
The Handshake Deal Protocol - pg
http://ycombinator.com/hdp.html
======
grellas
YC has helped shape many ways in which modern startups do business and I could
see this protocol adding to this by setting minimum expectations for defining
who is truly "in" on a funding round before the binding documentation is done.

I see it as a remote risk that any such exchange would be treated as a legally
binding contract. Too many essential terms would be missing, as for example in
the case of a bridge note such things as time to maturity, interest rate, size
of equity raise triggering mandatory conversion, etc. While the otherwise
missing essential terms might be supplied by a term sheet used by the startup
as a basis of discussion, such term sheets invariably make clear that they do
not become legally binding until definitive documents are signed. To say,
then, that one is "in" on such a term sheet would signify no more than what
one signifies by actually signing it: that is, the investor becomes morally
bound to negotiate in good faith until the documentation is prepared and
signed and also morally bound to participate when such documentation is
prepared in good faith and along customary lines. Of course, beyond the legal
hurdles, there is the not insignificant issue of how either an investor or a
startup would be treated in a tight-knit community such as YC if the person
becomes known as being "sue happy." Could such lawsuits ever come about? Yes,
and there may be unusual cases where the parties had had a true meeting of the
minds, or where one party relied to his detriment on the other's statements
and conduct such that a court might find an enforceable contract, but the
practical risk of this happening would be near zero for almost all such cases
- enough so, I think, that it may be effectively disregarded.

What the protocol does do is help prevent misunderstandings, inadvertent
outcomes, and the occasional deliberately weasly overreaching that can occur
with informal verbal exchanges. It says to the investor: do I _really_ have a
commitment from you such that, should you back out, your reputation will take
a hit? It says to the startup: pin your investors down to the point where you
can't be double-dealt but also make sure the commitment you think you have is
real and not a product of your own wishful thinking.

I can see this working beautifully as a first step within YC. Beyond that, it
will work as people come to terms with its existence and see it as useful. For
its purpose, it is really an elegant solution to a knotty problem and
therefore worthwhile.

------
tc
This protocol causes a valid and enforceable contract to be formed.

In fact, the constraints imposed by the protocol are almost exactly what you
might learn about contracts in the first year of law school. A contract is
composed of a 1) reasonably specific offer, 2) acceptance of that offer, and
3) some consideration between the parties.

By forbidding vague offers, PG is assuring that obviously questionable or
unenforceable agreements aren't made. The consideration in this case is the
startup reserving space in its round for the investor.

As far as steps 3 and 4, documenting the agreement is obviously valuable, but
the contract is formed at the end of step 2 [2].

Now, it does seem unlikely that anyone would try to enforce this in court, in
the same way that few are going to start a legal case over someone backing out
on a term sheet, but if you could show damages based on your reliance on the
other party's performance, you would in theory have a case.

Interestingly, it seems that either PG et al. must have aligned this protocol
with the constraints of contract law, or in trying to achieve their ends, they
independently reinvented the contract formation protocol that has been with us
for at least hundreds of years.

\--

Edit #1: Regarding the questions along the lines of, "this can't be a contract
because there are many other terms to address," a contract can _always_ be
longer. If you don't address a term in a contract a court will try to divine
the intent of the parties, or look at industry norms, or use defaults
established by statute law, and try to do something reasonable. A valid
contract isn't dependent on covering every possible, or even every usual,
term. The fact that one party _reasonably relied_ on the agreement and was
thereby harmed by the other party's non-performance is often going to be
sufficient.

[2] (edit): By reducing the contract to writing, even just one sentence in an
email (steps 3 & 4), you would fulfill many statutory requirements for written
agreements on certain kinds of transactions.

Edit #3: To be clear, I believe the contractual nature of this protocol is a
feature, not a bug. You really do want the elements of a contract regardless
of whether this is going to be enforced by a court, a person's own conscience,
reputation networks, or public shaming.

~~~
FlukeATX
Though this does follow the qualities of a contract, it's important to note
that oral agreements only get you so far in many jurisdictions and
particularly have an upper limit on the value, around the order of $500. So
while its great this is an explicit and clear conversation, I don't think you
can say that it is assuring unenforceable agreements aren't made.

~~~
jarrett
There is a written component to the protocol: The follow up email/text. "This
is to confirm you're in for X." "Yes."

~~~
comrade_ogilvy
I do wonder what happens without step 4 occurring.

