When a Handshake Isn’t a Handshake
Last week Y Combinator announced The Handshake Deal Protocol. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. Handshake deals are necessary in Silicon Valley because, in the world of startups, one must move quickly.
As Y Combinator notes, however, handshake deals can create problems:
Unfortunately, things don’t work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.
To avoid these problems, Y Combinator developed the following protocol, which must be followed for a handshake deal to exist:
- The investor says “I’m in for <offer>.” [The <offer> must specify an amount to be invested, plus a valuation or valuation cap (or no cap), plus an optional discount.]
- The startup says “Ok, you’re in for <offer>.”
- The startup sends the investor an email or text message saying “This is to confirm you’re in for <offer>.”
- The investor replies yes.
The protocol makes a lot of sense. The irony, however, is that once the protocol has been satisfied, the terms have been agreed upon in writing (email or text) – i.e., the parties no longer have merely a handshake (oral) deal!
Related post: Oral Agreements – You’re Just Asking for Trouble
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
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