As a Series A investor who invests in startups outside of the Valley, it's hugely useful to have something like this (independent of us) that we can point to as to what's normal, especially for founders who don't necessarily have the network to help them.
Founder's (and lawyers) who've never seen a term sheet before will often argue against standard terms (which no mainstream VC would move on) and on the flip-side, bad VCs will often try and put onerous terms into term sheets which can hurt the startup in future fundraising rounds or liquidity events.
While there's been a huge increase in transparency at the pre-seed/seed/SAFE fundraising stage, Series A and beyond is still very opaque.
Great to see YC extending their work on transparency into the Series A stage!
How do we balance against an orthodoxy setting in? As a startup employee, it was unusual and impossible to ask for ISO options until recently. It's changing now. Why shouldn't there be terms in the agreement that felt perfectly reasonable a few years ago but seems unfair to the founder now?
A standard form should be a guidance. It shouldn't become an unquestionable text.
Former founder here. I wish I had had this when I was raising my series A. I lost control of the board at my series A when the VC said that a 2-2-1 structure would be better for everyone. 13 months later, I was fired from the company I had started. The risks are real.
Had I known what a standard, clean series A term sheet looked like, I could have just pointed to this term sheet on ycombinator.com and said - "Make it like that."
I've found the Y Combinator resources to be some of the most valuable resources out there for startup founders. Do yourself a favor and familiarize yourself with what is available. It could help you not get fired from your startup.
What's a 2-2-1 structure and how did it result in you getting fired?
Edit: just saw it's in the article
> The way in which founders most often lose control at the Series A is with a 2-2-1 board structure, i.e. 2 founders, 2 investors and an independent board member. The loss of board control is most significant because it means the founders can be fired from their own company.
Can someone please help me understand what common re-vesting schedules are for founders? Like, if I raise seed money, surely I'll have to agree to a reasonable 4-year vesting schedule. But then if I raise a series A, B, and C, do I have to agree to new vesting schedules at each raise? Will I then not fully vest until 4 years after my series C? Do I lose all my vested shares at each raise? On the one hand re-vesting seems unfair to me, but on the other hand if I were to give someone 20 million dollars I wouldn't want them to quit the next day.
Also, sometimes you hear about founders being fired by their board. In this case, are they getting fully vested or are they just leaving with the equity they had vested at that point in time?
Some amount of re-vesting is often required at Series A, but it largely has to do with how vested the founders already are. If for example they've been working on the company for only a year, the existing vesting schedule will probably be left alone. On the other hand, if they've been working on the company for multiple years and are close to fully vested at Series A, it's almost guaranteed that the Series A investor will ask the founder to re-vest some amount of shares (for the reason you describe).
Re-vesting generally does not show up again after the Series A.
If you get fired before you fully vest, whether you leave with the equity you have or all your equity is something you can negotiate as part of the vesting terms.
I was under the impression that more and more founders (and even investors) are speaking out against the idea of legal fees paid by the founders. Is that only at the seed stage and acceptable at Series A?
Question: how did you think about giving pro-rata & information rights in this term sheet? It looks to me that the Other Rights & Matters section grants it to _all_ investors. Is that typical in your experience?
The post refers to the actual resulting contract (100+ pages) that the lawyers generate as a result of these terms.
Are there any examples of these for the curious to read? I know it’s out of scope for the post topic but as someone who hasn’t read a term sheet before and is curious, I am also curious about reading a full series A sale contract.
Why Delaware? I'm like, I grok it's a fan favorite and all for various reasons, but for those who aren't savvy about it, why Delaware? (And ideally: why not Delaware? Given that the gist of the criticism about it is that it hugely favors the investors over the founders and the employees.)
This term sheet template is very investor friendly primarily because of the lack of detail.
The Company has very little leverage after a term sheet is signed especially given a standard no-shop provision. You want to reduce the number of items that need to be negotiated later in the process as much as possible.