~~~
quantumhobbit
I wondered this too. How long could an investor wait before sending the "Yes"
and have it still considered valid? Could the investor not reply for a few
weeks or months and only send the "Yes" once the startup is growing and worth
more than the initial deal's valuation?

I think there needs to be an explicit timer between step 3 and 4. Something on
the scale of a few hours or at most a few days.

~~~
dangrossman
> Where no time is specified in the offer, the offeree has a reasonable period
> of time to accept the offer. After a reasonable period of time expires, the
> offeree's power to make a contract by accepting the offer "lapses". ... When
> a seller purports to accept an offer after it has lapsed by the expiration
> of time, the seller's acceptance is merely a counteroffer and does not
> create a contract unless that counteroffer is accepted by the buyer.

\-- Anderson's Business Law, Formation of Contracts: Offer and Acceptance:
Lapse of Time

------
kirse
Why not do something creative like have the investor sign a dollar bill (of
any denomination) and give it to the founders?

Every founder comes prepared with some cash in their wallet, and then when you
confirm a deal the founders ask the investors to sign the dollar bill with a
Sharpie/pen. On it would be some sort of short-hand for the deal valuation...
Cash is more ubiquitous than phones - even impromptu, it's highly likely one
person will have a cash on them - plus you don't have to deal with sharing
emails, phone signal, phone battery, waiting for that text/email message to
come through, blah-dee-blah.

And then you can frame it and do all sorts of other creative/cutesy stuff. If
YC made it a tradition to do a "signed cash" deal as a way of indicating the
confirmation of a deal, it'd make for a cool way of looking back at all the
great (or not-so-great) investments... sort of like that whole "my first
dollar" thing some people do.

~~~
rthomas6
>Cash is more ubiquitous than phones

Are you sure? Right now I have a phone but I don't have any cash.

~~~
wuest
The last time I had cash on my person, it was because I was traveling, and
wanted some on hand. I haven't carried cash, as a rule, in almost a decade.

~~~
a3_nm
I'm not in the valley, but I have the opposite policy: I systematically use
cash unless it is not possible to do so. (It's better for privacy.)

~~~
amalcon
I have your policy, but for a different reason: I generally don't want the
merchant to be charged a fee for the transaction.

------
shin_lao
The protocol is flawed at step 4.

The investor should reply "I confirm I'm in for <offer> for <startup>"
otherwise the investor could say it said yes to the wrong text message/mail,
and that's it's all a misunderstanding yada yada yada

Hard to do that if you have to answer something explicit.

~~~
kaliblack
"Yes" is sufficient. Remember that this purpose is to formalize a usually in-
person handshake deal. Even out of that context, claiming "oh I signed the
wrong paper" won't fly.

~~~
shin_lao
In a restaurant crowded with founders and investors I think it's easy to say
"I said yes to the wrong sms"... Otherwise a malicious founder could overhear
a conversation and send a sms at the right time to have a yes "proof"...

My main point is that it doesn't hurt to be explicit when confusion is
possible.

------
JOnAgain
>> Finally, it isn't possible to add conditions to a handshake deal. For
example, there is no way for an investor to use this protocol to offer, as
some investors try to do, to invest if other people will—e.g. to say that
they'll invest as part of a larger round if you can find a lead.

I disagree with this statement -- specifically about having a lead. As an
angel, I would use this condition because I wouldn't invest without a lead
institutional investor. What they bring to the table is: a) diligence during
the investment period b) lawyers that know what they're doing c) taking a seat
on the board

I feel these add material value to a deal (when it's the right lead, there can
be bad ones). I hope I'm adding value, both with money and with advice /
monitorship / whatever, but I'm not going to in a positon to look after legal,
finance, or accounting issues, I'm probably not going to insist on auditing
books, I am probably not interested in a board seat, etc. etc.

There are definitely angels and institutions who invest largely on social
proof. But there are real reasons to want a "real lead". I will probably never
invest in a party round unless it's really a friends and family round.

I will say "$X with $Y cap, but only with a lead". As a "small time" investor,
I am not willing to set or negotiate the valuation. I am not going to judge
based on who else you get or who your lead is but I do want there to be a
lead.

~~~
ohazi
This is a perfectly reasonable attitude. If _your_ constraints don't allow you
to make a handshake deal until later (when a lead is found), then _you_
shouldn't be making a handshake deal until then.

------
webwright
This is great protocol for all discussions/agreements. It's pretty hard for
any relationship to break down if there's a shared understanding of
expectations.

