This incident fails to explain why common stockholders should have zero voting power. That decision doesn't fall naturally from "an early VC had onerous terms that we didn't vet".
Serious question. Why should common stock holders have voting rights? If you're going to buy stock in any company the number one reason has to be that you believe in its leadership. The ultimate vote of a shareholder is to sell the stock. Mom & pop don't get to exercise any meaningful control over a company with voting rights, leaving folks like Icahn to exert undue influence, whose incentives are possibly not aligned with anyone else's.
>If you're going to buy stock in any company the number one reason has to be that you believe in its leadership.
Why should this necessarily be the case? There are many reasons to buy a stock. Sometimes leadership is an issue, and getting rid of it is an opportunity.
I'd rather you looked at it this way: If Icahn has an incentive, then the company has a management problem. You might not like the outcomes of his investments, but hes top-notch at recognizing shortcomings in existing management and their own businesses.
For me, despite ever maybe owning 0.0000000000001% of a company, the power of mutual ownership means all perspectives are taken into account. And that generally means more accurate valuations, and therefore safer investments.
Serious follow-up question regarding US securities laws: If stock class A has zero voting rights, can the stockholders of class B with voting rights unilaterally decide that class A will get no dividends while class B will get the entire company's profits paid out as dividends?
Yes though it will depend on the bylaws of the company and the state they're in. There are some dual share classes in the US that do have materially different dividend policies in addition to voting rights.
Normally Class A has the voting right and Class B has not.
But I would also like a clarification on this from somebody that actually knows. The S1 filing for Snap Inc. states:
"We have paid a stock dividend of our Class A common stock on our capital stock in the past and from time to time in the
future may pay special or regular stock dividends in the form of Class A common stock, which per the terms of our amended and restated certificate of incorporation must be paid equally to all stockholders."
"Equally to all stockholders", does that mean all Class A holders or both A and B holders?
Okay, thanks for the info. I was asking more due to the general case; if a stock class has no voting rights and never will receive dividends, it is effectively worthless unless holders of other stock classes voluntarily give away their money (they won't).
I am a little puzzled at some of the latest innovations in the US stock markets. I can understand investing in a company that a small group of insiders will always have majority control in, as long as all owners are treated equally wrt. all forms of payouts. I really don't understand why the market would assign value to a stock class with no voting rights and no plausible scenario for returning capital to stockholders.
Another serious question: if a stock has no voting rights and no dividends, why would it be worth anything at all? That is, what makes it different from a piece of paper with the company's name on it? If there are voting rights, then there's value because someone potentially could buy enough shares to meaningfully exert those rights, but if not, then what value do the shares have to anyone?
That's an interesting question. To oversimplify it, the value of a stock of essentially a wild-ass guess about how much cash one might be able to pull out of a company eventually per share times the number of shares.
If I a company isn't paying dividends or buying back stock, and we (the shareholders) can't coerce said company into doing so at some point, it's essentially an indestructible piggy bank in which money evaporates while you helplessly watch.
It's value is that you can sell it to someone else.
One of the big risks that Snap is taking in this IPO is that their common stock has no practical value.
As you said, stock generally has two ways of being worth something: partial control and/or profit sharing.
Snap common stock has neither. It's only value is its ability to be sold to someone else. It's basically a currency? Is $Snap the new BTC? I have no idea.
But that just pushes the question one layer of abstraction deeper. Why would that person be willing to buy Snap shares from you at any price?
On a long enough timeline, you have to believe that Snap will either disburse dividends, be acquired by another company or find some other way to convert ownership into actual cash.
They would buy because they believe they can sell it later at a higher price, based on the belief that other people want to buy $SNAP and will drive the price up.
I'm not avoiding your question—I agree that it should be based on underlying value—but that seems to be the only reason to buy $SNAP
If the company is successful, they will pay a dividend or do a buyback later. For example, Facebook raised $16B in its IPO, and recently bought back $6B worth of shares at about 4 times the IPO price. The IPO was a great deal for common shareholders, despite their lack of control. Perversely, the comparison to Facebook might bias people to pay more for Snapchat shares with no voting power.
