Review of Sam Altman’s Personal Term Sheet

How founder-friendly is it?

I managed a study in 2019 with attorneys who reviewed the six most popular startup financing documents—all of which were produced by investor-funded organizations. After pouring through 298 pages of legalese, the attorneys found the top six financing documents were, on average, only 38% compatible with Founder Friendly Standard. Of the six documents, Sam Altman’s personal term sheet is the most compatible with Founder Friendly Standard. See for yourself by viewing our infographic where you can drill down and compare the term sheets.

Comparison of Sam Altman’s personal term sheet with Founder Friendly Standard

Review written by Jennifer Rohleder, Principal of J. Rohleder Law, on July 25, 2019.

Below, you’ll see how Sam Altman’s Personal Term Sheet compares to Founder Friendly Standard. I wrote this review to help startup founders critically evaluate the issues in term sheet templates.

Section 1.1 of the Founder Friendly Standard says:

Individuals who work for the company and are instrumental in its inception (“Founders”) receive a class of equity such as Common Stock which provides no less than twenty-four (24) votes to one (1) vote of stock held by investors or employees.

Sam Altman’s Personal Term Sheet doesn’t meet Section 1.1 of the Founder Friendly Standard. There is no super-voting equity for Founders.

Section 1.2 of the Founder Friendly Standard says:

Investors receive a class of equity such as Class A Preferred Stock which will have one vote per share with a higher par value justified by a liquidation preference.

Sam Altman’s Personal Term Sheet does meet Section 1.2 of the Founder Friendly Standard. The term sheet provides that the Preferred Shares will receive the same number of votes as the number of Common Shares it could be converted into. The liquidation preference is limited to the original purchase prices of the shares, plus any declared and unpaid dividends.

Preferred Shares have an 8% dividend when declared, prior and in preference to any other dividends on other stock classes. Dividends are not addressed in version 1.1 of the Founder Friendly Standard.

Section 1.3 of the Founder Friendly Standard says:

Employees and contractors receive a class of equity such as Class B Common Stock which carries one vote per share and does not have a liquidation preference.

Sam Altman’s Personal Term Sheet does meet Section 1.3 of the Founder Friendly Standard. The term sheet contains no references to employees other than the 4-year vesting, 1-year cliff for employee options. One would expect employee options to purchase Common Stock which carries 1 vote per share and has no liquidation preference.

Section 1.4 of the Founder Friendly Standard says:

The first board consists only of Founders. The term of the board is one year. After the first year, a new board is elected by the equity holders at the annual meeting. Board decisions are made by a majority vote of the board. Board members cast no more than one vote each on any decision. Board committees are disallowed for at least the first two (2) years.

Sam Altman’s Personal Term Sheet doesn’t meet Section 1.4 of the Founder Friendly Standard. The term sheet is silent as to the composition of the Board of Directors. The investor is receiving a class of Preferred Shares under the term sheet. The term sheet also includes protection for the Preferred Class whereby certain company actions require the consent of a majority of the Preferred Class so long as any Preferred Shares are outstanding.

While the composition of the Board is not dictated, the Preferred Class has an overriding veto on any company action that would affect the powers of the Preferred, changes the authorized number of shares of Preferred, or authorizes any security that ranks senior to or on par with the Preferred.

Section 1.5 of the Founder Friendly Standard says:

New equity of any kind, including stock option pools, dilutes all equity holders equally. Therefore, no investor in the company has anti-dilution rights of any kind.

Sam Altman’s Personal Term Sheet does meet Section 1.5 of the Founder Friendly Standard. In his blog post describing the term sheet, Sam Altman specifically addresses what is NOT in his term sheet. The option pool for future hires is not included in the pre-money valuation. When an option pool is included in the pre-money valuation, only the Founders and not the investors are diluted. It’s an artificial manipulation of the valuation of the company. New hires benefit everyone – Founders and investors alike, and therefore should dilute everyone.

Section 2.1 of the Founder Friendly Standard says:

Founders agree in writing they will give and receive performance reviews at the end of each fiscal quarter for the first four (4) years.

Sam Altman’s Personal Term Sheet doesn’t address section 2.1 of the Founder Friendly Standard. The term sheet is silent regarding individual Founder or employee performance reviews.

Section 2.2 of the Founder Friendly Standard says:

Sweat equity vests each month over a period of four (4) years with a one (1) year vesting cliff. Vesting begins on the date shares are issued.

Sam Altman’s Personal Term Sheet does meet Section 2.2 of the Founder Friendly Standard. Both Founders and employees agree to 4-year vesting with a 1-year cliff.

Section 2.3 of the Founder Friendly Standard says:

Founders keep all information confidential and assign the company all intellectual property created within the scope of their work for the company.

Sam Altman’s Personal Term Sheet does meet Section 2.3 of the Founder Friendly Standard. All employees (current and former) and consultants, will enter into a non-disclosure and proprietary rights assignment agreement.