The re-statement/confirmation email is a great weapon against what time+memory
do with reality, whether it's in the investment setting, with a partner, with
an employee, or, heck, with a friend/spouse.

~~~
PotatoEngineer
I wouldn't expect most "handshake deals" with a friend/spouse to require that
level of formality - unless money is changing hands.

~~~
webwright
Agreed with the "most" sentiment. But it is worthwhile for anything where a
misunderstanding is possible and the consequences of a misunderstanding would
be meaningful (to you).

~~~
IgorPartola
When I was first dating the woman who became my wife, we decided to take a
vacation together and split the expenses. We worked up a budget and did a
pretty good job of sticking to it, until our car had a minor issue and we had
some extra expenses (an extra meal at a restaurant, etc.) When we did the
numbers at the end of the trip, it turned out that I overpaid by a bit, and
she wrote me a check for that amount. When I cashed it a week later, she got
very upset with me, because she forgot about it and already slated the money
for something else. My response was "well, you gave me a check and I simply
cashed it. I would have gladly paid for the extra stuff, if I knew that's what
you wanted". Her issue was that something unexpected happened with her money.

Long story short, a quick text with "About to cash the vacation check you
wrote" would have saved us a fight. OTOH, coming up on 10 years together, so I
think it worked out OK.

~~~
cbhl
I'm curious if something like this would happen today. With PayPal, Venmo,
Interac E-mail Money Transfer, and other similar services, I would expect such
a transfer (if the other person felt obligated to make one) would be nearly
instantaneous.

~~~
IgorPartola
PayPal for VC's? "OK, I'll invest in your company. Here's $5M!", "Gee,
thanks!", meeting over.

~~~
cbhl
I was referring to the specific case of having a significant other.

I think that the protocol as described makes a lot of sense, because
paperwork. (Although I think Clerky was supposed to be trying to help out with
that?)

------
jholman
I think this protocol has a flaw, in a corner case.

In the seventh paragraph, PG explicitly points out that it's in the interest
of duplicitous investors to delay commitment while retaining the ability to
retroactively commit. Delay between stages 3 and 4 gives investors that power,
and isn't explicit.

The twelfth paragraph does address this ("both parties will usually have
mobile devices... ordinarily [send messages] in person... suspicious if the
other is unwilling to"). However, as it acknowledges, only USUALLY. Mobile
devices get forgotten, or they run out of battery, or founders might be really
crazy frugal.

It seems obvious that the fix is for Step 3 to include an expiry date/time, to
be agreed upon just prior to step 1.

If only there were a discipline that had already studied things like this...

[http://en.wikipedia.org/wiki/Consensus_%28computer_science%2...](http://en.wikipedia.org/wiki/Consensus_%28computer_science%29)

~~~
dlss
This should be the top comment.

One of the explicit reasons for the protocol isn't met by the protocol.

------
jcampbell1
This seems completely sound. Is it implicitly understood that all investors
get the same terms? I assume that if there is an agreement to invest $100k at
$5M cap, then the startup can't go take another $100k at a $4M cap, without
giving that same deal to the first investor.

~~~
pc86
Can someone define cap for me in this context?

~~~
lincolnq
Convertible debt is the trendy way to finance seed-stage startups these days.
It allows early investors to essentially "punt" on determining the true
valuation of the company at an early stage, while still ensuring that they get
a decent deal when a valuation does get determined.

The way it works: instead of negotiating over true valuation early on, the
seed investor hands over the cash as a _debt instrument_ (so the startup
technically owes the investor the money they paid), under the agreement that
if the startup later raises a "real" (venture) investment round, the debt
converts to equity at the price of the later round.

Of course, to avoid screwing the seed investors over, they typically insist on
a "valuation cap" -- maximum valuation -- (so if you later raise venture at
$10mm, but the cap was $5mm, the seed investors get twice as much equity as
the venture investors per dollar paid). But if the venture investors only pay
for a $5mm valuation, then they get the same equity-per-dollar as the seed
investors.

~~~
pc86
This is exactly what I wanted to know, thank you!

------
larrys
"Sam Altman, Marc Andreessen, Paul Buchheit, Ron Conway, Ronny Conway, Chris
Dixon, Ben Horowitz, Ash Patel, Geoff Ralston, Joshua Schachter, Harj Taggar,
Albert Wenger, and Fred Wilson for reading drafts of this."

