Startup ecosystems are unique environments relative to most of the business world, in large part because of the substantial inequality of experience between the players involved. On a typical business deal, you have seasoned business people on both sides negotiating with each other, with appropriate advisors.
In the startup context, however, you very often have significantly inexperienced teams negotiating with investors who are, quite literally, 100x as experienced as they are at the types of transactions they are discussing. This is why first-time entrepreneurs often lean significantly on outside advisors, including lawyers, to “level the playing field” and ensure that a startup’s inexperience is not unfairly leveraged against them.
Unfortunately, “this is standard” is perhaps the most common way in which sophisticated “repeat players” (investors) often dupe founders into accepting this or that term or document. The truth is that while there is some standardization at a very high level among early-stage tech documentation, there is still a wide diversity of acceptable high-stakes norms, any combination of which can be appropriate for a company’s unique context.
The best way for a first-time team to protect themselves is to work with trusted, experienced advisors, including lawyers without conflicts of interest with investors, to explain what is or isn’t appropriate for their context. And they should be extremely cautious with anyone – even someone with what appears to be a great reputation – suggesting certain financing terms are “standard.” “Standard” is often in the eye of the beholder, and incentives heavily influence their vision.
For more on this topic, particularly as it relates to term sheets in Series A financing, see: The Problem with Standard Term Sheets (including YC’s).
Comments