Section 2.4 of the Founder Friendly Standard says:

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.

Sam Altman’s Personal Term Sheet doesn’t address Section 2.4 of the Founder Friendly Standard. No such warning is included in the term sheet.

Section 2.5 of the Founder Friendly Standard says:

Non-compete restrictions only apply to employee or independent contractor agreements and do not survive termination. The company’s bylaws and other investor agreements are either silent on the issue of non-competition or expressly allow competition.

Sam Altman’s Personal Term Sheet does meet Section 2.5 of the Founder Friendly Standard. The term sheet is silent on the issue of non-competition, which makes it possible for founders to find work after they leave the company.

Section 3.1 of the Founder Friendly Standard says:

For at least the first two (2) years of operations, the company will not agree to pay the legal expenses of any investor as a condition of investment.

Sam Altman’s Personal Term Sheet does meet Section 3.1 of the Founder Friendly Standard. In the blog post presenting his Term Sheet, Sam Altman specifically states that the company does not have to pay his legal fees. “Requiring the company to pay investors’ legal fees always struck me as particularly egregious.” In a funding round with a simple deal structure, legal fees are typically very low anyway.

Section 3.2 of the Founder Friendly Standard says:

For at least the first two (2) years of operations, the company does not agree to binding arbitration with any investor.

Sam Altman’s Personal Term Sheet does meet Section 3.2 of the Founder Friendly Standard. The term sheet is silent on dispute resolution, which leaves the door open for the company and its investors to go to court rather than arbitration.

Section 3.3 of the Founder Friendly Standard says:

For at least the first two (2) years of operations, the company does not agree to binding arbitration with any Founder.

Sam Altman’s Personal Term Sheet does meet Section 3.3 of the Founder Friendly Standard. The term sheet is silent on dispute resolution, which leaves the door open for the company and its Founders to go to court rather than arbitration.

Section 4.1 of the Founder Friendly Standard says:

Upon any transfer or sale of Founders’ super-voting equity, the portion of equity transferred converts to the class of equity described in Section 1.3. This also includes any transfer to a Founder’s estate, spouse, or heirs.

Sam Altman’s Personal Term Sheet doesn’t meet Section 4.1 of the Founder Friendly Standard. Founders do not have super-voting equity and no conversion of shares upon transfer is discussed in the term sheet.

Section 4.2 of the Founder Friendly Standard says:

The company has the right of first refusal on any transfer or sale of equity for up to forty-five (45) days, but it cannot veto a transfer or sale. This provision is void after a company’s stock is listed on a public exchange such as the NASDAQ, OTCBB, New York Stock Exchange, etc.

Sam Altman’s Personal Term Sheet does meet Section 4.2 of the Founder Friendly Standard, although perhaps not as strongly as a Founder might like. The term sheet provides for “customary first refusal and co-sale rights” for the company and the investors, as applicable. Additional limitations include the transfer of shares to competitors and transfers on secondary markets or that may trigger public reporting obligations.

Should startup founders accept ‘standard’ seed investment terms that are not founder-friendly?

Sam Altman’s Personal Term Sheet meets 10 of the issues (sections 1.2, 1.3, 1.5, 2.2, 2.3, 2.5, 3.1, 3.2, 3.3, and 4.2) addressed in the Founder Friendly Standard. The term sheet doesn’t meet three of the issues (sections 1.1, 1.4, and 4.1) and is silent on two issues (sections 2.1 and 2.4). All issues can carry long-term ramifications.

In my experience, and especially in the greater Washington D.C. metro area, companies do not start with outside investment. Rather, they start with what professor John W Mullins calls “customer-funding,” which means getting customers to pre-pay. The DC metro area has the highest concentration (1 in 326) of high-growth companies in the United States. Compare that to an investment-obsessed culture like San Francisco, where less companies, 1 in 797, become high-growth.

Another benefit of owning a customer-funded company is that you will be able to run it the way that you want without investors telling you what to do. If you still want or need investment, you should consider waiting until you can get terms in line with Founder Friendly Standard, which are meant to help keep you in charge of your company.

If your startup has received a term sheet from an investor and you would like to talk through the issues, visit my website to book a consultation.

INFOGRAPHIC: How does Founder Friendly Standard compare to term sheet templates from 500 Startups, Y Combinator, NVCA, Gust, and Sam Altman?

Limit of Liability/Disclaimer of Warranty: Jennifer Rohleder (“Author”) is not providing any financial, economic, legal, accounting, or tax advice or recommendations on this site. Although Author is an attorney licensed in the District of Columbia and Virginia, the information contained on this site was prepared for general information purposes only, does not constitute research, advice, or a recommendation from Author to the reader and is not a substitute for personalized financial or legal advice. Neither Author nor any of her affiliates make any representation or warranty as to the accuracy or completeness of the statements contained on this site. Author and her affiliates expressly disclaim any liability (including any direct, indirect, or consequential loss or damages) for all posts and their content.

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