So we can assume that the VC's named in the above have agreed to this protocol
and will be using it?

~~~
nwenzel
I saw the same thing. PG is pretty consistent with that tagline. So presumably
the VCs knew it would be there. If those VCs didn't want to give the
appearance of agreement, they probably would have asked to have their names
witheld.

PG also specifically mentions VC "noobs" as being a motivation for this
protocol. I would think that experienced VCs would be in favor of such a
protocol so that "dishonest" or noob VCs wouldn't disrupt a potential deal or
increase the cost of the deal with disingenuous offers.

------
ChuckMcM
Oh I like this a lot. That adds a lot of clarity around what can be a very
tumultuous time for a young company. I've personally been burned by the "We
would like to come in but we don't want to lead." line. I treat such
statements as polite "no thank you"s now.

------
apalmer
This doesn't make sense to me. Fundamentally, you either have a signed legal
contract, or you 'just' have a verbal agreement aka handshake deal. The
problem that this supposedly solves, is that verbal agreements are non binding
and leave wiggle room.

If you cant trust the other party, the only recourse is the full legal
contract. If you can trust the party then the handshake and the intention is
enough.

Further more even handshake deals made by trustworthy agents with the best
intentions sometimes fall apart before the full legal contract is signed. This
will never go away.

Bottomline, handshake deals work in situations where the reputation of the
individuals with each other is more valuable than the benefit of breaking a
given handshake deal. Its just game theory really.

Further if the protocol did get buy in and become widespread, it will
eventually reach a point where there are true legal ramifications for breaking
a handshake deal. At which point everyone will (and should) refuse to make
these deals for the same reason no one signs million dollar contracts without
having the lawyers review the details.

~~~
icegreentea
As pointed out elsewhere in the thread, verbal agreements that contain all the
other aspects of a valid (for example written) contract is infact every bit as
binding as a written version providing you can prove it occurred. You can do
this all sorts of ways - witnesses for examples. The wiggle room that enters
verbal agreements are typically not the result of it being a verbal agreement,
but that verbal agreements are typically more concise than written agreements,
and therefore lack the specificity and breathe.

In summary, a concept of a legal contract is largely abstracted away from the
medium it is expressed it. The medium only effects the ease at which you can
prove that your version of the contract is infact the version that both
parties agreed to.

~~~
apalmer
I understand completely verbal contracts are enforceable if all the 'wiggle
room' is squeezed out, by specifying in detail the specifics of the contract
and witnesses to remove the 'he said she said'. That's all a written contract
with all the legalese and signatures in triplicate etc really provides.

My point is IF you create a handshake protocol that meets all the criteria to
be fully 'enforceable', no one will actually partake, because business people
do not enter legally binding contracts without lawyers reviewing etc.

The handshake deal in addition to the legal aspect really requires a level of
trust. a handshake deal works because both parties trust the other really is
making a deal, that both parties are operating in good faith, AND that if
their is some technicality does occur they can still back out, but trust
exists that neither party will back out unless such a technicality does occur.

------
preinheimer
Step 4 needs to be:

The investor replies with Yes within 96 hours.

Otherwise it's the equivalent of having one party execute a contract, and the
other party just sit on the contract to wait for more information. Either
executing if it's clearly beneficial, or ignoring if it's not.

~~~
ghshephard
If this is a handshake deal - then doesn't the investor reply yes immediately?
It would be nice if those who are more knowledgeable than I would weigh in and
indicate whether these things happen in real-time. I.E. The "Handshake" deal
takes place within the space of a few minutes.

g.

~~~
preinheimer
The conversation seems to happen in real time, then flips over to email for a
written record. Without a defined expiry it's not clear what happens if the
investor says "yes" two months later after the startup receives some fantastic
press.

------
notatoad
Totally unrelated to the topic at hand, but what is PG's obsession with tiny
fonts? this article is set in 8.5pt font - can anybody read that? at 10pt HN
itself is almost as bad.

~~~
pg
Screen resolutions have been increasing.

~~~
koko775
But people's eyesight declines. My dad now puts his 27" iMac at 1024x768
because website font sizes are typically too small for him now.

~~~
pmjordan
Have you configured his iMac to run in HiDPI mode, using the "Quartz Debug"
tool? (free download in the "Graphics Tools for Xcode" bundle from Apple's
developer area) That at least increases the sharpness of the text, rather than
the plain interpolation you get by changing resolution, which is quite blurry.
I've set up my grandfather-in-law's iMac that way, it helps a lot!

~~~
koko775
I'm aware of it, but I don't think it's perfect, at least not for one of the
older versions of OS X which his computer runs. Moot point, anyway, he doesn't
want me messing with the way he has his display set up.

------
mikeash
I don't understand why this would be called a "handshake deal" when the last
two (and most important) steps involve e-mail. Call it an "e-mail deal" or
"e-mail contract" and a lot of the mystique just sort of floats away. Now it's
obvious why you need to call it off if either party doesn't want to send an
e-mail, it's obvious that the handshake itself isn't enough, etc.

------
6thSigma
Brb while I go make an Unofficial YC Handshake Deal Protocol app.