This not only reduces the likelihood of having to agree to a less than favorable term that was not addressed in the term sheet, but also reduces legal costs (which the Company is paying).
The post does make note of this:
> Some great investors still send longer term sheets, but this has more to do with their preference for going a bit deeper into the details at this stage, rather than deferring this until the definitive documents. The definitive documents are derived from the term sheet and are the much longer (100+ pages) binding contracts that everyone signs and closes on. It’s common to negotiate a few additional points at this stage, though deviation from anything explicitly addressed in the term sheet is definitely re-trading. Also, in a few places, this term sheet refers to certain terms as being “standard.” That may seem vague and circular, but term sheets frequently do describe certain terms that way. What that really means is that there’s an accepted practice of what appears in the docs for these terms among the lawyers who specialize in startups and venture deals, so make sure your lawyer (and the investor’s lawyer) fit that description.
Agreed. A founder should assume any ambiguity in a term sheet will be resolved in the investors favor (since you're very unlikely to walk away from a deal after signed). I preferred more comprehensive term sheets so that we could pin everything down while the investor was still in "courting mode".
Something we did in our later financings was to (very politely) provide an interested investor with a fairly comprehensive (~7 pages) template term sheet that had blanks for the major economic terms, but otherwise fully specified all the details of the proposed deal. This kept things from drifting off "founder friendly" after signing and had the added bonus of making offers easier to compare.
In practice, the firms that give 1-pagers don't really try to pull a bait and switch like that. They offer the 1-pager so they can close quickly, not so they can get quickly into the no shop to drive onerous terms. Could a firm consciously adopt that strategy? Sure, but it wouldn't last very long because people talk to each other.
Also, even the 1-pager goes into detail on liquidation preference, veto rights, board composition, drag-along and founder vesting. These are the items that get negotiated a lot or are otherwise really important to know before signing up.
As mentioned elsewhere, this exercise was descriptive, not prescriptive. Some of the founder friendliest investors use term sheets that look similar to this. Some of the unfriendliest investors still send 10 page term sheets.
Why is the no-shop provision standard, especially given that this document says it's the only binding term? What's going on here? I'd like to understand it a bit more.
Pet peeve of mine: You should never take a raw screenshot of a Word doc, with its red and blue underlines, cursor, etc. Convert it to a PDF first or find a way to turn off the highlighting+cursor.
Curious to know what the "typical" ranges are for some of the bracketed sections:
* What are typical / optimal post-money option pool sizes?
* What are typical / optimal founder vesting schedules?
* What are the usual ratios of lead investor / follow-on investor amounts?
It seems that the majority of the Preferred can vote to change the # of directors - wouldn't that offset the initial founder-friendly board setup or am I missing how that vote is used?
This is so valuable, just to have a reference point to ask, "so I've seen other sheets with X, what's the case for your preference?"
I have neither raised or invested, but do a lot of negotiations and having an external reference for framing discussion creates a lot of value. Seed is still in front of me, but these templates remove a lot of friction.
I was going to not-comment because it was just good news, but in case there was doubt, this is great.
Is this term sheet descriptive or prescriptive? Are you telling us what standard straight-forward terms are right now, or what they should be right now (and would be, in a slightly better world)?
I was surprised by the % being included as I figured that would be decided by the board at the time a divindend is approved. I have no idea why a % which would be defined before knowing the details of the companies financial situation.
I wonder if this is more of a protection against the board deciding on a dividend when it is in the best interest in the near term for the company to keep money in the bank. So defining 6% might mean "this company has so much cash that they can return a 6% dividend without harming the long-term potential". Perhaps if you aren't able to return 6%, you aren't ready to return a dividend at all?
Now switch the preferred shares to common shares and eliminate all liquidation preferences and you'd have something closer to a fair term sheet template.
