jasonkwon's comments

Network effects don't just exist in tech.

Delaware has the most developed corporate law and support services for corporate transactions (you can file charters, mergers, etc. within an hour there; good luck doing that in most other states, including CA). Every company that incorporates in Delaware adds further value to every other company that's in Delaware. Each marginal company adds to the Delaware legal corpus and support structure because (1) it ensures Delaware has the greatest variety and largest supply of potentially significant corporate legal cases, which means it has the greatest variety and largest supply of actually adjudicated cases and thus developed and stable law, and (2) it pays Delaware annual fees for those support services. This in turn attracts more companies to incorporate there because of that ever expanding corpus/infrastructure. And so on and so forth.

Yes, this.

The term sheet we posted is just meant to show what a pretty good term sheet looks like from a good investor. The investor having its legal fees reimbursed by the company is something that shows up all the time. Sure, you can negotiate that if you want. You can negotiate other things too, or choose not to. The way this usually plays out though is that unless you have the kind of leverage that lets you basically write your own term sheet, you have to prioritize, and most people prioritize getting what they want on valuation, control, clean terms, etc. before making sure to shift $30K in legal fees back to the investor.

Re-vesting schedules are all over the map.

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.

Theoretically this would appear to be true.

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.

Major investors concept (investor has to have invested at least $X) is often added in the definitives. Longer term sheets just state a threshold dollar amount; shorter ones (like this one) just skip that definition and just add it in the definitives.

It can be legally binding.

You can make arguments like this in negotiations and sometimes they can work. It just depends. As I mentioned elsewhere, this was meant to be more descriptive than prescriptive. Founder vesting/re-vesting is often a negotiation point in a Series A term sheet and the outcomes are varied and fact-dependent enough that it's tough to say that there's a standard here.

Existing employee vesting is generally left alone unless they have something crazy.

I think it just comes down to risk preferences. If you optimize for a higher valuation and give the investor downside protection for that, then you own more of the business and therefore more of the upside. If you choose to better optimize for the downside by taking away investor downside protection, you may end up with a lower valuation, lower ownership of the company and lower upside.

probably true

Annual and quarterly unaudited is normally implied. Sometimes monthly too. Most good Series A investors understand that audited financials don't make sense this early and their lawyers will draft something like the audit requirement can be waived by the investor in any year, or that audits won't be required until 2-3 years out.

I'm going to answer this question a little differently, because enforceability can also depend on facts and circumstances. Think of the binding / non-binding distinction as more of a social commitment signal. The No Shop means that once the company and investor both sign, they're pledging to work together to figure out this deal along these high level terms for the next 30 days. They've made a commitment to each other. Venture is a relatively small community and going back on your word gets around. Social consequences can be just as bad as legal ones.

We send people that link all the time to help them understand option pools. The main point of that post is to make it clear to founders that when an investor is saying they'll invest $X to get 20%, the dilution is more than 20% because of the impact of the pool.

I think if the pool is not part of the premoney, investors just adjust the valuation to compensate.

Just focus on the final output. Take the term sheet and work with your lawyer to model out how much you own after the round is closed. Is that a good deal or not? If you don't like it, there are multiple ways to increase your post-closing ownership. Moving the option pool into the post-money is one of the hardest ways to accomplish that because you are trying to move the investor up on both valuation and convention.

I wouldn't talk in absolutes because having a ton of negotiating leverage can make everything fair game. But in an run of the mill deal, it's pretty tough to make a VC give up anything that's not in brackets.

descriptive, but note the comment about the brackets.

I think you already answered that question in your post. There would be incrementally more proceeds for the founders and employees in an exit that is flat or below the postmoney valuation of the Series A round. But as you also noted, this stuff doesn't exist in isolation - pull one lever and it results in other changes. In this case, that outcome would probably change how the investors think about the risk-reward and may depress the valuation itself, especially if it's relatively high.

Yeah excessive preferences do exactly this. But it's not the preference mechanism as much as what the preference does in relation to business value. Assuming liquidation preferences are 1x, what it means is that the company needs to build value that is well in excess of the amount that's been raised. The reason people end up surprised is that the amount raised is not always transparent, nor is the value of the business.

Good question. The anti-dilution right is an adjustment to the investor's shares that occurs when the company does a down-round. The "broad-based" qualifier is a reference to the most company-friendly version of this because it requires the adjustment to take into account the scale of down-round in terms of dilution. For instance, if you closed a round at $20M post and then sold one share afterwards at $10M post, the adjustment would be negligible. There are other variations of anti-dilution adjustments that would ignore such considerations.

The anti-dilution adjustment is generally not something that applies to ordinary course dilution (like employee option grants).

Some minor wordsmithing that reflects lawyer and investor /founder preferences happens a fair amount.

The veto on company sales breaks founder friendly occasionally (you need a decent amount of leverage). Some examples:

1. It doesn’t exist 2. It only applies to sales that return less than X multiple of investor’s capital invested 3. It only applies to sales where the founders are getting retention packages (from acquirer) that substantially exceed their recent compensation

The veto on financings is present almost always. A founder would need rare leverage to get rid of it.

On both of these vetoes though there are additional constraints on abusive usage by investors — reputation being the most obvious one.