Last week Y Combinator announced The Handshake Deal Protocol [no longer available online – apparently because of the Protocol’s shortcomings discussed below]. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. This sometimes is considered necessary in Silicon Valley because, in the world of startups, one must move quickly.
As Y Combinator notes, however, a handshake deal 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 an oral handshake 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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