Investors can say they are founder-friendly. But the proof is in the paperwork. Click on the bar charts to read how popular investment and term sheet templates compare to Founder Friendly Standard® – performed by six startup attorneys.
VOTING EQUITY
SWEAT EQUITY
LEGAL RULES
TRANSFERS
500 Startups KISS
FFS 1.1 – Founder 24 votes per share
SILENT
KISS Notes do not address founder equity.
ANALYSIS BY
500 Startups KISS
FFS 1.2 – Investor 1 vote per share with liquidation preference
SILENT
KISS Notes do not address voting rights.
ANALYSIS BY
500 Startups KISS
FFS 1.3 – Employee 1 vote per share
SILENT
KISS Notes do not address “sweat” equity issued to employees and contractors.
ANALYSIS BY
500 Startups KISS
FFS 1.4 – No special voting rights
SILENT
KISS Notes do not address board composition or representation.
ANALYSIS BY
500 Startups KISS
FFS 1.5 – No anti-dilution
CONFLICT
KISS Notes do not meet section 1.5 of the Founder Friendly Standard. Some KISS terms, including the Valuation Cap, grant investors certain anti-dilution rights.
ANALYSIS BY
500 Startups KISS
FFS 2.1 – Founder performance reviews
SILENT
KISS Notes do not address performance reviews.
ANALYSIS BY
500 Startups KISS
FFS 2.2 – Founder 4-year vesting
SILENT
KISS Notes do not address vesting of sweat equity.
ANALYSIS BY
500 Startups KISS
FFS 2.3 – Confidentiality & IP
SILENT
The KISS Notes do not address founder confidentiality.
ANALYSIS BY
500 Startups KISS
FFS 2.4 – Founder tax warning
SILENT
The KISS Notes do not address sweat equity or IRC Section 83(b) elections.
ANALYSIS BY
500 Startups KISS
FFS 2.5 – Narrow non-competes
COMPATIBLE
KISS Notes do meet section 2.5 of the Founder Friendly Standard because KISS Notes do not include any non-compete provisions. Remember to compare section 2.5 to future agreements including bylaws and shareholder rights.
ANALYSIS BY
500 Startups KISS
FFS 3.1 – No legal reimbursement
COMPATIBLE
KISS Notes do meet section 3.1 of the Founder Friendly Standard. KISS Notes do not require the company to pay legal fees except where the company does not comply with the KISS agreement.
ANALYSIS BY
500 Startups KISS
FFS 3.2 – No binding arbitration with investors
COMPATIBLE
KISS Notes do meet section 3.2 of the Founder Friendly Standard. KISS Notes do not include an arbitration requirement or provision for investor disputes.
ANALYSIS BY
500 Startups KISS
FFS 3.3 – No binding arbitration with founders
COMPATIBLE
KISS Notes do meet section 3.3 of the Founder Friendly Standard. Because KISS Notes do not address founder disputes, they do not require founders to submit to binding arbitration. Remember to compare section 3.3 to future agreements including labor, bylaws, and shareholder rights.
ANALYSIS BY
500 Startups KISS
FFS 4.1 – Converting super-voting equity
SILENT
KISS Notes do not address founder equity.
ANALYSIS BY
500 Startups KISS
FFS 4.2 – Transferring equity
CONFLICT
KISS Notes do not meet section 4.2 of the Founder Friendly Standard. KISS Notes generally permit transfer of the securities upon notice to the company.
ANALYSIS BY
Y Combinator Safes
FFS 1.1 – Founder 24 votes per share
SILENT
Safes do not address the voting rights of the founders, investors, or employees. Typically, experienced investors will expect that Safes will convert into a class of preferred stock with terms consistent with the National Venture Capital Association’s (“NVCA”) standard documents. For the remainder of my answer, I’ll be referring to the NVCA documents. Those documents do not provide for the super-voting founder equity described in Section 1.1.
ANALYSIS BY
Y Combinator Safes
FFS 1.2 – Investor 1 vote per share with liquidation preference
SILENT
Each Safe is a convertible security that will convert into preferred stock at the company’s next equity financing. Preferred stock that is consistent with the NVCA documents has one vote for each share of common stock into which the preferred stock is convertible. Initially, the preferred stock is typically convertible into common stock on a 1:1 basis, subject to adjustment for dilutive issuances. Although preferred stock in the NVCA model has a liquidation preference, it does not have a higher par value.
