Source | www.ycombinator.com | Jason Kwon, Aaron Harris
While working with companies in YC’s Series A program, we’ve noticed a common problem: founders don’t know what “good” looks like in a term sheet. This makes sense, because it is often, literally, the first time in their careers that they’ve seen one. This puts founders at a significant disadvantage because VCs see term sheets all the time and know what to expect. Because we’ve invested in so many founders over the years and have seen hundreds of Series A term sheets, we know what “good” looks like. We work with our founders to understand where terms diverge from “good”, what they can do about that divergence, and when and how it makes sense to negotiate.
Below is what a Series A term sheet looks like with standard and clean terms from a good Silicon Valley VC. Bracketed items (besides the names of the company and lead investor) are always or frequently negotiated. Items not in brackets are sometimes negotiated, but this has more to do with the idiosyncratic features of the company or the situation, and generally aren’t terms that parties intend to heavily bargain over during the negotiation.
One of the critical things you’ll notice is that we didn’t put in standard pricing. While the lead in a Series A round generally wants 20% of the company, pricing can flex up and down depending on the leverage held by each side. We think price is an important term, but too specific to each raise to try to create a standard. We’re more concerned with terms around control and structure that are less familiar to founders, and therefore more prone to cause confusion and trouble.
Note: this term sheet doesn’t belong to any particular VC — we drafted it — but it does substantively reflect what we see most often. Founders with a lot of negotiating leverage can sometimes do better, and the converse is true too.