“Standard” term sheets are only 38% founder-friendly

Side-by-side comparison of Founder Friendly Standard with popular term sheet templates.

Y Combinator Safe, 500 Startups KISS, and other “standard” term sheets cannot claim they are founder-friendly, reveals study by 6 startup attorneys.

Side-by-side comparison of Founder Friendly Standard with popular term sheet templates.
Interactive: Comparisons of “standard” angel and VC contracts

Nearly every hour of my spare time since May 2019 has gone into this research study to determine if “standard” term sheets really are founder-friendly. It feels amazing to be finished! Here is what we found.

Six attorneys analyzed 298 pages of legalese from:

  1. Y Combinator Safes
  2. 500 Startups KISS notes
  3. NVCA Model Legal Docs
  4. Gust Series Seed term sheet
  5. Sam Altman ‘Founder-Friendly’ term sheet
  6. Y Combinator Series A term sheet

Compared to Founder Friendly Standard®, a framework for determining if a venture capital or angel investment deal is founder-friendly, the above “standard” term sheets and contract templates were on average:

  • A little more than a third (38%) founder-friendly as defined by being compatible with Founder Friendly Standard.
  • Just under a third (32%) founder-unfriendly as defined by being incompatible with Founder Friendly Standard.
  • Nearly a third (30%) silent on the issues in Founder Friendly Standard.
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Calling all bootstrappers for #DisruptSF campaign

Results from our founder-friendly term sheet twitter teardown.
Infographic: Attorney analysis of popular (founder-friendly?) startup term sheets

To help entrepreneurs identify a founder-friendly term sheet, six attorneys compared KISS, Safe, NVCA, Gust, and other startup investment agreements to Founder Friendly Standard. The research took place in Q3 2019.

A startup that bootstraps and increases market power consistently has the best odds of getting a founder-friendly term sheet. You don’t need VC or angel investors to start your business.

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Why founders should get super-voting equity

Founder Friendly Standard gives founders 24:1 super-voting equity. Here is the rationale behind it.

This weekend, I’ve been reaching out to startup influencers to coordinate a twitter campaign where we celebrate Indie Hackers, bootstrappers, customer-funding, and Zebras during the unicorn-obsessed Tech Crunch Disrupt conference in San Francisco, October 2 – 4, 2019. If you want to join us, we’re using the hashtag #DisruptVC.

One of the influencers I approached asked why Founder Friendly Standard gives founders a 24:1 voting advantage. The reason is to keep founders in control of their companies. Here’s an excerpt from the email:

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Are there any standard contract templates for investors and founders to use when funding startups?

Here’s me at Enchanted Rock meditating on a better way to beat the odds at the startup lottery.
Here’s me at Enchanted Rock meditating on a better way to beat the odds at the startup ‘lottery.’

Yes. There are lots of templates available, and you should start by retaining an attorney who represents founders. Your attorney may have a set of templates that you can have adapted to the Founder Friendly Standard.

After learning hard lessons about the tension between investors and founders, I teamed up with my former business partner, Dan Flanegan, and my former attorney, K. Adam Bloom, to create an open-source standard that you can attach to any bylaw agreement, term sheet, employment agreement, etc.

It’s called the Founder Friendly Standard. It has 17 sections that can lay common disputes to rest such as who gets to vote, who gets liquidation preferences, what is the scope of non-compete, etc.

Here are (3) three of the juiciest sections:

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17 tweets from Grays Sports Almanac for Venture Capital

#StartupGrind 2019 was a coming out party for many of the ideas behind my investment hypothesis, Grays Sports Almanac for Venture Capital. 

Here are the top 17 tweets that illustrate points made in the book:

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What are the odds of startup success by US metro area?

1 in how many companies achieves High-Growth status by metro area. Washington DC leads the way with 1 in 326.

District of Columbia leads with 1 in 326 odds of starting a High-Growth Company. Providence is the city with the worst odds—1 in 3,297.

1 in how many companies achieves High-Growth status by metro area. Washington DC leads the way with 1 in 326.

A High-Growth Company is defined as achieving $2M+ in revenue with 20% annualized growth over a 3-year period. This definition comes from page 10 of the 2017 Kauffman Index of Growth Entrepreneurship.

The data table below shows the odds of starting a High-Growth Company in each major city in America. This data serves as a baseline for the fund I’m modeling based on the book, Grays Sports Almanac for Venture Capital. I am sharing my research notes here so that you can incorporate this data into your angel investing or venture capital models.

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Manage 10 of the 20 top startup failure risks.

Founder Friendly Standard and customer-funding can help founders avoid “No market need, Running out of cash, Not the right team,” and 7 more reasons startups fail. 

Source: Top 20 reasons startups fail is from CB Insights. I added the check marks.

The above graph shows the top 20 reasons why startups fail from CB Insights. I marked up the graph with green checkboxes to show which risk factors customer-funding (also called bootstrapping) can help you manage. Orange checkboxes denote risk factors that Founder Friendly Standard can help manage. 

Risk Factor: No market need

If you’re bootstrapping, you’ll find out pretty quickly if there is no market need. Unlike your angel and VC-funded cohorts, you’ll be able to make fast pivots while they’re lining up their organizations’ change management strategies.

Risk Factor: Ran out of cash

If you are bootstrapping, you are financing innovation with organic cash flows. This is a key growth driver in the Credit Suisse Family 1000 research. If your company is controlled by its founders, you’re more likely to pace yourself, spending the money like it’s your own vs. your VC-funded competitors who are quick to spend (principal–agent theory).

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My startup tips in one place

Here is a collection of tips for startup founders. I’ve learned these while starting three companies and transitioning into an employee of a Fortune 500 company. (All opinions are my own.)

Binge watch in Netflix style formatting.
There’s nothing like a good binge-watching session!

Amazon

Kindle Book: Grays Sports Almanac for Venture Capital (2018)

Audio Book: Grays Sports Almanac for Venture Capital (2018)

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8 personal values that you can tweet

Keep it simple. To me, this means breaking things down into 3’s. What do you value?

According to my personal coach, Joe Cohen, personal values are a powerful tool for evaluating what’s important.

Here is a list of eight of my personal values. Since what we value influences our behavior, think of this as a “user guide” to Eisaiah.

Which of these values do we share? I want to hear from you on Twitter! Tag me @eisaiah_e.

Invest long-term. To me, this means committing to productivity growth. What do you value? @eisaiah_e @j40pillars #personalvalues #personalgrowth #positivity #success #selfdiscovery

Invest long-term. To me, this means committing to productivity growth.

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Update: Founder Friendly Standard v1.1

Pictures of Founder Friendly Standard Authors

Pictures of Founder Friendly Standard Authors
Founder Friendly Standard Authors: Dan Flanegan, Eisaiah Engel, Adam Bloom

Founder Friendly Standard v1.0 has been updated today. The new version of the standard is 1.1. Here is a description of the change:

  • Section 2.4 – clarifying language (in bold) has been added for companies outside of the United States. The section now reads: Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.

The change has been applied to: