cdixon blog

TheFunded term sheet

TechCrunch has a post today about TheFunded’s ideal first round term sheet.   I think what Adeo Ressi is trying to do with TheFunded is great, and he has clearly been a leader in exposing VC shenanigans and simplifying term sheets.

I looked through his ideal term sheet and from my summary reading the only thing I disagree with is full acceleration on single trigger (company is acquired).  The term I favor regarding single trigger is to have acceleration such that the founders only have a maximum N (say 12) months remaining. This seems to me a reasonable compromise so that 1) the founders only have to stick around at the acquirer for a maximum of N months (since they will probably be miserable at BigCo if they have to stay longer) 2) the acquiror gets some comfort that the founder will stick around long enough to integrate the startup into BigCo, thus getting the full value out of the acquisition.

I know some lawyers are telling entrepreneurs they shouldn’t have any acceleration on single trigger because it will make the company less attractive to acquirers.  Having been through a couple of acquisition negotiations on the business side (I know many lawyers will say they’ve been through many acquisitions but lawyers only see 10% of what really goes on in the process), what I learned is that acceleration on single trigger doesn’t hurt you from an acquirer’s perspective as long as founders are incented to stick around for some reasonable period of time (approximately 1 year, not 2-4 years).

Actually, the negotiation over acceleration on acquisition ends up pitting the founders against the investors, not the acquirer.  The way the (rational) acquirer figures it, they are going to agree to pay, say, $100M for a company with founders who have built incentives to stick around (some vesting left).  If the founders get full acceleration, then the acquirer figures they are going to have to set aside, say, $10M for future incentives, so will only pay $90M to buy the company, thereby leaving less for the investors. I didn’t understand this dynamic until I went through the process myself.

Of course a lot of this depends on the type of acquisition.  If it is a small trade sale the acquirer will probably want the founding tech team to stick around for as long as possible.  If it’s a profitable business then BigCo will probably want to put their own managers in charge and only need founders to stick around for 6-12 months.

I definitely support TheFunded’s full acceleration on double trigger (company acquired and founder is fired).  In fact – I think I might be alone on this one – I support double trigger for all employees.  I don’t see why only founders should have this basic protection.

I didn’t see any mention in the term sheet of initial vesting of existing founder shares (maybe I overlooked it…?).  I think that this is a very important term and that founders should vest over 4 years from seed funding or perhaps starting a few months before (for “time served” as they say).  In my experience, entrepreneurs way overestimate the odds that greater initial vesting will protect them from the VCs, and way underestimate the odds that less initial vesting will protect them from their co-founders.   I don’t care if your co-founder is the greatest person in the world, things happen in people’s lives, moods change, relationships get complex, etc. and founders leave startups.  Pretty often.  A better way to protect yourself from VCs is to only do deals with high integrity ones.