Public traded companies: you can sell the stock. The voting rights are rarely used, but they allow majority shareholders to properly control the company. No distinction is made by size of shareholder, just shares = votes.
Private held companies: not necessarily traded. Your investment is illiquid. Nobody outside is really watching. The managers can fly the company into the ground before you can find a buyer, and voting is your only shield against this.
> This incident fails to explain why common stockholders should have zero voting power.
They don't have zero voting power. They have greatly reduced voting power. Huge difference.
Snap Inc. is a delaware corporation. The shareholders (DE = shareholder; NY = stockholder) have certain non-waivable rights as a matter of delaware law.
To put it another way: The founders create the company, including designing the ownership structure. The fact of the matter is, common shareholders are willing to buy into this structure, even without very strong voting rights, at a huge valuation. The proof is in the pudding - why should the founders have done otherwise? No one is forcing the common shareholders to buy into the Company - they are doing so knowing full well that they have very low voting rights.
So, why should management give up control to common stockholders? What benefit is there? The only answer, in my role as a corporate lawyer, is when the company cannot raise money on terms more favorable to the founders and management.
That was not the case with Snap. And it worked out brilliantly.
It's a little early to declare mission accomplished. The IPO hasn't actually happened yet. It will be hard to know if limited shareholder supervision reduces the value of the company. But if the IPO is a bust, a lot of people will wonder.
Fair enough - but the S1 is filed. The IPO is set for Wednesday.
As soon as the shares are sold Wednesday morning, it's champagne time. Granted there is a lockup period for company insiders, but unless they sink the ship in 6 months, they are going to be racing their new yachts by thanksgiving.
"Snap acknowledged in its IPO filing that it would likely be the first company to sell non-voting stock in an IPO on a U.S. stock exchange."
If all you mean is that Delaware law allows certain kinds of lawsuits by stockholders, then no, IMO, that is not the same as having voting rights. And yes I understand that it not unusual for common stock in public companies to have greatly reduced voting rights. There is still a difference between that and none.
The Class A common stock is non-voting and is not entitled to any votes on any matter that is submitted to a vote of our stockholders, except as required by Delaware law. Delaware law would permit holders of Class A common stock to vote, with one vote per share, on a matter if we were to:
•
change the par value of the common stock; or
•
amend our certificate of incorporation to alter the powers, preferences, or special rights of the common stock as a whole in a way that would adversely affect the holders of our Class A common stock.
In addition, Delaware law would permit holders of Class A common stock to vote separately, as a single class, if an amendment of our certificate of incorporation would adversely affect them by altering the powers, preferences, or special rights of the Class A common stock, but not the Class B common stock or Class C common stock. As a result, in these limited instances, the holders of a majority of the Class A common stock could defeat any amendment to our certificate of incorporation. For example, if a proposed amendment of our certificate of incorporation provided for the Class A common stock to rank junior to the Class B common stock and Class C common stock with respect to (i) any dividend or distribution, (ii) the distribution of proceeds were we to be acquired, or (iii) any other right, Delaware law would require the vote of the Class A common stock, with each share of Class A common stock entitled to one vote per share. In this instance, the holders of a majority of Class A common stock could defeat that amendment to our certificate of incorporation. Moreover, if an amendment to our certificate of incorporation would alter the powers, preferences, or special rights of the Class A common stock and either the Class B common Stock or the Class C common stock in a way that would affect them adversely compared to the unaffected class, Delaware law would permit the holders of Class A common stock to vote with the other adversely affected class of common stock together as a single class. For example, if a proposed amendment to our certificate of incorporation provided for the Class A common stock and Class B common stock to rank junior to the Class C common stock with respect to (i) any dividend or distribution, (ii) the distribution of proceeds were we to be acquired, or (iii) any other right, Delaware law would require the vote of the Class A common stock and Class B common stock voting together as a single class, with each share of Class A common stock and Class B common stock entitled to one vote per share. In this instance, the holders of a majority of the Class A common stock and Class B common stock, voting together as a single class, could defeat that amendment to our certificate of incorporation.
---
So, yes, the class is called "non-voting" but, as I point out, they still do have powers to vote. Just very limited ones. However, I am perfectly willing to admit that you do have a point that this is literally as de minimis as it gets.