ANALYSIS BY
Y Combinator Safes
FFS 1.3 – Employee 1 vote per share
SILENT
Safes do not address employee or contractor equity.
ANALYSIS BY
Y Combinator Safes
FFS 1.4 – No special voting rights
SILENT
Safes do not address board composition. Under the NVCA documents, holders of preferred stock typically have the right to appoint a board observer or director.
ANALYSIS BY
Y Combinator Safes
FFS 1.5 – No anti-dilution
CONFLICT
With discount-only or MFN Safes, the amount of equity into which Safes are convertible is entirely dependent on the pricing of the next equity financing, so there is no dilution to measure until after the conversion.
Safes with valuation caps effectively give the holders full-ratchet anti-dilution rights. They are guaranteed a minimum percentage of the company (on a post-money basis). If the valuation of the next equity financing is below the cap, the Safe holders receive a higher percentage of the company, diluting all other stockholders.
Most commonly, the NVCA documents give preferred stockholders weight-average anti-dilution protection, which means that stockholders other than the preferred stockholders take most of the dilution.
Safes with valuation caps effectively give the holders full-ratchet anti-dilution rights. They are guaranteed a minimum percentage of the company (on a post-money basis). If the valuation of the next equity financing is below the cap, the Safe holders receive a higher percentage of the company, diluting all other stockholders.
Most commonly, the NVCA documents give preferred stockholders weight-average anti-dilution protection, which means that stockholders other than the preferred stockholders take most of the dilution.
ANALYSIS BY
Y Combinator Safes
FFS 2.1 – Founder performance reviews
SILENT
Safes do not address performance reviews.
ANALYSIS BY
Y Combinator Safes
FFS 2.2 – Founder 4-year vesting
SILENT
Safes do not address vesting terms for “sweat equity.” However, the NVCA documents often require uniform vesting terms, and 4-year vesting with a 1-year cliff is the most commonly prescribed schedule.
ANALYSIS BY
Y Combinator Safes
FFS 2.3 – Confidentiality & IP
SILENT
Safes do not address founder confidentiality and IP assignment.
ANALYSIS BY
Y Combinator Safes
FFS 2.4 – Founder tax warning
SILENT
Safes do not address 83b elections or other founder tax consequences.
ANALYSIS BY
Y Combinator Safes
FFS 2.5 – Narrow non-competes
COMPATIBLE
Safes meet section 2.5 of Founder Friendly Standard because they are silent on the issue of non-competition.
ANALYSIS BY
Y Combinator Safes
FFS 3.1 – No legal reimbursement
COMPATIBLE
Safes are silent on the payment of legal expenses.
ANALYSIS BY
Y Combinator Safes
FFS 3.2 – No binding arbitration with investors
COMPATIBLE
Safes do not include an arbitration clause.
ANALYSIS BY
Y Combinator Safes
FFS 3.3 – No binding arbitration with founders
COMPATIBLE
Safes do not include an arbitration clause.
ANALYSIS BY
Y Combinator Safes
FFS 4.1 – Converting super-voting equity
SILENT
Safes do not deal with the transfer or sale of founder equity.
ANALYSIS BY
Y Combinator Safes
FFS 4.2 – Transferring equity
CONFLICT
Safes are not transferable, other than to affiliates of the holder. The NVCA documents do not subject investor stock to a right of first refusal.
ANALYSIS BY
NVCA Model Legal Docs
FFS 1.1 – Founder 24 votes per share
CONFLICT
NVCA Docs do not meet Section 1.1 of the Founder Friendly Standard. Article FOURTH (A)(2) of NVCA Certificate of Incorporation says that Common Stock holders are entitled to one vote for each share of common stock at meetings of stockholders. Common Stock holders can’t vote on issues solely affecting/reserved to Preferred Shareholders. These can potentially include issues such as voting on a director, allowing for conversion of shares, and receiving preferred dividend payments, among others.
ANALYSIS BY
NVCA Model Legal Docs
FFS 1.2 – Investor 1 vote per share with liquidation preference
CONFLICT
NVCA Docs do not meet Section 1.2 of the Founder Friendly Standard. The NVCA Certificate of Incorporation Article FOURTH (B)(2) provides that Preferred Shareholders have a liquidation preference, Article FOURTH (B)(3) of the same document provides that voting is done as a single class. Why this does not meet Section 1.2 of the Founder Friendly Standard is NVCA Docs provide the option for investors to elect two members of a five-person board. This would give investors a type of super-voting equity, not one vote per share.
