An ecosystem innovation fund, or “EIF,” is a seed fund for startups. EIFs are a hybrid of corporate venture capital and the US government’s Small Business Innovation Research grant program, or “SBIR.” EIFs combine the best from both models to create a new vehicle for large companies to invest in innovation in their digital ecosystems.Continue reading
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).Continue reading
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.
- 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.
- 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.
- Principal-agent theory suggests that agents (investors) may be more short-term focused than principals (founders).
- 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.
A new standard for optionality to beat the odds
Grays Sports Almanac for Venture Capital proposes a new risk management strategy for venture capital. In this book, I outline why a venture fund might beat the odds by purchasing 2,208 to 4,416 warrants on startups. Startups would operate under a governance framework called the Founder Friendly Standard, which gives entrepreneurs control of their companies. In exchange, the venture fund would have the option to exercise warrants for 15 years—purchasing discounted equity only in the startups that become successful.
In 2017, Forbes published an article called, “Group of White Men in Patagonia Vests Confused for VC Fund, Raise $500 Million.” It took a while for me to realize the article was satire. A year later, researchers from Harvard, IESE, and Yale unintentionally corroborated the Forbes story with the finding that luck and past success are the winning factors for startup investors—not skill (Nanda et al., 2018). Luck and past success can cause venture capitalists to become overconfident and tinker with their portfolio companies. This can be a problem for entrepreneurs and for limited partners (often pension funds and family offices) who trust venture capitalists to invest wisely.Continue reading