This is distinctly unusual. But it is still not zero voting power - just literally as close as delaware law allows.
Insane growth before raising = maximum leverage, and the corresponding competitive pressure on the deal, plus asking for it. (and being in the right place/time)
Read https://www.amazon.com/dp/B01M3UIVW3/ref=dp-kindle-redirect?... and ask for/demand the suggested "clean" terms. That gets you pretty far -- going beyond that, you can probably either optimize for valuation or optimize for control, but probably not both, even in a very hot deal.
+1 for "Venture Deals". It's a fantastic resource for founders raising money on every level - from "I know nothing about finance" seed to "how long till IPO" D-round. There are countless blog posts and articles on this, but none of them provide the same guided walkthrough for all important considerations along real-life examples.
What exactly would constitute founder-friendly seed / series A terms in the area of future investor participation rights? Are we literally saying any right of first refusal is onerous, or is it just the multiple that gave Lightspeed up to 50% of the next round (which sounds like a 2-2.5X multiple)?
Sam Altman has a right of first refusal provision in his "founder-friendly term sheet". At least I think he does.. he doesn't call it a ROFR, preferring the plainer language of "investor participation rights". But it's there and even the multiple is left as an open variable.[1]
Pro rata is just ROFR with a 1x multiple, yes, so it seems it was the particular multiple (anything greater than strictly proportional) that was onerous.
A right of first refusal is the right to purchase the shares offered by a company to someone else. So if VentureBros wanted to invest $10M in TheGuild, and TheGuild's old VC, ImpossibleIndustries, had a ROFR, ImpossibleIndustries could block VentureBros and buy the same shares for $10M.
Pro-rata participation rights means that if you sell shares to a third party, the rightsholder gets to purchase more stock from the company in order to maintain their percentage share so that they are not diluted. So if ImpossibleIndustries owned 10% of TheGuild, and VentureBros then invested $10M and got a certain percentage of TheGuild, ImpossibleIndustries would have the right to buy more stock of TheGuild in order to ensure that, after the transaction, ImpossibleIndustries still had 10% of the total shares of the TheGuild.
Next time. I will be posting more about this sort of thing in the future (I am a lawyer who codes, and it is amazing how frequently tech people get law wrong and vice versa) - I will likely stick with Venture Bros examples.
There's nothing wrong about what I said - that investor can't block a future round.
These terms are pretty common in the valley, to think thy suddenly give investors a right to refuse other investors in future rounds is frankly ridiculous
The terms Jeremy had with Snap were different, and they didn't get in the way of the entrepreneur in any case since he agreed to move out of the way (his reputation is worth more than follow-on rounds one snap)
That's the best protection entrepreneurs have - investors build their business on their rep. No good or reputable investor is going to burn that for a single term
You said that @sama's term sheet didn't have a rofr, just participation rights. That is incorrect. It has both.
> that investor can't block a future round.
This is expressly what a right of first refusal, or ROFR, is. To be precise: they can prevent the next purchaser from coming in, though they can only do so by making the purchase themselves. If they cannot afford to, they cannot block. The round will, itself, proceed, but not necessarily with the outside investors.
> to think thy suddenly give investors a right to refuse other investors in future rounds is frankly ridiculous
They 100%, unequivocally, absolutely do. This is the central, core purpose of a ROFR. It happens quite often.
Btw, I checked out your profile. I very much respect your work.
@sama's terms are fairly equitable. I am a corporate lawyer with a substantial practice in startups and software (I also code in node, and used to work in LAMP and ANSI C way back in the day). I do a fair number of startup investment rounds.
These are reasonable terms. They don't bend over backwards for the company, they are not a land-grab by the investor. Are there 50 other ways from Sunday to also have equitable terms? Yes - every deal is different, which is why you need a lawyer, and depending on the context, different terms can be equitable. In general, though, this is pretty "content-neutral."
Note: I am not your lawyer. If you need a lawyer - get a lawyer. But yes, my handle is my actual name (so you can look me up to see that I am not just an armchair IANAL). As far as I know, I am the only lawyer named Liberty around.