ANALYSIS BY
NVCA Model Legal Docs
FFS 1.3 – Employee 1 vote per share
COMPATIBLE
NVCA Docs do meet Section 1.3 of the Founder Friendly Standard. In the NVCA Stock Purchase Agreement, Section 2.2 (b) provides for a stock option plan, under which “officers, directors, employees and consultants” may be issued shares of Common Stock. There is no separate ‘Class B’ for employees/contractors, but according to Section FOURTH, (A)(1) of the NVCA Certificate of Incorporation, common stock does carry one vote per share, and liquidation rights are subject to qualified rights of Preferred Shareholders.
ANALYSIS BY
NVCA Model Legal Docs
FFS 1.4 – No special voting rights
CONFLICT
NVCA Docs do not meet Section 1.4 of the Founder Friendly Standard. Section 1.2 of the NVCA Voting Agreement provides the option to select the number of directors that the Board will consist of. Though optional, the NVCA Docs suggest that the Board initially consists of five directors, two of which are designated by investors.
ANALYSIS BY
NVCA Model Legal Docs
FFS 1.5 – No anti-dilution
CONFLICT
NVCA Docs do not meet Section 1.5 of the Founder Friendly Standard. Subsection 4.4.4 of the NVCA Certificate of Incorporation provides for anti-dilution rights. There are two options provided, including a broad and narrow option, i.e. a “broad-based weighted average” anti-dilution provision and a “full ratchet” anti-dilution option.
ANALYSIS BY
NVCA Model Legal Docs
FFS 2.1 – Founder performance reviews
SILENT
NVCA Docs do not address section 2.1 of the Founder Friendly Standard.
ANALYSIS BY
NVCA Model Legal Docs
FFS 2.2 – Founder 4-year vesting
COMPATIBLE
NVCA Docs do meet Section 2.2 of the Founder Friendly Standard. Section 5.3 of the NVCA Investor Rights Agreement suggests a 4-year vesting term with 1-year vesting cliff. This is required not only for sweat equity but for “all future employees and consultants.”
ANALYSIS BY
NVCA Model Legal Docs
FFS 2.3 – Confidentiality & IP
COMPATIBLE
NVCA Docs do meet Section 2.3 of the Founder Friendly Standard. Section 2.19 of the NVCA Stock Purchase Agreement says current and former employees, consultants, and officers of the Company represent they’ve executed confidentiality agreements. Furthermore, Section 2.8 of the NVCA Stock Purchase Agreement provides that the Company represents that all “employees and consultants have assigned all intellectual property rights.” Key Employees also must not have excluded works or inventions from their assignment of inventions. However, the term “Founder” is not used in the NVCA Docs, so it may be important to note that there is the possibility for a founder to fall through the cracks of this Standard if they do not fit into one of the above-stated categories, such as an “employee, consultant, or officer.”
ANALYSIS BY
NVCA Model Legal Docs
FFS 2.4 – Founder tax warning
COMPATIBLE
NVCA Docs do meet Section 2.4 of the Founder Friendly Standard. Section 2.22 of the NVCA Stock Purchase Agreement provides a representation by the company that all elections and notices for 83(b) have been or will be filed. However, there is no recommendation for individuals to consult any tax professional regarding 83(b) elections.
ANALYSIS BY
NVCA Model Legal Docs
FFS 2.5 – Narrow non-competes
COMPATIBLE
NVCA Docs do meet Section 2.5 of the Founder Friendly Standard. Under Section 2.19 of the NVCA Stock Purchase Agreement, all key employees must sign a non-solicitation (and non-compete is bracketed as optional); this meets Founder Friendly Standard. It is worth noting that Section 2.11(b) of the NVCA Stock Purchase Agreement requires that the Company must represent that “no officers, directors, or employees, or respective spouses, children, or affiliates” are engaged in relationships with the Company's competitors up to the time of closing the investment transaction; it is not express language that prevents competition moving forward.
ANALYSIS BY
NVCA Model Legal Docs
FFS 3.1 – No legal reimbursement
CONFLICT
NVCA Docs do not meet Section 3.1 of the Founder Friendly Standard. Section 6.8 of the NVCA Stock Purchase Agreement provides that the Company pays the reasonable fees and expenses of counsel for the lead purchaser, up to a capped amount. Under Section 5.8 of the NVCA Investor Rights Agreement, in the event of a sale of the Company, the expenses for investor counsel is to be borne by the Company.