~~~
darxius
I was just thinking about using the "bump" feature a lot of smartphones have
for step 3. The bump would have a message pop up on their screen, to which
they would reply yes or no and completing step 4.

~~~
derefr
I would say,

1\. something with a trigger like Bump,

2\. which then pops up an Etherpad-style collaboratively-edited text field,

3\. with MMO trade-dialog style 3-phase mutual-assent commit,

4\. that leads to a copy being saved on both your phones, to a public-but-
anonymous URL both parties can cite, and also forwarded to any other parties
which either of you please--for example, your lawyers.

~~~
nekgrim
We live in social days. Add a FB/Twitter sharing "Just got an investissement
from X"/"Just invested in Y"

~~~
wiredfool
It has to be confirmed, so wait till it gets retweeted/liked a few times, and
not on an orphaned platform.

------
Jabbles
Surely there's a huge opportunity for the market of VCs to favour those that
move quickly: Bring an accountant to the startup demo day to look over the
books of ones you find impressive, a lawyer on call to prepare a (i.e. tweak a
standard) contract and a free coupon for a same-day courier service for the
founders to return it once they've consulted their lawyer and signed. Then an
instant money transfer.

Obviously, this puts an awful lot of power in the hands of the investor that
actually attends the demo day. Those VCs (and their backers) willing to do so
will face the usual risk/reward tradeoff.

~~~
eli
I would _want_ a potential investor to spend a little more time on due
diligence than that. Also, does the lawyer work for free? Don't you want to do
some of your own research on the investor? This just sounds utterly bonkers.

~~~
Jabbles
I don't think many people turned down Yuri Milner's offer.

They may feel differently about a bigger, later stage offer, but they may have
to trade that off with how quickly they want to start spending money. Would
the speed and organisation of a VC impress you?

~~~
eli
At the risk of sounding contrarian, yeah I would be very, very skeptical of
taking money from someone who is ready to invest after first meeting me a few
hours ago. You're likely stuck with this person for the lifetime of your young
company.

------
matthuggins
There should be some time limitation mentioned in step 3. Otherwise, there's
nothing to stop step 4 from occurring several months later, which ideally
would nullify the deal.

------
_jss
I could really use some advice on this, actually. It's very serendipitous to
see this posted.

What if you have a handshake deal and the other person abruptly disappears?
I'm incurring all costs of operation, they've gone back and not completed
anything they've said they would and now don't even reply to emails?

~~~
crapshoot101
Honestly? Given what you've described, they aren't interested and it isn't
happening.

~~~
_jss
My concern is centered around the "What ifs" that happen in the future.

What if my site starts to take off? What if it doesn't, but is a lifestyle
business? Then he decides he wants back in!

I don't want him to come in later and demand anything from me, since he's
abandoned me and prior to that at least 90% of his initial promises went
unfulfilled.

------
IgorPartola
So I've wondered this for a while. Contracts are of course important, but if
the only way you can trust the other party is through a contract and don't
feel secure without one, can you really be sure that you won't get screwed
over because of a hole in the contract? Seems to be that in reality a contract
is only as good as the word of the person behind it, and if you wouldn't
simply take them on their word, you might reconsider doing business with them
altogether.

This protocol highlights that you don't need 50 pages of documentation to
agree on something and I like it because of that.

~~~
pc86
That's why you have your attorney look at the contract thoroughly. It's not
about distrusting anyone, it's about making sure you're as protected as you
can be.

Truthfully, a contract is only as good as your attorney is.

------
coopdog
I smell an app

Google Glass (or even a simple voice recorder in an app designed for the
purpose) would also be great to reduce the friction of having to type
something into a phone while talking to an investor.

------
Uhhrrr
You should probably clarify that this is not intended a legal contract and
violations will be dealt with socially (if that is indeed what you intend).

~~~
jcampbell1
What? How is this not a legal contract? All the elements are there.

~~~
legutierr
But might that not be a problem? Some deals must get hung up on the
documentation, no? Or perhaps more reasonably, a disagreement over the
materiality of something discovered in due-diligence? This can't be a promise
to invest X at Y valuation no matter what, which it might be if it were
treated as a legal contract.

