

An Analysis of the YC "Open Sourced" Documents In Layman's Terms - sachinag
http://www.sachinagarwal.com/2008/08/an-analysis-of.html

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gojomo
Nice analysis, especially the highlighting of the effective veto power over
acquisitions in the protective provisions.

To nitpick, I think Agarwal's wording about the liquidation preference gives
the impression the term sheet implements what's called 'fully participating'
preference, where even after collecting the preference amount, they also share
in the remaining money.

IANAL, but I think the wording actually implies a 'non-participating'
preference: series AA can take the preference amount, or convert to common and
share pro-ratably with commons, but not both.

To picture the difference: take Agarwal's example of selling 10% for $10K. But
then imagine the company is sold for only $110K. With fully-participating
preferred, I believe the investor gets their $10K liquidation preference, then
also 10% of the remaining money, for a total of $20K. With non-participating,
they could take the $10K liquidation preference, but then they would share
none of the rest with the common. Instead they will choose to convert to
common and get 10% of the total, $11K. (Someone please correct me if I'm
wrong.)

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dats
Well, Agarwal says the remaining is split on an "as converted" basis which
implies non-participating preferred. So it seems right to me!

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aston
Definitely should be clarified in the article, though. I had no clue what _as
converted_ meant despite some casual research into common terms. I doubt
people totally new to term sheets would have a clue about participation based
on what's there now.

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ALee
Good simple primer to those just starting out.

If you're getting into the nitty gritty, I suggest checking out the great
folks at Venture Hacks, Get Venture, and Startup Company Lawyer. I know that
the Venture Hacks guys hang out here from time to time.

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yokumtaku
I'll put up a post on <http://www.startupcompanylawyer.com> about these docs
at some point in the near future.

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rokhayakebe
We need a startup that simplifies the funding process and turns these
documents into a single sheet with no more than 4 paragraph. Seriously this 10
page contracts have to go.

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dshah
Indeed, that would be great. But just the act of simplifying the docs to a
standard set of usable (because they're balanced) documents is a _major_ step
forward.

Kudos to the YC team for another innovation that is sorely needed. This should
have a great impact well beyond the startups that they fund themselves.

