
Bad Terms - tilt
http://www.aaronkharris.com/bad-terms
======
jackgavigan
I've gained the impression that there is a higher risk of imbalances that
disadvantage the founders occurring outside the Bay Area. It feels like the
presence of lots of experienced founders (not to mention their willingness to
advise others) in the Bay Area means that there there is a far smaller chance
that the founders will be naive/ignorant enough to fall foul of these kinds of
terms.

It's certainly a risk here in the UK.

There are even companies here that will charge founders £500 (~$720) to pitch
to potential investors, and a 5% "success fee":
[https://www.lbangels.co.uk/companies/costs](https://www.lbangels.co.uk/companies/costs)

~~~
cookiecaper
Tech investment barely exists outside of Silicon Valley, and when it does, the
terms are horrible. In my former city, many companies still ended up flying
out and courting investors in San Francisco because the local scene was so bad
for it (even though we had several local "startup accelerator" and incubation
programs).

I also just think VC terms are bad in general, and I think their intentionally
exploitative nature prevents a lot of good things from happening.

~~~
rdl
SV is the dominant market for funding. NYC is credible but still not ideal
(and some of the best NYC firms do a lot of investments outside NYC). It's a
power law distribution...SFBA, then NYC and London a lot lower down, then a
long way down with a few places (LA, Seattle, Israel, Beijing/Shanghai for
Chinese companies, etc.) punctuating the cliff. And indeed, the terms I've
seen from non-SFBA investors are invariably far shittier than anything from
SF...valuations are sometimes comparable, but lots of stupid hair on non-SFBA
deals, and the _bad_ non-SFBA investors are way way worse than the bad-SFBA
investors.

VC terms have gotten less bad over the past 15y, at least among the best
firms.

~~~
_sentient
Not sure that's entirely accurate: [http://www.citylab.com/tech/2016/01/the-
rise-of-global-start...](http://www.citylab.com/tech/2016/01/the-rise-of-
global-startup-cities/426780/)

While SF and SJ lead the pack, it's far from a power law distribution. To be
fair, much of the venture deals in Boston / San Diego are life sciences /
biotech, and that does you relatively little good if you're a software
startup.

Totally agree about terms though. Non valley investors tend to target much
lower valuations and stipulate weird conditions. This is partly a function of
outsized outcomes being fairly rare in tier 2 and tier 3 markets though, so
it's not exactly irrational for investors to assume a lower EV for a startup
and price it accordingly.

What you really lose is this honest-keeping function that you get when there's
sufficient competition for deals. Fear of being excluded or seen as
"unfriendly" to founders tends to keep potential bad actors in line, which
reduces some of the deal hair and benefits the overall ecosystem.

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nkw
A good post. Especially this point:

"Get a lawyer that understands startups. It's important to find someone with
experience. Not only can a good lawyer explain what's going on with terms of
your agreement, he/she can tell you if those terms are standard."

I would also add parties need _their own_ lawyer. Founders, investors, and the
company are all different entities with different interests. If you have
multiple founders, it is wise for each to have separate counsel. I've seen too
many instances where there is a law firm for the company/one founder, and a
law firm for investors, but the other founders just kind of "go along" because
they think their interests are aligned with founder #1, when that may or may
not be the case.

~~~
Goronmon
I apologize if this comes off a bit glib, but sometimes this sort of advice
makes me think the steps to founding a startup begin with:

1) Be wealthy

2) Don't be not wealthy

~~~
tinalumfoil
Being a founder (or co-founder or startup employee) means taking a decade out
of your life for low pay and financial instability for the chance of having
stake in a successful company. If you're not wealthy you're not in a position
to be a founder in the first place.

~~~
cookiecaper
Someone should really inform the college kids who keep applying to incubators
like YC...

~~~
jessegreathouse
It's a different story when you've got nothing to lose. When you've already
got a successful career and a life savings it's turning into a gamble that's
just not worth it. The unfortunate thing is that the world needs more mature
founders, and less college grad types.

~~~
cookiecaper
I agree. This is one of my biggest problems with the current VC system: it
excludes founders that have experience and judgment. I would even posit that
founders who have a family to support are more likely to want to keep the
company stable than a single 20-something.

You have to wonder if there are any reasons other than lower salaries that VCs
prefer to work with young, nothing-to-lose types.

~~~
ktRolster
_it excludes founders that have experience and judgment._

Those are the ones with money.

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karamazov
Here's a non-paywalled link to the ratchet explanation:
[https://www.cooley.com/files/TechIPOsTriggeringMore'Ratchets...](https://www.cooley.com/files/TechIPOsTriggeringMore'Ratchets'InShakyMarket.pdf)

~~~
akharris
Didn't realize it was paywalled. Just changed it. Thanks!

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AndrewKemendo
One thing that is not mentioned that has been really important of the past
decade or so, to watch out for is when you pair inexperienced founders with
inexperienced investors.

A lot of individual Angels really have no clue about a lot of the intricacies
of Convertible Notes, for example liquidation overhang [1], and they tend to
like those. So even more important to have a lawyer who knows this stuff.

I have also gotten feedback that SAFE notes are not generally used, or even
heard of, outside of the valley - especially with smaller Angels.

[1] [http://www.bothsidesofthetable.com/2015/05/30/one-simple-
par...](http://www.bothsidesofthetable.com/2015/05/30/one-simple-paragraph-
every-entrepreneur-should-add-to-their-convertible-notes/)

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sbooks
Shameless plug here, but before I would model the round in Capshare.com so you
can see how the terms play out with different exit scenarios.