What multiple? I honestly haven't seen it. What I did see was this, however:
> Those terms gave Lightspeed the right of first refusal to invest in a future round of funding and the ability to increase its share of the company in that round. Lightspeed could also take 50 percent of the future round.
That is the issue and that would make a target less desirable for VC investment.
By multiple, do you mean the voting leverage? Because note that this happened after Lightspeed invested and allowed the VC to invest, rather than blocking it. To be very clear: the 10:1 voting ratio was decidedly not what blocked outside VC. The ROFR blocked outside VC. The 10:1 founder voting ratio was the solution.
Typically, "multiple" in this context means a liquidation preference - if one existed here, it was not detailed in the NYTimes article. My bet is you could probably find this information in the S1, (located here: https://www.sec.gov/Archives/edgar/data/1564408/000119312517... ) but if you want me to read that, you will have to pay my hourly.
On the face of it, it seems that if existing investor VC1 has a ROFR, it only means that VC2 can't under-bid on the next round, and that minimizes dilution for founders on that round. That is, if VC2 says "We'll give you $2M at a $10M valuation" and VC1 says "We choose to exercise our ROFR at that price", clearly VC2 has set a valuation too low; if they want in, they'll have to make an offer that VC1 won't match. That all sounds good for the founders (and other early shareholders). What am I missing here?
If VC1 chooses to steal the deal, then VC2 underbid on the valuation, no? Plus, even without any ROFRs, there are bidding wars all the time (between VC2 and VC3, say, where neither has a chunk yet).
From VC2's perspective they are probably overpaying due to the ROFR. In your example, $10M could just be what both VCs actually value company at, so VC1 exercising their right is not a bad sign. Therefore to win the deal (if it can't be shared) VC2 has to offer >$10M.. perhaps a lot more if they want to ensure they don't waste their time with the offer. So the concern is this may discourage other VCs from bidding on the deal, knowing the only way to win is to overpay. Or that startups need to sell a bigger stake to make room for both VCs.
By that logic, even if VC1 is dead and buried, VC2 still will never make an offer, since VC3 might swoop in and steal the deal, so it's always a waste of time to make an offer. Additionally, it's implausible that two VCs will calculate the exact same "fair" valuation, since it's all so nebulous.
From the point of view of the original angel investors and early employees, why shouldn't the founder push for the best, least dilutive, offer? Are you suggesting that if VC2 comes in with a low-ball offer, the founder should just say "gee, they made such an effort, I owe them the right to excessively dilute us all, even though VC1 is putting his money where his mouth is, and is willing to step up to avoid it."
Let's say I helped you by putting up a down payment for you to buy your house, for which I get 10% ownership. Later, you want to sell the house (or a further interest in it). If you get an offer, and I think it's too low, is it unreasonable for me to want to "steal the deal" at that artificially low price? Otherwise, it's simply a transfer of wealth from me (and you) to the new buyer, which I'd certainly like to defend myself against. People buy houses all the time in competition with other buyers; no serious buyer says "I'm not going to make an offer on that house, because someone else might beat my offer, or maybe exactly match it and the seller could choose that other offer."
No, because once the contracts with VC2 are signed etc. they can't change the terms, so VC3 can't swoop in anymore in the same round.
And even if VC3 swoops in during negotiations with VC2, it requires the founders to be pursuing that (and VC1 would be aware). Whereas with the ROFR the founders have no choice.
Finally, VCs suffer from herd behavior. So it is very plausible that many VCs arrive at the same valuation - the valuation of the VC leading the round / the valuation of the best-reputation VCs. If foo VC values a company at $10M, but Sequoia comes in at $20M, 99% of the time foo VC will second-guess their valuation and match Sequoia.
The founders have a fiduciary duty to all existing shareholders (angels, early employees, etc.) to exactly be pursuing VC3 at the same time as VC2, before anything is signed, and to take the best deal. They already have no choice.
Your point about herd behavior is well taken, though. And the result is that the VCs moan and groan, but ultimately the price goes up, and the entrepreneur wins, because they get the best valuation possible. (I've been in the room as an angel investor, and I was sure happy when the valuation went up 25% when a second VC got interested in the B round.)
