Attorney Roundtable: How founder-friendly are “standard” VC term sheets?

Jennifer Rohleder, Keith Strahan, Zev Safran, and Ryan Juliano

Venture capitalists and angel investors can say they are founder-friendly. But their “standard” term sheets and funding agreements may tell a different story.

Four attorneys with deep expertise in startup fundraising weighed in during a roundtable discussion with me, Eisaiah Engel, co-author of Founder Friendly Standard, a checklist for entrepreneurs to address all the “other” terms in a financing besides valuation and percentage of the company purchased. The attorneys shared their insights on what makes a term sheet founder-friendly, how “standard” term sheets compare to each other, and how to avoid my past mistakes when negotiating venture financing.

INFOGRAPHIC: The attorneys in this roundtable discussion contributed to this infographic comparison of the six most popular startup financing templates (Y Combinator Safes and Series A, NVCA Model Legal Docs, Gust Series Seed, Sam Altman’s personal term sheet, and the 500 Startups KISS).

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Calling all bootstrappers for #DisruptSF campaign

Results from our founder-friendly term sheet twitter teardown.
Six attorneys compare popular investment agreements side-by-side to Founder Friendly Standard
Click each box in the interactive version for analysis.

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 startup founders should have super-voting equity

Super-voting equity for founders in Section 1.1 of Founder Friendly Standard

Founder Friendly Standard gives founders 24:1 super-voting shares of stock. The purpose is to keep founders in control of their startups so they can build for the long term.

Here are data that support giving startup founders super-voting shares and thus control of their companies:

  1. Google has 10:1 super-voting equity for its founders. Snapchat doesn’t give shareholders any voting rights. Investors buy stock in these companies every day. 
  2. The Credit Suisse Family 1000 research found that companies controlled by their founders build for the long-term, which translates to a competitive advantage over time.
  3. Principal-agent theory suggests that agents (investors) may be more short-term focused than principals (founders).
  4. Prospect theory suggests that diversified investors would engage in riskier behavior to seek outsized gains. Founders, whose net worth is not diversified, would often prefer the opposite.
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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 ecosystem innovation fund model that I introduced in Innovation Casino. 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!

Books

Innovation Casino (2020)

Grays Sports Almanac for Venture Capital (2018)

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