bills.
It's a different story when you've got nothing to lose. When you've already got a successful career and a life savings it's turning into a gamble that's just not worth it. The unfortunate thing is that the world needs more mature founders, and less college grad types.
I agree. This is one of my biggest problems with the current VC system: it excludes founders that have experience and judgment. I would even posit that founders who have a family to support are more likely to want to keep the company stable than a single 20-something.
You have to wonder if there are any reasons other than lower salaries that VCs prefer to work with young, nothing-to-lose types.
You have to wonder if there are any reasons other than lower salaries that VCs prefer to work with young, nothing-to-lose types.
it excludes founders that have experience and judgment.
Those are the ones with money.
Those are the ones with money.
Most of them know it, but when you are in college or newly out of it, all of your friends are suffering from low pay and financial instability too. IMHO your 20s are a very good time to do a startup because the opportunity cost is low: you're probably not going to be making a whole lot of money anyway, so your choices are guaranteed poverty or likely poverty with the chance of a huge windfall.
Having money to start with makes a number of things much easier. It means fewer worries about what happens if it all goes south. It means being able to hire a lawyer up front. It means having a lot more runway for bootstrapping.
Money doesn't solve every problem, obviously, but it helps with quite a lot.
Money doesn't solve every problem, obviously, but it helps with quite a lot.
Most good Valley firms will defer fees for startups given a good referral. As for getting that referral, spend two years working in Silicon Valley and you won't have a problem.
Indeed. I tell would-be founders exactly this. I bootstrapped my company for quite some time before successfully courting investors, and this was only possible because being an engineer pays well enough to build a solid savings in advance. While on one hand I take pride in having had the willpower to make things work, this isn't a satisfying solution for entrepreneurship in general.
Or even worse, where they use the legal services provided by the VC or the accelerator. Bad move, bring your own lawyer and pay for that lawyer so that you know who they work for. And don't ever sign anything that you don't understand.
Yes, I'm sure every founder will be able to retain his own effective and experienced legal counsel, considering that good specialized lawyers generally charge at least $500/hr.
Piece of cake for the founder who needs to pitch investors for seed money.
I know from experience that even if you do scrape together enough for a small retainer with such a lawyer, you're just naturally going to be last priority. The attorney knows that you aren't good for any more and any real work is going to take more time than you have on retainer, so they'll be working for free for a substantial amount of time, and that prospect doesn't excite anybody.
I know from experience that even if you do scrape together enough for a small retainer with such a lawyer, you're just naturally going to be last priority. The attorney knows that you aren't good for any more and any real work is going to take more time than you have on retainer, so they'll be working for free for a substantial amount of time, and that prospect doesn't excite anybody.
I so deeply agree with this, and I was surprised to discover just how much startup-specific stuff these specialized lawyers can do. Model your cap table in various scenarios (since most of us don't have a finance person early on this is HUGELY helpful) and also give you the due-diligence checklist for pretty much any counter-party, since they've sat opposing them all. They're also working on lots of deals, so they can give helpful answers to, "is this normal?" or "what are you seeing in the market?" that can help inform how hard to negotiate.
If you have a distaste for lawyers, as a lot of people do in our culture, and try to put off deeply engaging and instead do it yourself you are going to get burned. It is better to pay someone their hefty fees and then ask TONS of questions, so that you will truly learn from everything you have them do. This is the unsexy part of running a startup that I wish I could tell every founder. You just have to embrace it, might as well get good at it.
If you have a distaste for lawyers, as a lot of people do in our culture, and try to put off deeply engaging and instead do it yourself you are going to get burned. It is better to pay someone their hefty fees and then ask TONS of questions, so that you will truly learn from everything you have them do. This is the unsexy part of running a startup that I wish I could tell every founder. You just have to embrace it, might as well get good at it.
Here's a non-paywalled link to the ratchet explanation:
https://www.cooley.com/files/TechIPOsTriggeringMore'Ratchets...
Didn't realize it was paywalled. Just changed it. Thanks!
One thing that is not mentioned that has been really important of the past decade or so, to watch out for is when you pair inexperienced founders with inexperienced investors.
A lot of individual Angels really have no clue about a lot of the intricacies of Convertible Notes, for example liquidation overhang [1], and they tend to like those. So even more important to have a lawyer who knows this stuff.
I have also gotten feedback that SAFE notes are not generally used, or even heard of, outside of the valley - especially with smaller Angels.
[1] http://www.bothsidesofthetable.com/2015/05/30/one-simple-par...
A lot of individual Angels really have no clue about a lot of the intricacies of Convertible Notes, for example liquidation overhang [1], and they tend to like those. So even more important to have a lawyer who knows this stuff.
I have also gotten feedback that SAFE notes are not generally used, or even heard of, outside of the valley - especially with smaller Angels.
[1] http://www.bothsidesofthetable.com/2015/05/30/one-simple-par...
Shameless plug here, but before I would model the round in Capshare.com so you can see how the terms play out with different exit scenarios.
It's certainly a risk here in the UK.
There are even companies here that will charge founders £500 (~$720) to pitch to potential investors, and a 5% "success fee": https://www.lbangels.co.uk/companies/costs