The only counter-argument I can see is, in your example, if Sequoia's money really is greener than fooVC's (which there are long-standing arguments for and against).
No they don't have a fiduciary duty to negotiate with everyone. Founders routinely arbitrarily decide certain VCs are not the right fit (basically, they don't like them).
You're confusing ROFR with simple bidding when you use the phrase "steal the deal". VC2 and VC3 are open bidding, and between them whoever bids highest wins (you call it "steals"). ROFR changes this landscape considerably. VC1 doesn't have to put their bid in until the others are locked.
I cited an article explaining how this can steer away competition. Another scenario you might not have considered is that if VC1 would've bid $15M, but the highest other offer is only $10M, then VC1 gets it at $10M.
Sometimes you don't want to keep getting funding from the same VC so that they don't acquire too much ownership and power in your company. To diversify its investor base, Snap would have to convince VC2 to pay a price that is higher than anything VC1 is willing to pay. Maybe it would work out and VC2 would be happy to pay a premium to get in the deal. But it's also possible that VC2, VC3, and VC4 all walk away from the deal because they don't want to deal with the defacto bidding war with VC1, who has more information and knowledge from being involved with the company from early on.
The real damage is that ROFR's often allow partial matches rather than require taking 100% or 0%. Where this goes really badly is an Investor wants to do $2M at 10M and the other investors wants to ROFR half the deal. $1M might be below the minimum investment threshold for VC2 and the $1M from VC1 might be too small for the whole $2M targeted round by the company. So now the whole deal falls apart because you can't fill out the whole round since VC2 won't invest 50% of the round and VC1 can prevent VC2 from taking a large enough block by ROFR some of the shares in the deal.
The 2015 interview at a start-up awards show linked [1] in the article is pretty interesting. Evan gives a few startup ideas who failed before he succeeded with Snapchat, how he initially marketed Snapchat with flyers in a local mall , and that the amount "his father was tired of paying" in Snapchat’s bills was around $5K a month.
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[ 5.8 ms ] story [ 164 ms ] threadWhy should this necessarily be the case? There are many reasons to buy a stock. Sometimes leadership is an issue, and getting rid of it is an opportunity.
FWIW, there are a lot of people who's goal isn't to sell but to collect dividends due to the long term success of a company.
For me, despite ever maybe owning 0.0000000000001% of a company, the power of mutual ownership means all perspectives are taken into account. And that generally means more accurate valuations, and therefore safer investments.
Normally Class A has the voting right and Class B has not.
But I would also like a clarification on this from somebody that actually knows. The S1 filing for Snap Inc. states:
"We have paid a stock dividend of our Class A common stock on our capital stock in the past and from time to time in the future may pay special or regular stock dividends in the form of Class A common stock, which per the terms of our amended and restated certificate of incorporation must be paid equally to all stockholders."
"Equally to all stockholders", does that mean all Class A holders or both A and B holders?
I am a little puzzled at some of the latest innovations in the US stock markets. I can understand investing in a company that a small group of insiders will always have majority control in, as long as all owners are treated equally wrt. all forms of payouts. I really don't understand why the market would assign value to a stock class with no voting rights and no plausible scenario for returning capital to stockholders.
If I a company isn't paying dividends or buying back stock, and we (the shareholders) can't coerce said company into doing so at some point, it's essentially an indestructible piggy bank in which money evaporates while you helplessly watch.
One of the big risks that Snap is taking in this IPO is that their common stock has no practical value.
As you said, stock generally has two ways of being worth something: partial control and/or profit sharing.
Snap common stock has neither. It's only value is its ability to be sold to someone else. It's basically a currency? Is $Snap the new BTC? I have no idea.
On a long enough timeline, you have to believe that Snap will either disburse dividends, be acquired by another company or find some other way to convert ownership into actual cash.
I'm not avoiding your question—I agree that it should be based on underlying value—but that seems to be the only reason to buy $SNAP
it's pretty tenuous, but real nonetheless.
Private held companies: not necessarily traded. Your investment is illiquid. Nobody outside is really watching. The managers can fly the company into the ground before you can find a buyer, and voting is your only shield against this.