No young start-up should ever agree to preferred shares or any liquidity preferences. This is the next great battle for founders to win over venture investors. To push that risk back onto the investors where it should be instead of allowing the investors to unduly offload even more of their risk onto the founders and early employees.
Liquidity preferences should have never become common with start-ups, they should be quite rare. There is no more important territory for founders to be focused on taking back from venture capitalists than that. Liquidity preferences are a routine source of screwing over the founders and early employees. YC could do something tremendous for founders by fighting on their behalf to put that shifted risk back where it should be: with the investor; the founders and employees already shoulder enough risk as it is.
2) This is a 1x non-participating liquidation preference.
Plenty of folks sign term sheets with MUCH WORSE preferences. Participating 1.5x etc.
This preference simply says, investor gets their money back if invested on a preferred basis during Series A.
That's where the real problems often come, participating preferred at 1x+. This is not one of those term sheets.
3) Fair is what is available in the market that is not misleading. A 1x nonparticipating preference is much more logical than many other approaches, so is easier to understand. And yes, if you take 20M from a Series A funder and sell for $22M, you are basically going to get $0.
Not sure why the downvotes. The reality is preferences are what poisons employee equity grants and is what ends up surprising people when startups end in any way other than spectacular success.
It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.
This is extremely useful. Most importantly, I am glad that they included examples of what is non-standard. These are the real curveballs that are difficult for first-timers to gauge. whether they are "normal" to have on a term sheet or whether they're getting squeezed without really knowing.
Could someone here talk more about the "no shop" clause, which seems 100% geared toward giving a buyer better than a competitive price. But, the document says it is the only term that is legally binding!
How is "nothing in this document is legally binding and the buyer doesn't have to buy, EXCEPT for the term that the seller may not talk to any other buyers in any way." What kind of sense does that make? Would you "accept" an offer to sell your car that says it isn't binding in any way except that you may not talk to anyone else about selling your car to them, for the next 30 days?
Also since it says it is "legally binding" what are the remedies? What is the history of such a term?
Why would founders agree to it and actually follow it?
One potential modification would be to add some language to the No Shop clause to allow the lead investor to approve any other conversations about the round. This can be helpful when the Series A round is larger, as the diligence by separate investors can proceed in parallel.
This is really helpful, thanks a lot! Just wondering, is the template released as Creative Commons or anything similar? I'd like to use it in some teaching material but only if it's intended use.
I know this article focuses on founders, but I'd love to see something done in the industry for employees (especially early employees!) as well.
One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave (4+ years, I was very early) all my equity was vested, and buying it required spending ~250k (USD!) between cost of exercising and AMT taxes, all while the company shares were illiquid as ever. The company had no interest in helping me, despite me asking for an extension to the option expiration, they were too bitter that I was leaving and creating significant "damage" to the business.
It was incredibly painful and I felt very cheated and stupid for agreeing to those terms in the first place (actually faced some deep depression and anger against the world for a few months because of this, and thought about going to therapy), but what did I do in the end? I paid out the money. Yes, I wrote a check to my employer for 60k, and another check to the IRS for 190k, depleting my non-emergency savings (and this is from a very frugal person, who never even spent more than 8k on a car, car being my biggest expense ever). There were funds who would lend me the money, but wanted 50%+ of the proceeds, and if the company goes under you're still on the hook for a taxable event when the loan is forgiven.
Luckily AMT for ISO exercise can be slowly (very slowly) recouped in future tax years (and the new tax law made it a bit easier by increasing the deduction and the phaseout limits), but I still had to waste so much of my after tax money just to leave with what I matured over the years. And that money is now sitting in the government pockets for years, producing me no interest and losing value with inflation until I recoup all of it.
Fortunately, a year after I bought those shares one of the investors contacted me and bought some of my equity, so I was able to recoup all what I originally put in (and then some). But it's simply insane, and I am still in the hole for all that AMT that I will recoup in ~10 years, no less.
