

Lawyer Turned YC Partner Carolynn Levy Is Revolutionizing Startup Investing - arigold
http://abovethelaw.com/2015/01/innovation-more-than-another-app-how-wilson-lawyer-turned-yc-partner-carolynn-levy-is-revolutionizing-startup-investing

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ganeumann
I'm not a lawyer, and at the risk of sounding stupid, there's something I
don't get.

Every time someone talks about debt v. equity in funding a startup they say
that debt is better because it is less paperwork, easier and cheaper. For
instance, Carolynn says:

"Financing documents, no matter how streamlined, have a lot of provisions that
are complicated and require a not-insignificant amount of time and attention
to slog through. Should the investor have a board seat? What protective
provisions are appropriate versus onerous? What voting threshold should
trigger this drag-along provision? What exactly is a registration right?
Startup founders are typically not savvy about financing terms and are thus
required to get up to speed at a particularly inconvenient time in the
company's lifespan. The purpose of these small checks from seed investors is
just to get the company off the ground - do people really want to worry about
what a "deemed issuance of Additional Shares of Common Stock" is at this point
in time?"

So equity docs are more expensive than debt because they're more complicated.
And they're more complicated because they have all these provisions and
protections that debt docs don't. But if you created equity docs that didn't
have all these provisions, wouldn't they be pretty much as simple as debt
docs?

A typical equity deal has these docs: 1\. A stock purchase agreement--17
pages, 13 of which are reps and warranties, and closing conditions, things
that debt docs usually don't have; 2\. A Voting agreement, protections that
debt docs don't have; 3\. An Investors Rights Agreement, protections that debt
docs don't have; 4\. A Restated Certificate of Incorporation, protections that
debt docs don't have along with changes that debt docs also need to make
(increase authorized shares).

So if you took out all the stuff that debt docs don't give investors anyway,
you have a 4 page stock purchase agreement. Compared to a 8 page convertible
note. (I didn't count signature pages in either doc.)

This is an honest question, I assume there is a reason, I just don't know what
it is.

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bradleyjg
In either the debt or equity case if you simply remove terms they will
generally be filled in by defaults based on statute, regulations, and case
law. If the issues around equity are inherently more complicated than debt,
just settling for defaults doesn't much help. Both sides of the transaction
are still going to need to familiarize themselves with those issues.

An analogy: most people take the default divorce law instead of writing a
prenup, but those default rules are complicated, in many cases more
complicated than what the parties would draft. So going with the default can
save you time upfront (and awkward conversations) but it isn't generallly a
good idea, especially if you opt not to understand what you are agreeing to.

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dragonwriter
> An analogy: most people take the default divorce law instead of writing a
> prenup, but those default rules are complicated, in many cases more
> complicated than what the parties would draft.

Of course, prenuptial agreements may be less complex than "default divorce
law", but they don't actually reduce the potential complexity of a divorce,
because then the complexity becomes the complexity of the prenuptial
agreement, compounded by the complexity of the rules governing the validity of
prenuptial agreements (outside of restrictions on particular terms),
compounded by the complexity of the rules governing the permitted terms in
prenuptial agreements and the conditions in which particular terms are
enforceable, compounded by the complexity of the default divorce rules (which
cover both the areas that cannot be modified by a prenuptial agreement, and
any areas left uncovered if the prenuptial agreement, or particular terms,
fail.)

So the prenup increases both the up-front and tail-end complexity.

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chollida1
Great discussion.

Also a great link to Mark Suster's critique of convertible notes. I think the
below link should be required reading for anyone who wants to use the SAFE
documents for fund raising.

I think there is a tendency to think if its good enough for Y Combinator then
its good enough for me. Mark points out the numerous ways a convertible note
can get you ni trouble. Atleast by reading it, you'll be going in with your
eye's open.

[http://www.bothsidesofthetable.com/2014/09/17/bad-notes-
on-v...](http://www.bothsidesofthetable.com/2014/09/17/bad-notes-on-venture-
capital/)

~~~
throwaway_cto
There is one more major flaw to convertible notes for founders: how do you
value market price for vested shares when a cofounder is leaving? See this ASK
HN post:
[https://news.ycombinator.com/item?id=8926028](https://news.ycombinator.com/item?id=8926028)

I'm in deep trouble because of this and wish I'd known better...

~~~
zabramow
very interesting. thanks for sharing.

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pskittle
how imp is taking an interest in fundraising before getting to product market
fit?

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delinka
Usability problem: [Cmd]-[Left Arrow] has been highjacked from navigating my
history to navigating the site's stories. Please don't do this.

~~~
leelin
Thank you! I was worried no one would bring this up. I had to reload the page
at least 5 times because of all the ways attempting to scroll seemed to push
me to another article. On top of that the "chat interface" widget was slow to
load each time.

Thankfully the content was great and worthwhile; otherwise I would normally
give up by the 2nd redirect.

~~~
zabramow
Looked into this. Pretty sure this is an issue with the parent site.