~~~
jcampbell1
> This can't be a promise to invest X at Y valuation no matter what, which it
> might be if it were treated as a legal contract.

Legal contracts don't work they way you think. If there is a discrepancy
between what is offered and reality, the contract can fail, or the courts can
find a reasonable interpretation, or both parties can agree to change the
contract (most common). This happens in due diligence all the time.

~~~
legutierr
Thanks for your response. Can you help me understand what would happen under
this protocol were an investor to pull out because of something that is
discovered in due diligence? Or if the proposed modification were not to be
acceptable to the company seeking investment? I would imagine in that case
that any dispute would be over whether the discrepancy was material enough to
justify the modification or withdrawal.

Either way, though, there is a clear difference between this and a verbal
agreement in that if the parties cannot reach a reasonable compromise, a
dispute around a verbal agreement will most likely (although not always) be
dropped, and an email exchange such as this would provide a greater
opportunity to litigate.

From my point of view, one primary rational of having a written contract is to
reduce the likelihood of litigation. With that in mind, a verbal agreement
seems perhaps a better option than an email-based protocol, in a weird sort of
way.

------
jgross206
Seems like a good idea. One issue--

What if the investor doesn't immediately respond to the e-mail? Wouldn't that
be sort of like the "partial yes" free option from the article, where they
could wait until terms are (or are not) more favorable but still have a
seemingly valid claim on an initial agreement?

Perhaps there should be a time limit, or the start-up can have the option of
sending a second e-mail withdrawing the initial one?

~~~
redblacktree
I think in that case, the expectation is that you (as a founder) have no
obligation to "keep a place in line" for them. If they never responded, you
can consider it a "no."

~~~
quantumhobbit
When is the investor considered to have "stepped out of line"? an hour, a few
days, a week or more? What happens if the investor doesn't reply, the startup
assumes the no reply is a no, and weeks later the investor sends an out of
context "yes" hoping to cash in on the terms of the earlier deal?

I know this sounds like a petty concern for a "handshake deal" but the
startup's e-mail at step 3 creates a paper trail that an unscrupulous investor
could abuse.

------
CurtMonash
I am baffled by the idea that this is a binding contract. You agree to a loan
without specifying an interest rate -- how is that a done deal??

------
washedup
Dishonest men live at all levels.

This doesn't solve the original problem: What you suggest won't solve the
issue of investors taking advantage of startups or the other way around. They
will simply play another looser version of the handshake as you want it to
exist. Anyone that is eager enough will get into this space before they are
ready and be subject to the same sharks.

But not every investors is bad, for if they were they would earn an
untrustworthy reputation.

The handshake deal first started as a way to avoid legal or financial
promises. By giving the handshake such rules, you are diminishing it's
intrinsic value as a "safety zone" for both parties to freely communicate. But
of course, this shared information can be used to one of the parties advantage
over the other.

Now, as another step towards building confidence in the investor/startup
relationship, this is a great idea. It refines, offers some support, and
starts communication between the parties on a smaller scale.

------
bgmasters
One thing to note is that the CA statute of frauds renders certain kinds of
oral contracts invalid, unless there is some memorandum of the oral contract
is in writing. One such contract, as outlined in CA Civil Code Section
1624(a)(7) is:

> A contract, promise, undertaking, or commitment to loan money or to grant or
> extend credit, in an amount greater than one hundred thousand dollars
> ($100,000), not primarily for personal, family, or household purposes, made
> by a person engaged in the business of lending or arranging for the lending
> of money or extending credit.

This wouldn't seem to apply to equity financings, but I suspect it applies to
debt financings. If that's right, an actual "handshake deal" is not legally
enforceable absent the kind of e-mail memorialization that PG is talking
about. Of course, a "handshake deal" starts to look a lot like a simple
written contract if a handshake alone cannot a deal make.

------
001sky
_The startup sends the investor an email or text message saying "This is to
confirm you're in for <offer>." The investor replies yes._

== This not a handshake deal, de-facto or de jure.

Therefore, this is a terrible, misleading article. A/k/a why god invented
lawyers.

[0] The Handshake Deal Protocol (ycombinator.com).

------
3pt14159
The idea here is good, but the execution leaves far too much room for the
startup founder or the investor to get screwed. In contract law any
ambiguities are judged against the person that wrote the contract. Since the
startup founder wrote "This is to confirm you're in for $100k at a $5 million
cap." This is the contract that they have offered. Why bother making things so
formal and binding when _everyone_ knows that things still need to be dotted
and signed.

My main concern is that this is forcing contracts onto normal negotiation.
Maybe if the wording was changed to "strongly interested in" so that you can
still publicly shame repeat offenders, without having the contract being
formed when there are still other things to consider.