Other coworkers who left and didn't have the money to come up with the exercise and tax liability, simply lost them, justifying to themselves "well, they're probably not going to be worth anything anyway" (which could be totally true even after paying thousands to exercise them!).
It's a plain insult to startup employees. I wish all startup employees would rebel against this and refused to accept any startup offer unless there was early exercise paid by the company upon joining, or option expiration window of 10+ years.
I, for one, know that will never __ever__ join another startup again for this reason.
[+] [-] ig1|7 years ago|reply
Founder's (and lawyers) who've never seen a term sheet before will often argue against standard terms (which no mainstream VC would move on) and on the flip-side, bad VCs will often try and put onerous terms into term sheets which can hurt the startup in future fundraising rounds or liquidity events.
While there's been a huge increase in transparency at the pre-seed/seed/SAFE fundraising stage, Series A and beyond is still very opaque.
Great to see YC extending their work on transparency into the Series A stage!
[+] [-] 8ytecoder|7 years ago|reply
A standard form should be a guidance. It shouldn't become an unquestionable text.
[+] [-] wolco|7 years ago|reply
[+] [-] gowld|7 years ago|reply
What's that like? Are you competing with other investors? Or do founders agree to forgo funding because they don't like anything on offer?
[+] [-] akharris|7 years ago|reply
Looking forward to seeing some (more) term sheets from you!
[+] [-] rsweeney21|7 years ago|reply
Had I known what a standard, clean series A term sheet looked like, I could have just pointed to this term sheet on ycombinator.com and said - "Make it like that."
I've found the Y Combinator resources to be some of the most valuable resources out there for startup founders. Do yourself a favor and familiarize yourself with what is available. It could help you not get fired from your startup.
[+] [-] ascar|7 years ago|reply
Edit: just saw it's in the article
> The way in which founders most often lose control at the Series A is with a 2-2-1 board structure, i.e. 2 founders, 2 investors and an independent board member. The loss of board control is most significant because it means the founders can be fired from their own company.
[+] [-] icedchai|7 years ago|reply
[+] [-] xodast|7 years ago|reply
[+] [-] thedudeabides5|7 years ago|reply
[+] [-] 55555|7 years ago|reply
Also, sometimes you hear about founders being fired by their board. In this case, are they getting fully vested or are they just leaving with the equity they had vested at that point in time?
[+] [-] jasonkwon|7 years ago|reply
Some amount of re-vesting is often required at Series A, but it largely has to do with how vested the founders already are. If for example they've been working on the company for only a year, the existing vesting schedule will probably be left alone. On the other hand, if they've been working on the company for multiple years and are close to fully vested at Series A, it's almost guaranteed that the Series A investor will ask the founder to re-vest some amount of shares (for the reason you describe).
Re-vesting generally does not show up again after the Series A.
If you get fired before you fully vest, whether you leave with the equity you have or all your equity is something you can negotiate as part of the vesting terms.
[+] [-] akharris|7 years ago|reply
[+] [-] pbiggar|7 years ago|reply
Any thoughts on this?
[+] [-] anotherfounder|7 years ago|reply
[+] [-] sonnyblarney|7 years ago|reply
Surely early investors will be diluted, so what are these peculiar rights referring to?
[+] [-] itistru|7 years ago|reply
[+] [-] timhaines|7 years ago|reply
[+] [-] sneak|7 years ago|reply
Are there any examples of these for the curious to read? I know it’s out of scope for the post topic but as someone who hasn’t read a term sheet before and is curious, I am also curious about reading a full series A sale contract.
[+] [-] ddebernardy|7 years ago|reply
[+] [-] marvindanig|7 years ago|reply
[+] [-] HoyaSaxa|7 years ago|reply
The Company has very little leverage after a term sheet is signed especially given a standard no-shop provision. You want to reduce the number of items that need to be negotiated later in the process as much as possible.
