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.
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A client told me that she wants to include Class F shares in her Certificate of Incorporation for the Delaware corporation we were forming. This post describes how we concluded that – for this client, at any rate – Class F shares were not a good idea.
Class F shares were invented by the Founder Institute several years ago to protect founders (largely against investors, especially VCs – see If You Accept Venture Capital, You will Lose Control of Your Company). Class F shares provide 2:1 board votes per founder versus normal board members, and 10:1 share votes as compared to normal common shares.
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In an article published today (Venture Capital to Suppress Its Appetite for Risk in 2013), the Wall Street Journal reports that venture capitalists have dramatically lowered their appetite for risk, reducing the power of Internet entrepreneurs who are seeking funding.
The article notes that:
- In light of disappointing stock-market performance of Facebook, Zynga and Groupon, VCs are investing less in consumer Internet companies.
- During the past year, valuations have gone down significantly.
- On a quarter-over-quarter basis, the number of deals, the amount invested and the percentage of “up” rounds all have declined.
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Accelerators offer entrepreneurs seed funding and one-to-one mentoring in exchange for an equity stake, making a profit when some of their startups receive institutional (VC) funding. However, according to a Wall Street Journal article published yesterday (Start-Ups Crowd ‘Accelerators’), most accelerators – especially those outside Silicon Valley, Boston and New York – are of doubtful value.
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Yesterday the Wall Street Journal published an informative piece about asking people you know and love for a loan (Do’s and Don’ts of Asking Friends for Money). Here is a recap of the tips offered by experts quoted in the article:
- Put yourself in the lender’s shoes.
- Borrow the money as you would from a bank.
- Bring in a lawyer to draw up the agreement.
- Ask for more money than you think you need.
- Assume the worst.
- Remember “Hamlet”. ["Neither a borrower nor a lender be...."]
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
The evening of Wednesday, April 18, I will moderate SVForum’s East Bay Series program “Improving Fundability with Social Media”.
Program description:
Social media such as Facebook, Twitter, and Google+ have clearly woven themselves into the very fabric of our personal and professional lives. Their simple and intuitive user experience, and the effective and efficient means they provide to connect people, brands, and consumers are transforming the very way business is conducted. It’s natural that so much of the innovation funded by the venture community is connected in some way with Social Media, whether it’s to reach customers, respond to service issues, or build buzz about new products and services. Our panel will discuss how companies are adopting–and adapting these platforms to increase traffic, conversions, and profit as they extend relationships and make every interaction part of their experience -– and how entrepreneurs can take advantage of this trend to build successful new products and ventures. Join us and learn how having a Social Media platform can impact or improve your start-up’s potential for raising critical funding.
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I recently spoke with three startup entrepreneurs who had just retained a finder to locate venture capital in exchange for an equity stake in the form of warrants (the right to purchase shares at a specified price by a specified date). They got very nervous when, after reading their agreement with the finder, I told them the business and legal reasons why retaining the finder was a bad idea:
- The finder would start by sending nondisclosure agreements to targets – but VCs generally will not sign NDAs and are likely to think the entrepreneurs don’t know what they are doing.
- The finder then would send an Executive Summary to each VC. But virtually no ExSum that is sent to a VC cold is read, let alone responded to.
- Next, the finder would make follow-up calls to the VCs. But such follow-ups will be of little, if any utility. The way to get to a VC is via an introduction from someone that the VC knows and trusts. Furthermore, VCs who are interested will not want the finder’s answers to questions – they will want to talk to the entrepreneurs.
- More fundamentally, VCs will be suspicious of, and will have little interest in engaging with, entrepreneurs who use finders. The typical VC believes that if you cannot figure out a way to be introduced by someone that the VC knows, you don’t have what it takes to build a successful business.
- The finder’s form of warrant agreement gave him anti-dilution protection – a feature that would turn off many VCs and would make them think, again, that the entrepreneurs don’t know what they are doing.
- The finder required that the entrepreneurs indemnify him against any claims associated with his activities, even if the claims arise from the finder’s negligence.
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Congress is considering legislation by which the Securities and Exchange Commission would lift limits on private equity investments, letting companies sell equity interests to investors online (“crowd funding”). Today the Wall Street Journal published a debate on this topic (Should Equity-Based Crowd Funding Be Legal?).
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On March 8, The Angel Resource Institute, Silicon Valley Bank and CB Insights released the first Halo Report, which analyzes early-stage investments by angel investment groups. Of particular note: In 2011, California accounted for 21% of the deals and 29.8% of the funds invested.
Other noteworthy findings:
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
In an article published today (Chasing the New Angel Investors), the Wall Street Journal discusses why entrepreneurs must work ever-harder to persuade angel investors to invest.
According to the article, although seed and startup angel investment has increased, there are several reasons why that money is more difficult to attract:
- Since the recession, many angels have become more demanding, looking for proof of marketplace acceptance rather than a hunch that it exists.
- Angel groups, which syndicate deals among their members, have a more-formal review process that may involve discussions by dozens of potential investors.
- With less venture capital available, angels are more concerned about whether a company can grow to profitability or a successful exit.
The article’s advice for entrepreneurs: Have something to show, know your business thoroughly, and polish your pitch.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.