All the top tier VCs (including YC) repeat the mantra "don't sweat the terms". It also appears on Ron Conway's slide in this lecture.
There seems to be a dangerous line between taking a good deal as offered and getting nailed by a bad deal. It's easy for the VC to say "don't sweat the terms", they are setting the terms after all. The advice makes sense if you're working with a top tier firm that has a reputation to protect, but it seems like it could be quite dangerous when applied to lower tier VCs?
This is one of several significant conflicts of interest in this lecture series. I'm surprised it doesn't seem to bother people to see VC trying to play both sides of the table. The optimal world for investors (a tiny proportion of huge successes) looks very different than the optimal world for startups (many moderate successes). And the idea of investors trying to coach founders on how best to enrich investors is just nuts.
This isn't for charity. In my opinion this startup school is intended to pump college students into the VC environment so that they (Private funds) can capture as many young, smart talents as possible to add to their portfolios.
At the end of the day the "Startup" world is the world of finance, and I think the explosive crop of high risk private equity (Angel, VC, hedge) investors are trying to get as many "makers" into it as possible.
Whether this is good for the new entrants or not is too early to tell. I think it probably is when compared to the alternatives, but my guess is that I am missing something.
Is it an advertisement for YC? Absolutely. So is HN.
It's also interesting. I don't think I'd have gotten much out of the class as an undergrad, but a decade later, I'm learning a lot from this lecture series. Among the things I've learned: I probably don't want to start a startup; I'd rather focus on great products and execution in my field.
I view it as more in line with the Graham/Buffett school of giving back as you go. PG (not BG) has an academic bent, and academics like share what they've learned.
My reaction resembled that of yours. My reaction was, "well this isn't so different from the doctrine of investment banking recruiting, and that is seen as acceptable at the very least, right?"
One massive success like Airbnb or Uber means vastly more to the world than even a thousand moderate ones. If your motivation as an entrepreneur is to change the world and not just to make money, your optimal world is one where the chances can be non-zero.
> In that case, what would be the key difference between a clean term vs a messy one?
In my experience, terms with lots of if-then conditionals are the most common flag. The last "messy" term sheet I saw had an unusually long diligence period. Predictably, the investor "found" a bunch of problems at the 11th hour and pulled out, leaving the startup in a financial lurch.
Anything that differs from standard docs should be _highly_ suspect, assuming you can get ahold of some.
As a lower bound, I've never seen terms presented on Shark Tank that weren't off-the-wall insane. :D
> How would a first time founder tell the difference?
>By talking to other founders, advisors, and their attorneys.
I 100% agree with you (and I have such contacts to help me out), but I lament the fact that many founders will lack such contacts to give them a sanity check. Perhaps one can reach out to people about it, but without a preexisting network to tap, I am afraid that many will simply accept the bogus terms rather than deal with the discomfort of reaching out for help.
A simple analog for first time founders is standard docs (series AA & SAFE) vs non standard docs.
As an aside, I think it's really hard to get clean terms when you're outside silicon valley... I had a friend raise money in Utah recently and he was saddled with all sorts of strangeness. (board for a $200k seed investment, etc.)
I raised a clean $1M with a YC Safe note from a firm in Fargo, ND of all places. Took less than a month from initial meeting to cash in the bank. Times have changed.
Not true. I did a Safe earlier this year with a VC firm in the midwest. Yes, I had to be firm about it but all sides were really happy with it. Things are changing.
Perhaps then we just need more companies gaining traction? Then it's not so much an issue of funding environment but a relative lack of strong startups.
SAFE may be met with more resistance outside SV but it's certainly not a deal breaker. Sibling cites a midwest firm that agreed to it, and I know one in East Asia that agreed to it.
Thank you, yes that's a great first filter (standard vs non-standard docs.) Though, as you said, unfortunately it's rare for terms outside the valley to be standard so that might not be as helpful a criteria for founders outside the Valley, and especially for us here in Asia.
I'd argue if a VC is trying to sneak in some non-standard bad terms, you should just walk away. They're definitely not people you want to work with.
The best VCs have extremely simple, straightforward terms. I've seen a term sheet from a top tier VC that was just half a page long with no bs in the share purchase agreement either.
There's a difference between "Don't overnegotiate" (or "Don't jeopardise a deal in an attempt to raise your valuation by a small percentage") and "Don't sweat the terms."
There are some seriously unscrupulous investors out there. If any terms give you cause for concern, get second, third and fourth opinions from independents.
I think their point is, if you have 5 investors, 4 of them are offering you a high valuation and terms, and 1 of them has the lowest valuation but he brings the most to the table in terms of connections, advice, being aligned with you on the vision, etc, then you should go with that last investor, even though his valuation is the lowest. This is the same point that CloudFlare's founders stressed in their recent interview on startup school.
Ironically I was just listening to Geoff Donaker's (from Yelp) talk at Stanford. At the end someone asks what were the biggest problems they faced. #1 was sweating the terms with their investors.
There seems to be a dangerous line between taking a good deal as offered and getting nailed by a bad deal. It's easy for the VC to say "don't sweat the terms", they are setting the terms after all. The advice makes sense if you're working with a top tier firm that has a reputation to protect, but it seems like it could be quite dangerous when applied to lower tier VCs?