ANALYSIS BY
NVCA Model Legal Docs
FFS 3.2 – No binding arbitration with investors
CONFLICT
NVCA Docs do not meet Section 3.2 of the Founder Friendly Standard. Section 6.16 of the NVCA Stock Purchase Agreement provides for:
- The option of courts in a particular jurisdiction,
- Or two options for arbitration, using AAA or DRAA rules, both of which include binding provisions with no two-year prohibition.
- Under the DRAA alternative, there is the option to remove the waiver of the right to appeal.
- There is no distinction made between investors or founders.
ANALYSIS BY
NVCA Model Legal Docs
FFS 3.3 – No binding arbitration with founders
CONFLICT
NVCA Docs do not meet Section 3.3 of the Founder Friendly Standard. Section 6.16 of the NVCA Stock Purchase Agreement, Section 6.4 of the NVCA Right of First Refusal and Co-Sale Agreement, Section 6.11 of the NVCA Investor Rights Agreement, and Section 7.16 of the NVCA Voting Agreement, all provide for:
- The option of courts in a particular jurisdiction,
- Or two options for arbitration, using AAA or DRAA rules, both of which include binding provisions with no two-year prohibition.
- Under the DRAA alternative, there is the option to remove the waiver of the right to appeal.
- There is no distinction made between investors or founders.
ANALYSIS BY
NVCA Model Legal Docs
FFS 4.1 – Converting super-voting equity
CONFLICT
NVCA Docs do not meet Section 4.1 of the Founder Friendly Standard. There is no super-voting equity provided for in the NVCA Docs; and as such, there is no conversion mechanism, as provided for and in accordance with the Founder Friendly Standard.
ANALYSIS BY
NVCA Model Legal Docs
FFS 4.2 – Transferring equity
CONFLICT
NVCA Docs do not meet Section 4.2 of the Founder Friendly Standard. While Section 2.1(b) of the NVCA Right of First Refusal and Co-Sale Agreement does provide the Company with the first right of refusal for up to 45 days, Section 3.3 of the same agreement says equity cannot be transferred to (a) an entity which directly or indirectly competes with the Company, in the Board’s discretion; or (b) any customer, distributor, or supplier of the company if the Board determines it would put the Company at a competitive disadvantage. Section 3.2 of the same agreement provides that this right of first refusal shall not apply to the sale of stock to the public in an IPO.
ANALYSIS BY
Gust Series Seed
FFS 1.1 – Founder 24 votes per share
CONFLICT
The Gust Term Sheet doesn’t meet Section 1.1 of the Founder Friendly Standard. There is no mention of a super-voting class of shares for Founders. This is not surprising, and can be remedied by already having super-voting shares included in the company’s bylaws.
ANALYSIS BY
Gust Series Seed
FFS 1.2 – Investor 1 vote per share with liquidation preference
CONFLICT
The Gust Term Sheet doesn’t meet Section 1.2 of the Founder Friendly Standard. While the terms sheet provides a liquidation preference of 1x the original issue price plus accrued and unpaid dividends, it lets investors elect one member (“Preferred Director”) of a three-person board. This is akin to giving investors super-voting equity, not one vote per share. (Section 1.4 below describes the powers given to the Preferred Director)
ANALYSIS BY
Gust Series Seed
FFS 1.3 – Employee 1 vote per share
COMPATIBLE
The Gust Term Sheet does meet Section 1.3 of the Founder Friendly Standard. While the term sheet does not provide for a third class of stock for employees, one would expect employee equity to receive one vote per share with no liquidation preference.
ANALYSIS BY
Gust Series Seed
FFS 1.4 – No special voting rights
CONFLICT
The Gust Term Sheet doesn’t meet Section 1.4 of the Founder Friendly Standard. The term sheet provides that two directors are elected by the holders of a majority of the Common Stock, and one is elected by the holders of a majority of the Preferred. While it looks like the Founders would control two thirds of the board, further provisions require the Preferred Director’s approval before taking an action. These actions include taking on debt, selling assets, changing Founders or executive officers, and entering into a liquidation event that would result in the Preferred receiving less than 5x the original purchase price. This can put the investors, rather than the Founders, in control of the company. Founders, is this what you want?