~~~
danenania
It seems like the point here is that 'normal negotiation' is flawed. If you're
really planning to invest (or accept investment), you're going to be filling
out a large and thorough contract fairly soon anyway. What's the harm in
starting out with a mini-contract, unless you want an option to weasel out? If
there are other things to consider that prevent you from doing this, then you
shouldn't be verbally making those same commitments. There's still room to say
"strongly interested" or whatever instead, but you shouldn't expect your place
in line to be saved if others say "definitely" and follow the protocol.

------
mhartl
I continue to be impressed at how cleverly Y Combinator hacks investing. What
a breath of fresh air!

------
brador
They also arise when punishment for breaking the promise is high. Tight
network, word gets around.

------
evolve2k
To avoid confusion I personally think it also makes to be able to define the
applicable standard as part of the protocol.

'$100k at a $5 million cap on standard YC terms'

Where standard YC terms refers to an existing terms template or you could
refer to another set of standard terms by name.

Explicit Doctype

------
damoncali
Doesn't this encourage rushing complex decisions? Aren't handshake deals best
suited for inherently simple transactions? Diamonds were mentioned, futures
traders (in the old school pits) are another.

In other words, does this solve the wrong problem? If venture deals were as
simple as diamonds, would such a proposal exist?

I'm no VC, but it seems like it's easy to get a contractual "meeting of the
minds" when you're talking about simple things, and this does nothing to
simplify things unless you have standard paperwork to go along with it. Are
those details not the main destabilizing influence? (this could very well not
be the case - as I said, I'm no VC).

------
saurik
There are laws surrounding what is and is not a valid agreement. This website
claims to somehow set a "standard" that would define when "if and only if" an
agreement had occurred, but they do not have the right to just unilaterally do
that. Even when dealing with people themselves, unless they can demonstrate
that the other person had seen this website and known its contents ahead of
time (and that thereby the contents of this website were to be taken as part
of the overall oral agreement), the fact that they publish this website
doesn't change what is or is not an agreement.

------
quizotic
The databaser in me wonders about the applicability of a two-phase commit
protocol.

Suppose PG/YC (s/PG/{FW or BF or ...}) acted in the role of a transaction
coordinator.

Instead of sending confirmation messages directly to each other, the parties
would send their confirmations to the coordinator. Like an escrow agent, the
coordinator would wait until all parties had confirmed and then send agreement
notifications to all.

This might allow investors to commit with contingencies, such as requiring
other investors or a minimum investment greater than their own investment.

~~~
OnyeaboAduba
great idea would add alot of extra work on the plates of yc mentors tho

------
amix
Not being in SV and not following the SV way of building companies I really
don't understand the rush, especially for something as important as picking
the right investors. This would be like picking your wife on the first date
and doing a handshake on it... Why not go for a more slow and more thoughtful
route? As I see it great companies are not built in days, but years of hard,
concentrated and thoughtful work and decisions.

------
CurtMonash
I found the acknowledgements interesting -- folks who've read this and
presumably not vomited all over it include Messrs. Andreesen, Horowitz, &
Conway.

------
jwhitlark
I really like this idea. But "handshake deal" is too ambiguous. pg couldn't
have proposed it without sounding crass, but I think it should be called a...

"YC handshake"

------
samstave
Not to try too hard here; but is there an opportunity to have an app that one
could click a button, and have a confirmation email sent to both parties, but
also have the data captured (anonymously, if preferred) so that the
volume/type/frequency of deals could be looked at?

Maybe even a YC sponsored app - as part of an industry barometer/metric.

Keep the thing SUPER simple so that its "select offer" enter email addresses,
hit "confirm"

------
hkmurakami
This is fantastic. Like putting more leverage and negotiating power to
engineers (who have traditionally been marginalized by the suits), providing
more knowledge and leverage to founders and taking away grey-zone-hand-waving-
smoke-and-mirrors wiggle room from the comparatively powerful party (the VCs)
can only be positive in bringing about parity in the relationship.

------
ronaldx
Startups should think carefully about any source of bias behind Paul Graham's
advice, and whether or not following pg's advice blindly is in their best
interest.

Since the startup gave their (legally-binding) confirmation first, the
entrepreneur may be able to stake a legal claim whenever they later choose to
do so - or not.

------
tomasien
Not having money is fine, thinking you have money when you don't will kill
you.

It's amazing to me that even after having a company utterly destroyed by
broken promises from handshake deals that I still trust them, but I do EVERY
SINGLE TIME! I'm going to use this protocol for the next few and see how it
works out.

------
pjscott
This sounds very simiar to the medieval merchant law: a non-state-affiliated
system of lightweight customs for helping people trust each other in business
transactions.

<http://en.wikipedia.org/wiki/Lex_mercatoria>

------
kayge
Interesting timing. A similar post landed in my inbox this morning, from the
blog of a VC in NYC: [http://www.avc.com/a_vc/2013/03/doing-business-on-a-
handshak...](http://www.avc.com/a_vc/2013/03/doing-business-on-a-
handshake.html)

