At last! Standard legal docs for startups

At last! Standard legal docs for startups

Summary: Finally, startups have access to standard legal documents that can save them as much as $50k when raising money--and protect them from predatory VCs.

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I'm amazed it has taken this long but finally, startups can download standard term sheet documents that can save them tens of thousands of dollars in legal fees - and protect them from vulture VCs.

The docs have been prepared by Adeo Ressi, founder of The Funded, a site that ranks VCs.

Mike Arrington, a former lawyer, writes on Techcrunch:

The key terms include the elimination of participation with preferred stock, a 1x liquidation preference, and single trigger vesting acceleration on acquisition.

What this means: VCs try to increase returns by asking for large liquidation preferences. A 3x liquidation preference, for example, means the VC gets to take out 3 times his/her initial investment before founders and employees get anything.

...More importantly, participation is eliminated. VCs often ask for this. What it means: Participation rights means the VC gets to take a pro-rata share of money in a sale even after the liquidity preference. With it eliminated, the VC has to choose - either take their 1x liquidation preference or convert and share with common pro rata. For any large deal, they will convert and be treated like the founders and employees.

One key part, which could cause some friction with VCs is the inclusion of the "single trigger vesting" provision. This could affect the price of acquisitions because it means founders won't be obligated to stay on if the company is acquired.

However, this provision can be negotiated at the time of acquisition rather than in the founding round. There can be other incentives for founders to stay at the company.

These documents should help reduce some of the animosity between founders and investors because of highly unfavorable terms. There are many instances where founders have made no money while VCs made out like bandits. There's still a lot of bad blood between VCs and founders.

- - - Please see: FFI Plain Preferred Term Sheet

Also: Y Combinator Series AA Equity Financing Documents

Topics: Banking, Enterprise Software

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  • Good info!

    Information like this would have been useful for the employees of a software company that I did work for in the 90s. The VCs came in with the right to appoint the board and senior officers so as to improve profitability. The officers were granted large stock options to help focus their interest. Pretty much standard right? Well over the next 24 months, the officers converted all their options and slowly sold them on the market. No one was paying attention. They stopped paying the suppliers and took very large bonuses. Then as the financials began to show the drain, they 'retired'. When the other stakeholders turned to the Canadian VC company, they found that this company had totally liquidated its position and all of its participating senior officers had left the company. Having lost millions, the company tried to stay afloat but lost the battle and was liquidated a couple of years later. The VC company scarfed and the company, employees, and institutions who counted on its software all lost. From the stories I have heard, it is more common than not.
    BigRonG