ANALYSIS BY
Gust Series Seed
FFS 1.5 – No anti-dilution
CONFLICT
The Gust Term Sheet doesn’t meet Section 1.5 of the Founder Friendly Standard. The price per share is calculated using a set-aside of 15% of the company’s shares as an option pool. The pool exists after the investment is made but is used in the calculations before the investment is made. This means that all of the shares of the option pool come from the Founders shares, not the investor shares. The investors are protected from dilution for future employees.
The conversion of Preferred into Common shares is subject to the “Broad-based Weighted Average anti-dilution protection.” This means that if the company raises money in the future at a lower valuation than the valuation used in the current round, the current investors will be partially protected. According to Gust, this provision is the “middle-of-road industry standard, halfway between the Founder-biased no anti-dilution approach and the investor-biased full ratchet anti-dilution version.”
The focus on the down-side protection seems misplaced in such an early round of funding. Early-stage companies are risky by definition; that risk should be shared equally. Does that sound right to you?
The conversion of Preferred into Common shares is subject to the “Broad-based Weighted Average anti-dilution protection.” This means that if the company raises money in the future at a lower valuation than the valuation used in the current round, the current investors will be partially protected. According to Gust, this provision is the “middle-of-road industry standard, halfway between the Founder-biased no anti-dilution approach and the investor-biased full ratchet anti-dilution version.”
The focus on the down-side protection seems misplaced in such an early round of funding. Early-stage companies are risky by definition; that risk should be shared equally. Does that sound right to you?
ANALYSIS BY
Gust Series Seed
FFS 2.1 – Founder performance reviews
SILENT
The Gust Term Sheet doesn’t address the principle laid out in section 2.1 of the Founder Friendly Standard. The term sheet is silent on this issue.
ANALYSIS BY
Gust Series Seed
FFS 2.2 – Founder 4-year vesting
COMPATIBLE
The Gust Term Sheet does meet Section 2.2 of the Founder Friendly Standard. The term sheet provides for “reverse vesting” so the company can repurchase unvested stock if a Founder leaves before four years. The term sheet provides for full acceleration upon “double trigger,” meaning if the company is acquired prior to the 4-year period and the new company terminates a Founder, that Founder’s remaining stock immediately vests.
ANALYSIS BY
Gust Series Seed
FFS 2.3 – Confidentiality & IP
COMPATIBLE
The Gust Term Sheet does meet Section 2.3 of the Founder Friendly Standard. The term sheet requires all Founders to have assigned all relevant IP to the company and executed a non-disclosure agreement.
ANALYSIS BY
Gust Series Seed
FFS 2.4 – Founder tax warning
SILENT
The Gust Term Sheet doesn’t address Section 2.4 of the Founder Friendly Standard. The term sheet is silent on this issue.
ANALYSIS BY
Gust Series Seed
FFS 2.5 – Narrow non-competes
CONFLICT
The Gust Term Sheet doesn’t meet Section 2.5 of the Founder Friendly Standard. The term sheet requires Founders sign a non-compete and non-solicitation agreement that extend one year after termination. Non-competes can restrict Founders’ ability to find work in their industry.
This isn’t fair for Founders receiving below-market salaries; it’s unlikely they will have enough savings while they look for jobs in other industries. Fired and restricted from finding work, founders can be exploited when it comes time to sell their equity. Have you ever heard of this happening to a founder?
This isn’t fair for Founders receiving below-market salaries; it’s unlikely they will have enough savings while they look for jobs in other industries. Fired and restricted from finding work, founders can be exploited when it comes time to sell their equity. Have you ever heard of this happening to a founder?
ANALYSIS BY
Gust Series Seed
FFS 3.1 – No legal reimbursement
CONFLICT
The Gust Term Sheet doesn’t meet Section 3.1 of the Founder Friendly Standard. The term sheet states that the company is responsible for reimbursing a flat fee to the preferred for background check expenses, due diligence, and review of transaction documents by investors’ counsel. This an egregious term; such costs are the costs of doing business for a professional investor.
ANALYSIS BY
Gust Series Seed
FFS 3.2 – No binding arbitration with investors
COMPATIBLE
The Gust 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 Founders and investors to go to court rather than arbitration.
ANALYSIS BY
Gust Series Seed
FFS 3.3 – No binding arbitration with founders
COMPATIBLE
The Gust 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 Founders and investors to go to court rather than arbitration.
