Standardization of Venture Capital Term Sheets

Topics :  Start Ups · Venture Capital · Aug 17, 2009  |  0  Comments

A lot of discussion over the past few days on VC Term Sheets and standardization to enable quick closing and lower legal costs. Good news is that its all moving in the right direction which is great for enterpreneurs like me.


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First by Chris Dixon- THE PROBLEM WITH TRANCHED VC INVESTMENTS . They key points:
"In venture capital, tranching refers to investments where portions of the money are released over time when certain pre-negotiated milestones are hit.  Usually it will all be part of one Series of investment, so a company might raise, say, $5M in the Series A but actually only receive, say, half up front and half when they’ve hit certain milestones. "
  1. And the problems with it:
  2. Makes hiring more difficult
  3. Distracts the entrepreneur
  4. Milestones change anyways
  5. Hurts VC-entrepreneur relations
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Then Fred Wilson's response- Milestone Based Investing
"Let's be honest and see this as what it is. It's an option for the investor to put more money in at the old price as the investment increases in value and the risk is mitigated. It's a bad deal for the entpreneur and a great deal for the investor."

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Then Chris Dixon again - IDEAL FIRST ROUND FUNDING TERMS talking about term sheet standardization

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Then Fred Wilson again - The Ideal First Round Term Sheet
"Chris laid out the ideal set of first round terms and I agree with them. What's interesting is that Chris is a serial entrepreneur and I am a VC. And yet we agree on what the term sheet should say. That's progress. We are in the process of closing our first investment with the Gunderson docs. We (the VCs) don't have a law firm on this investment and we are not negotiating the documents. We agreed on the term sheet and we are closing on a set of documents we've signed off on prior to issuing the term sheet. They are "boilerplate documents."
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Then the original grand daddy of Term Sheets , Brad Feld, jumps in:

"When my partner Jason Mendelson and I wrote our Term Sheet series in 2005, we had a lot of people thank us for demystifying the term sheet.  Some time last year, both TechStars and Y Combinator open sourced their financing documents –TechStars were done in conjunction with Cooley Godward and Y Combinator’s were done in conjunction with Wilson Sonsini.  On top of all of this, the NVCA (National Venture Capital Association) has had a set of model legal documents up on the web for a while (Jason was on the team that put these together).

So – there’s now no shortage of term sheet data (and forms) available.  Now the trick is to get everyone to start using the same stuff.  It seems like first round deals is a great place to start. 

Ironically, if you read through all the various sets of documents with a fine tooth comb, you’ll find an interesting phenomenon – they are all slightly different.  So – a next step is to get Gunderson, Cooley, and WSGR to standardize on one set.  If there was truly a set of “first round docs” (for angel rounds, seed rounds, and venture capital rounds – whatever you want to call them) – life would be a lot better for entrepreneurs, VCs, and probably even the law firms since most first round deals are money losers for them even though they generally cost way too much."




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