Comments on: Point of order: Standardised termsheets are not the answer for startups

By: valto

valto — Mon, 28 Sep 2009 06:00:21 +0000

We have started a nonprofit to tackle this problem with following approach:

1. create categorizing model to separate different types of start-ups
2. find/build/attach high level sets of terms for different categories
3. develop efficient web tool to better manage the logistics and communication of the agreeing process (start with high level term sets by category with “blog style” commenting per each term)

As a non-profit we will make all of our work freely available to our members.

Anyone wanting to participate, you are welcome to join us. We need plenty of resources.

By: Philip Wilkinson

Philip Wilkinson — Sat, 05 Sep 2009 11:01:29 +0000

Great article guys. It’s definitely true that different investors are going to want different levels of term sheets. At the beginning you can argue that you don’t really need something too complicated but if the business starts to be a success, you may have to go and revise it all again to cover the holes you left before. Bigger value deals will of course need much more complicated terms where a standardised term sheet can at the very least help educate entrepreneurs into what to start looking for.

My preference: read and and learn about lots of different term sheets to get your own knowledge improved as an entrepreneur. Use one as a starting point with your potential investors, and then bring the lawyers in to clean the rest up, standardise anything, and as you say, bring the deal to completion!

It’s the ironic world of the entrepreneur that at the time you have the least money and most risk of your startup going anywhere, that you actually need the most work doing!

By: gordon

gordon — Thu, 03 Sep 2009 20:01:19 +0000

I never thought that I would ever hear two lawyers tell us that we needs lawyers!

Wow.

By: Jonathan Markwell

Jonathan Markwell — Thu, 03 Sep 2009 17:19:27 +0000

Danvers, Barry,

Thank you for your replies this makes a lot of sense. However I think we still need something like: http://friendda.org to ensure that expectations are set in at least some form.

A few common sense paragraphs would make a big difference. I’ve seen companies start in the way you describe and then get way more complicated than they should when one founder fails to take the leap of going full-time. This is probably more important when there are two cofounders vs. three or more.

By: BarryVitou

BarryVitou — Thu, 03 Sep 2009 16:40:14 +0000

Hi Jonathan, Couldn’t agree more. We encourage bootstrapped start ups like this and their investors to adopt a proportionate approach. They do. All the time. In examples like this we would hope that the investors take a pragmatic view of the level of risk they are assuming. By definition people investing in start ups at any level accept risk. If they don’t they shouldn’t be doing it. The cheapest way of investing as Danvers says would be for the start up to just issue shares without any further paperwork. This basically costs nothing (ie the start up could do it itself with some basic research). A basic set of articles to cover off very basic protections is very cheap. The key at this early stage is, as you say, to get going. If investors want to gold plate something by going beyond the bare minimum level of protections at this level then they will have to accept that they will need to pay for it!

By: Danvers Baillieu

Thu, 03 Sep 2009 16:23:57 +0000

The simplest answer must be: “issue the shares”. Ultimately at that level there has to be a high degree of trust going on and the result is binary – success (further funding) or failure (everyone loses). If further investors come in then the FFF crowd should then be protected by a new agreement.

By: Jonathan Markwell

Jonathan Markwell — Thu, 03 Sep 2009 13:51:37 +0000

So what do you do when you are fresh out of university with a great idea and a great team with no cash. All you need is £15K to cover 3 months living expenses and roll out a first version of your app. You manage to convince some friends / family / fools to part with just enough to get you going.

The deal breaker is that everyone involved wants something on paper that they can trust covers their best interests. What goes on that piece of paper when there is no cash available to pay for a lawyer?

By: Loopy

Loopy — Thu, 03 Sep 2009 11:08:26 +0000

Here, here,

I remember selling one of my companies and the great work done by Bird & Bird in London. I totally agree that what you buy with lawyers is not a standard document but it is the shepherding of the process. Although ours was a company sale I would still rely [in the future] on the lawyers expertise to help me through the term sheet [I have seen some shit one's in my time]. I do entrepreneur, I don’t do legal. My lawyer saves me money in the long term.

By: Rodolfo

Rodolfo — Thu, 03 Sep 2009 09:42:24 +0000

Lawyer says “you need lawyers!”.

The point of having a standard term sheet is to have a reference point that is out in the open for comments.

It also fills the sub 500k investment space for which using a law firm might be anti-economical (alas the work involved in a 500k or 5m series A is pretty much the same in the UK)

Negotiating a deal is not rocket science. In fact it’s pretty dumb even if you take into account “quirks and complications”. The reason why you want a lawyer with nuts coated in iron sitting next to you is that they do deals like that every day and have the pulse on the situation and have seen multiple term sheets from the same investor and know the state of the market out there. That information alone has a direct impact on your bottom line during a liquidity event.

Which is also the reason why you should steer away from firms who do “VC” when in fact what they did was some private equity deals (honestly? it’s London, everybody has done a few).

My 0.02

By: Azeem

Azeem — Thu, 03 Sep 2009 09:41:41 +0000

Good points with a few thoughts:

There is simply not an infinity of structures or outcomes any more than there is any infinity of species.

A taxonomy (or decision tree) could be created which would, at its endpoints define the various and several points in a term sheet.

I researched startup legal fees last year and found that the lowest legal fees were £4-5k for the first round of investment; rising slowly in proportion to the investment. Getting away with less than £6k seems to be tough.

But for a £200k or £100k seed round this is an absurdity. £5k buys you an iPhone app for your start-up which is clearly of more value than the legals.

The other thing that has surprised me has been the absence of structured project management in closing deals. This adds to the cost and time of closing these deals.

So yes there may be more than one set of terms but there is no reason why they can’t be highly structured, accessible via a decision tree, and with extremely clear timelines around when documentation, signatures and other collateral is required.