ANALYSIS BY
Gust Series Seed
FFS 4.1 – Converting super-voting equity
CONFLICT
The Gust Term Sheet doesn’t meet Section 4.1 of the Founder Friendly Standard. Founders do not have super-voting equity per the term sheet.
ANALYSIS BY
Gust Series Seed
FFS 4.2 – Transferring equity
COMPATIBLE
The Gust Term Sheet does meet Section 4.2 of the Founder Friendly Standard. The company has the right of first refusal with respect to any proposed transfer of capital stock at the same price that was offered. The term sheet doesn’t provide a veto right. The term sheet doesn’t limit the amount of time such a right of first refusal is valid.
ANALYSIS BY
Sam Altman Term Sheet
FFS 1.1 – Founder 24 votes per share
CONFLICT
The Altman Term Sheet doesn’t meet Section 1.1 of the Founder Friendly Standard. There is no super-voting equity for Founders.
ANALYSIS BY
Sam Altman Term Sheet
FFS 1.2 – Investor 1 vote per share with liquidation preference
COMPATIBLE
The Altman 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.
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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 1.3 – Employee 1 vote per share
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 1.4 – No special voting rights
CONFLICT
The Altman 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.
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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 1.5 – No anti-dilution
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 2.1 – Founder performance reviews
SILENT
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 2.2 – Founder 4-year vesting
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 2.3 – Confidentiality & IP
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 2.4 – Founder tax warning
SILENT
The Altman Term Sheet doesn’t address Section 2.4 of the Founder Friendly Standard. No such warning is included in the term sheet.
ANALYSIS BY
Sam Altman Term Sheet
FFS 2.5 – Narrow non-competes
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 3.1 – No legal reimbursement
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 3.2 – No binding arbitration with investors
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 3.3 – No binding arbitration with founders
COMPATIBLE
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 4.1 – Converting super-voting equity
CONFLICT
The Altman 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.
ANALYSIS BY
Sam Altman Term Sheet
FFS 4.2 – Transferring equity
COMPATIBLE
The Altman 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.
ANALYSIS BY
Y Combinator Series A
FFS 1.1 – Founder 24 votes per share
CONFLICT
YC Term Sheet is incompatible with Section 1.1 of the Founder Friendly Standard. There is no super-voting equity for founders.
ANALYSIS BY
Y Combinator Series A
FFS 1.2 – Investor 1 vote per share with liquidation preference
CONFLICT
YC Term Sheet is incompatible with Section 1.2 of the Founder Friendly Standard. While the term sheet provides a liquidation preference of 1x the original issue, it lets the Lead Investor appoint one member (“Preferred Director”) of a three-person board. Investor shares also have special veto powers when adjusting Preferred Stock to let new investors in, selling the company, or changing the number of directors on the board. This is akin to giving investors super-voting equity, not one vote per share.
ANALYSIS BY
Y Combinator Series A
FFS 1.3 – Employee 1 vote per share
COMPATIBLE
YC Term Sheet is compatible with Section 1.3 of the Founder Friendly Standard. Although the term sheet doesn’t provide for a third class of stock for employees, one would expect employee equity to receive 1 vote per share with no liquidation preference as this is not special treatment.
ANALYSIS BY
Y Combinator Series A
FFS 1.4 – No special voting rights
CONFLICT
YC Term Sheet is incompatible with Section 1.4 of the Founder Friendly Standard. The term sheet provides that two directors are elected by the holders of a majority of Common Stock, and one Preferred Director is appointed by the lead investor. While it looks like the founders would control two-thirds of the board, further provisions require the Preferred Director and the majority of the holders of Preferred Stock to approve actions like adjusting Preferred Stock to let new investors in, selling the company, or changing the number of directors on the board. These veto powers can put the investors, rather than founders, in control of the company. Founders, isn’t the point of starting your own company to be your own boss?
ANALYSIS BY
Y Combinator Series A
FFS 1.5 – No anti-dilution
CONFLICT
YC Term Sheet is incompatible with Section 1.5 of the Founder Friendly Standard. The conversion of Preferred into Common shares is subject to the “Broad-based Weighted Average anti-dilution protection.” This means that if the company raises money in the future at a lower valuation than the valuation used in the current round, the current investors will be partially protected. Down-side protection seems unnecessary in such an early round of funding. Early-stage companies are risky by definition. Do you think investors and founders should share that risk equally?