They don't have zero voting power. They have greatly reduced voting power. Huge difference.
Snap Inc. is a delaware corporation. The shareholders (DE = shareholder; NY = stockholder) have certain non-waivable rights as a matter of delaware law.
To put it another way: The founders create the company, including designing the ownership structure. The fact of the matter is, common shareholders are willing to buy into this structure, even without very strong voting rights, at a huge valuation. The proof is in the pudding - why should the founders have done otherwise? No one is forcing the common shareholders to buy into the Company - they are doing so knowing full well that they have very low voting rights.
So, why should management give up control to common stockholders? What benefit is there? The only answer, in my role as a corporate lawyer, is when the company cannot raise money on terms more favorable to the founders and management.
That was not the case with Snap. And it worked out brilliantly.
As soon as the shares are sold Wednesday morning, it's champagne time. Granted there is a lockup period for company insiders, but unless they sink the ship in 6 months, they are going to be racing their new yachts by thanksgiving.
I have yet to see a news outlet describe the SNAP common stock as you have. Do you have any references?
A few of many example articles describing how their common stock will have 0 voting rights:
https://www.fool.com/investing/2017/02/08/your-snap-shares-w...
http://fortune.com/2017/02/07/snapchat-ipo-snap-stock-buy/
"Snap acknowledged in its IPO filing that it would likely be the first company to sell non-voting stock in an IPO on a U.S. stock exchange."
If all you mean is that Delaware law allows certain kinds of lawsuits by stockholders, then no, IMO, that is not the same as having voting rights. And yes I understand that it not unusual for common stock in public companies to have greatly reduced voting rights. There is still a difference between that and none.
https://www.sec.gov/Archives/edgar/data/1564408/000119312517...
The Class A common stock is non-voting and is not entitled to any votes on any matter that is submitted to a vote of our stockholders, except as required by Delaware law. Delaware law would permit holders of Class A common stock to vote, with one vote per share, on a matter if we were to:
change the par value of the common stock; or amend our certificate of incorporation to alter the powers, preferences, or special rights of the common stock as a whole in a way that would adversely affect the holders of our Class A common stock.In addition, Delaware law would permit holders of Class A common stock to vote separately, as a single class, if an amendment of our certificate of incorporation would adversely affect them by altering the powers, preferences, or special rights of the Class A common stock, but not the Class B common stock or Class C common stock. As a result, in these limited instances, the holders of a majority of the Class A common stock could defeat any amendment to our certificate of incorporation. For example, if a proposed amendment of our certificate of incorporation provided for the Class A common stock to rank junior to the Class B common stock and Class C common stock with respect to (i) any dividend or distribution, (ii) the distribution of proceeds were we to be acquired, or (iii) any other right, Delaware law would require the vote of the Class A common stock, with each share of Class A common stock entitled to one vote per share. In this instance, the holders of a majority of Class A common stock could defeat that amendment to our certificate of incorporation. Moreover, if an amendment to our certificate of incorporation would alter the powers, preferences, or special rights of the Class A common stock and either the Class B common Stock or the Class C common stock in a way that would affect them adversely compared to the unaffected class, Delaware law would permit the holders of Class A common stock to vote with the other adversely affected class of common stock together as a single class. For example, if a proposed amendment to our certificate of incorporation provided for the Class A common stock and Class B common stock to rank junior to the Class C common stock with respect to (i) any dividend or distribution, (ii) the distribution of proceeds were we to be acquired, or (iii) any other right, Delaware law would require the vote of the Class A common stock and Class B common stock voting together as a single class, with each share of Class A common stock and Class B common stock entitled to one vote per share. In this instance, the holders of a majority of the Class A common stock and Class B common stock, voting together as a single class, could defeat that amendment to our certificate of incorporation.
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So, yes, the class is called "non-voting" but, as I point out, they still do have powers to vote. Just very limited ones. However, I am perfectly willing to admit that you do have a point that this is literally as de minimis as it gets.
This is distinctly unusual. But it is still not zero voting power - just literally as close as delaware law allows.
A very slight softening of the blow. :)
I actually have that on a sticky on my desk. Sadly.