~~~
dsr_
Not coincidental, given that pg thanks Fred Wilson (avc.com) for
feedback/input at the bottom of the handshake protocol page.

------
thrush
I think that there needs to be some "time-cap" associated with the handshake
protocol. If I don't hear back from step 4 within 24 hours or some other
agreed time, I feel it'd be safe to assume the deal is off.

------
davidw
Quite an impressive list of "thanks for reading this". Will we see some of
them publicize and affirm their commitment to the "handshake protocol"? That
would lend a lot of weight and credence to the idea.

------
nym
Why not have both parties sign a contract digitally with crypto?

<https://itunes.apple.com/us/app/opengp/id414003727?mt=8>

~~~
nym
In fact, you could make everyone who attends register by signing a message-
that way everyone at your event would be ready (and have a public key
registered with YC) to sign any contract digitally.

Welcome to the future.

------
jconley
Nice! A simple 2PC [1] for deals!

[1] <http://en.wikipedia.org/wiki/Two-phase_commit_protocol>

------
caf
Given that messages without guaranteed delivery will tend to be used for step
4, isn't this protocol susceptible to the Two-Generals problem?

------
aganek
I like this proposal very much.

On the other hand, it reminds me of a quote by Sam Goldwyn... "A spoken
contract isn't worth the paper it's written on."

------
jasalo
I made this website inspired in the Handshake Deal Protocol: www.hdplist.com
for both investors and startups to use it.

------
dd000
Is this done before or after due diligence?

~~~
davros
before, its like a really minimal term sheet and they are alwasy subject to
due diligence, failure to reach agreement on the long-form, etc

~~~
dd000
this is only for YC companies right? not just any company. investors assume YC
has done its homework

------
mercurialshark
Holy fuck, y combinator is on the bar exam.

------
ichirotherager
Where I come from, you ask a man if he wants to grab a BEER. Much more
productive conversations that way :)

------
hahahanononono
So...What happens when the VC hires a few hookers to close really bad deals
for startups?

------
omegant
Time for a deal protocol app?

------
jermaink
pilots call this cockpit-tower protocol a "closed-loop communication".

------
monsterix
Splendid. Was expecting something of this sort after Harj Taggar's post "We'll
be circling back" [1]. Hope the protocol does good of what it intends to: i.e
not letting VCs hide behind a _VC way of saying no_.

However from a situation standpoint, this kind of indicates beginning of
incoming _processes_ in VC funding. Bureaucracy. Like it happens in big boy
industry. Seems a bit detrimental but probably dishonest and noob VCs asked
for it.

[1] <http://paulgraham.com/circling.html>

------
johnthebeloved
Of course, there's always the "Johnny Lingo Method" of negotiation and deal
making: [http://nobudgetbudget.com/be-a-master-negotiator-with-the-
jo...](http://nobudgetbudget.com/be-a-master-negotiator-with-the-johnny-lingo-
method/)

------
rlpb
A handshake is generally not taken to be a legally binding contract in itself.
An email might be. So it might be worth making it clear in the emails that you
don't intend them to be legally binding.

~~~
argonaut
Oral contracts are legally binding.

<http://en.wikipedia.org/wiki/Oral_contract>

~~~
rlpb
<http://en.wikipedia.org/wiki/Intention_to_be_legally_bound>

~~~
argonaut
> There is a presumption for commercial agreements that parties intend to be
> legally bound (unless the parties expressly state that they do not want to
> be bound

<https://en.wikipedia.org/wiki/Contract>

If you're going to cite Wikipedia, please actually read it.