On a positive note, the YC Term sheet calculates the option pool on a post-money basis. That helps reduce the trickery that my colleague, Jennifer Persico Rohleder, points out in Section 1.5 of her analysis of the Gust Series Seed term sheet.
On a positive note, the YC Term sheet calculates the option pool on a post-money basis. That helps reduce the trickery that my colleague, Jennifer Persico Rohleder, points out in Section 1.5 of her analysis of the Gust Series Seed term sheet.
ANALYSIS BY
Y Combinator Series A
FFS 2.1 – Founder performance reviews
SILENT
YC Term Sheet does not address section 2.1 of the Founder Friendly Standard. The term sheet is silent on this issue.
ANALYSIS BY
Y Combinator Series A
FFS 2.2 – Founder 4-year vesting
SILENT
YC Term Sheet does not address Section 2.2 of the Founder Friendly Standard. This is a big issue to be silent on. What if a co-founder holding 25% of the equity leaves after a few months? Watch out for how vesting gets addressed in any follow-on documents that may be needed to finalize the investment.
ANALYSIS BY
Y Combinator Series A
FFS 2.3 – Confidentiality & IP
SILENT
YC Term Sheet does not address Section 2.3 of the Founder Friendly Standard. Watch out for how confidentiality and intellectual property get addressed in any follow-on documents that may be needed to finalize the investment.
ANALYSIS BY
Y Combinator Series A
FFS 2.4 – Founder tax warning
SILENT
YC Term Sheet does not address Section 2.4 of the Founder Friendly Standard. The term sheet is silent on this issue. Make sure you talk to a licensed tax professional in your state/province/country as soon as possible.
ANALYSIS BY
Y Combinator Series A
FFS 2.5 – Narrow non-competes
COMPATIBLE
YC Term Sheet is compatible with Section 2.4 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. Watch out for non-compete restrictions in any follow-on documents that may be needed to finalize the investment. Agreeing to a non-compete can have devastating consequences if you are underpaid and ultimately leave the company without selling your equity at a high price.
ANALYSIS BY
Y Combinator Series A
FFS 3.1 – No legal reimbursement
CONFLICT
YC Term Sheet is incompatible with Section 3.1 of the Founder Friendly Standard. The term sheet says the Company is responsible for paying the Lead Investor’s legal fees up to $30,000. How could this be used to extract concessions from founders in any follow-on documents to finalize the investment?
ANALYSIS BY
Y Combinator Series A
FFS 3.2 – No binding arbitration with investors
COMPATIBLE
YC Term Sheet is compatible with Section 3.2 of the Founder Friendly Standard. The term sheet is silent on dispute resolution, which opens the door for founders and investors to go to court rather than arbitration. Watch out for arbitration clauses in any follow-on documents that may be needed to finalize the investment.
ANALYSIS BY
Y Combinator Series A
FFS 3.3 – No binding arbitration with founders
COMPATIBLE
YC Term Sheet is compatible with Section 3.3 of the Founder Friendly Standard. The term sheet is silent on dispute resolution, which opens the door for founders and investors to go to court rather than arbitration. Watch out for arbitration clauses in any follow-on documents that may be needed to finalize the investment.
ANALYSIS BY
Y Combinator Series A
FFS 4.1 – Converting super-voting equity
CONFLICT
YC Term Sheet is incompatible with Section 4.1 of the Founder Friendly Standard. Founders do not have super-voting equity in the term sheet.
ANALYSIS BY
Y Combinator Series A
FFS 4.2 – Transferring equity
COMPATIBLE
YC Term Sheet is compatible with Section 4.2 of the Founder Friendly Standard—although not as much as founders might like. The term sheet doesn’t provide an outright veto right, but it does have stipulations. Investors get the right of first refusal to buy a founder’s stock. And if a founder finds a buyer for her stock, investors would have the right to sell to her buyer first.
ANALYSIS BY
Founder Friendly Standard ("FFS") - individual sections
COMPATIBLE
CONFLICT
SILENT – DOESN’T ADDRESS
Sources:
- Founder Friendly Standard v1.1
- Attorney analysis of 500 Startups KISS
- Attorney analysis of Y Combinator Safes
- Attorney analysis of NVCA Model Legal Docs
- Attorney analysis of Gust Series Seed
- Attorney analysis of Sam Altman Founder-Friendly Term Sheet
- Attorney analysis of Y Combinator “Standard” Series A Term Sheet