This not only reduces the likelihood of having to agree to a less than favorable term that was not addressed in the term sheet, but also reduces legal costs (which the Company is paying).
The post does make note of this:
> Some great investors still send longer term sheets, but this has more to do with their preference for going a bit deeper into the details at this stage, rather than deferring this until the definitive documents. The definitive documents are derived from the term sheet and are the much longer (100+ pages) binding contracts that everyone signs and closes on. It’s common to negotiate a few additional points at this stage, though deviation from anything explicitly addressed in the term sheet is definitely re-trading. Also, in a few places, this term sheet refers to certain terms as being “standard.” That may seem vague and circular, but term sheets frequently do describe certain terms that way. What that really means is that there’s an accepted practice of what appears in the docs for these terms among the lawyers who specialize in startups and venture deals, so make sure your lawyer (and the investor’s lawyer) fit that description.
[+] [-] agmiklas|7 years ago|reply
Something we did in our later financings was to (very politely) provide an interested investor with a fairly comprehensive (~7 pages) template term sheet that had blanks for the major economic terms, but otherwise fully specified all the details of the proposed deal. This kept things from drifting off "founder friendly" after signing and had the added bonus of making offers easier to compare.
[+] [-] jasonkwon|7 years ago|reply
In practice, the firms that give 1-pagers don't really try to pull a bait and switch like that. They offer the 1-pager so they can close quickly, not so they can get quickly into the no shop to drive onerous terms. Could a firm consciously adopt that strategy? Sure, but it wouldn't last very long because people talk to each other.
Also, even the 1-pager goes into detail on liquidation preference, veto rights, board composition, drag-along and founder vesting. These are the items that get negotiated a lot or are otherwise really important to know before signing up.
As mentioned elsewhere, this exercise was descriptive, not prescriptive. Some of the founder friendliest investors use term sheets that look similar to this. Some of the unfriendliest investors still send 10 page term sheets.
[+] [-] logicallee|7 years ago|reply
Why is the no-shop provision standard, especially given that this document says it's the only binding term? What's going on here? I'd like to understand it a bit more.
[+] [-] nemo1618|7 years ago|reply
[+] [-] seancoleman|7 years ago|reply
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] rexreed|7 years ago|reply
* What are typical / optimal post-money option pool sizes?
* What are typical / optimal founder vesting schedules?
* What are the usual ratios of lead investor / follow-on investor amounts?
It seems that the majority of the Preferred can vote to change the # of directors - wouldn't that offset the initial founder-friendly board setup or am I missing how that vote is used?
[+] [-] acjohnson55|7 years ago|reply
Seriously.
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] tanitall|7 years ago|reply
[+] [-] motohagiography|7 years ago|reply
I have neither raised or invested, but do a lot of negotiations and having an external reference for framing discussion creates a lot of value. Seed is still in front of me, but these templates remove a lot of friction.
I was going to not-comment because it was just good news, but in case there was doubt, this is great.
[+] [-] johan_larson|7 years ago|reply
[+] [-] jasonkwon|7 years ago|reply
[+] [-] tschellenbach|7 years ago|reply
[+] [-] pedalpete|7 years ago|reply
I wonder if this is more of a protection against the board deciding on a dividend when it is in the best interest in the near term for the company to keep money in the bank. So defining 6% might mean "this company has so much cash that they can return a 6% dividend without harming the long-term potential". Perhaps if you aren't able to return 6%, you aren't ready to return a dividend at all?
[+] [-] zeckalpha|7 years ago|reply
[+] [-] adventured|7 years ago|reply
No young start-up should ever agree to preferred shares or any liquidity preferences. This is the next great battle for founders to win over venture investors. To push that risk back onto the investors where it should be instead of allowing the investors to unduly offload even more of their risk onto the founders and early employees.
Liquidity preferences should have never become common with start-ups, they should be quite rare. There is no more important territory for founders to be focused on taking back from venture capitalists than that. Liquidity preferences are a routine source of screwing over the founders and early employees. YC could do something tremendous for founders by fighting on their behalf to put that shifted risk back where it should be: with the investor; the founders and employees already shoulder enough risk as it is.
[+] [-] privateSFacct|7 years ago|reply
1) This is a standard series A term sheet
2) This is a 1x non-participating liquidation preference.
Plenty of folks sign term sheets with MUCH WORSE preferences. Participating 1.5x etc.
This preference simply says, investor gets their money back if invested on a preferred basis during Series A.
That's where the real problems often come, participating preferred at 1x+. This is not one of those term sheets.
3) Fair is what is available in the market that is not misleading. A 1x nonparticipating preference is much more logical than many other approaches, so is easier to understand. And yes, if you take 20M from a Series A funder and sell for $22M, you are basically going to get $0.
[+] [-] foobiekr|7 years ago|reply
It’s unrealistic to do away with the common/preferred split, but protecting founders and perhaps some key employees as well as banning any kind of participating preferences or ratchets is a good place to start.
[+] [-] anonu|7 years ago|reply
[+] [-] privateSFacct|7 years ago|reply
[+] [-] logicallee|7 years ago|reply
How is "nothing in this document is legally binding and the buyer doesn't have to buy, EXCEPT for the term that the seller may not talk to any other buyers in any way." What kind of sense does that make? Would you "accept" an offer to sell your car that says it isn't binding in any way except that you may not talk to anyone else about selling your car to them, for the next 30 days?
Also since it says it is "legally binding" what are the remedies? What is the history of such a term?
Why would founders agree to it and actually follow it?
[+] [-] mhb_eng|7 years ago|reply
[+] [-] Lordarminius|7 years ago|reply
[+] [-] wasd|7 years ago|reply
* If this term sheet is used, can we avoid the legal costs of a Series A?
[+] [-] vxNsr|7 years ago|reply
[+] [-] anuraaga|7 years ago|reply
[+] [-] deanmoriarty|7 years ago|reply
One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave (4+ years, I was very early) all my equity was vested, and buying it required spending ~250k (USD!) between cost of exercising and AMT taxes, all while the company shares were illiquid as ever. The company had no interest in helping me, despite me asking for an extension to the option expiration, they were too bitter that I was leaving and creating significant "damage" to the business.
It was incredibly painful and I felt very cheated and stupid for agreeing to those terms in the first place (actually faced some deep depression and anger against the world for a few months because of this, and thought about going to therapy), but what did I do in the end? I paid out the money. Yes, I wrote a check to my employer for 60k, and another check to the IRS for 190k, depleting my non-emergency savings (and this is from a very frugal person, who never even spent more than 8k on a car, car being my biggest expense ever). There were funds who would lend me the money, but wanted 50%+ of the proceeds, and if the company goes under you're still on the hook for a taxable event when the loan is forgiven.
Luckily AMT for ISO exercise can be slowly (very slowly) recouped in future tax years (and the new tax law made it a bit easier by increasing the deduction and the phaseout limits), but I still had to waste so much of my after tax money just to leave with what I matured over the years. And that money is now sitting in the government pockets for years, producing me no interest and losing value with inflation until I recoup all of it.
Fortunately, a year after I bought those shares one of the investors contacted me and bought some of my equity, so I was able to recoup all what I originally put in (and then some). But it's simply insane, and I am still in the hole for all that AMT that I will recoup in ~10 years, no less.
Other coworkers who left and didn't have the money to come up with the exercise and tax liability, simply lost them, justifying to themselves "well, they're probably not going to be worth anything anyway" (which could be totally true even after paying thousands to exercise them!).
It's a plain insult to startup employees. I wish all startup employees would rebel against this and refused to accept any startup offer unless there was early exercise paid by the company upon joining, or option expiration window of 10+ years.
I, for one, know that will never __ever__ join another startup again for this reason.