Sam Altman has a right of first refusal provision in his "founder-friendly term sheet". At least I think he does.. he doesn't call it a ROFR, preferring the plainer language of "investor participation rights". But it's there and even the multiple is left as an open variable.[1]
So are @sama's terms actually spat-worthy?
[1] http://blog.samaltman.com/a-founder-friendly-term-sheet
This is incorrect. See my comment above.
Pro-rata participation rights means that if you sell shares to a third party, the rightsholder gets to purchase more stock from the company in order to maintain their percentage share so that they are not diluted. So if ImpossibleIndustries owned 10% of TheGuild, and VentureBros then invested $10M and got a certain percentage of TheGuild, ImpossibleIndustries would have the right to buy more stock of TheGuild in order to ensure that, after the transaction, ImpossibleIndustries still had 10% of the total shares of the TheGuild.
Go team Venture.
This is a fairly favorable founder term sheet. I negotiate startup investment fairly often - this is a decidedly equitable offer.
These terms are pretty common in the valley, to think thy suddenly give investors a right to refuse other investors in future rounds is frankly ridiculous
The terms Jeremy had with Snap were different, and they didn't get in the way of the entrepreneur in any case since he agreed to move out of the way (his reputation is worth more than follow-on rounds one snap)
That's the best protection entrepreneurs have - investors build their business on their rep. No good or reputable investor is going to burn that for a single term
You said that @sama's term sheet didn't have a rofr, just participation rights. That is incorrect. It has both.
> that investor can't block a future round.
This is expressly what a right of first refusal, or ROFR, is. To be precise: they can prevent the next purchaser from coming in, though they can only do so by making the purchase themselves. If they cannot afford to, they cannot block. The round will, itself, proceed, but not necessarily with the outside investors.
> to think thy suddenly give investors a right to refuse other investors in future rounds is frankly ridiculous
They 100%, unequivocally, absolutely do. This is the central, core purpose of a ROFR. It happens quite often.
Btw, I checked out your profile. I very much respect your work.
These are reasonable terms. They don't bend over backwards for the company, they are not a land-grab by the investor. Are there 50 other ways from Sunday to also have equitable terms? Yes - every deal is different, which is why you need a lawyer, and depending on the context, different terms can be equitable. In general, though, this is pretty "content-neutral."
Note: I am not your lawyer. If you need a lawyer - get a lawyer. But yes, my handle is my actual name (so you can look me up to see that I am not just an armchair IANAL). As far as I know, I am the only lawyer named Liberty around.
I love this.
I love this.
> Those terms gave Lightspeed the right of first refusal to invest in a future round of funding and the ability to increase its share of the company in that round. Lightspeed could also take 50 percent of the future round.
That is the issue and that would make a target less desirable for VC investment.
By multiple, do you mean the voting leverage? Because note that this happened after Lightspeed invested and allowed the VC to invest, rather than blocking it. To be very clear: the 10:1 voting ratio was decidedly not what blocked outside VC. The ROFR blocked outside VC. The 10:1 founder voting ratio was the solution.
Typically, "multiple" in this context means a liquidation preference - if one existed here, it was not detailed in the NYTimes article. My bet is you could probably find this information in the S1, (located here: https://www.sec.gov/Archives/edgar/data/1564408/000119312517... ) but if you want me to read that, you will have to pay my hourly.
This is illustrated in detail here: http://venturehacks.com/articles/options-open
From the point of view of the original angel investors and early employees, why shouldn't the founder push for the best, least dilutive, offer? Are you suggesting that if VC2 comes in with a low-ball offer, the founder should just say "gee, they made such an effort, I owe them the right to excessively dilute us all, even though VC1 is putting his money where his mouth is, and is willing to step up to avoid it."
Let's say I helped you by putting up a down payment for you to buy your house, for which I get 10% ownership. Later, you want to sell the house (or a further interest in it). If you get an offer, and I think it's too low, is it unreasonable for me to want to "steal the deal" at that artificially low price? Otherwise, it's simply a transfer of wealth from me (and you) to the new buyer, which I'd certainly like to defend myself against. People buy houses all the time in competition with other buyers; no serious buyer says "I'm not going to make an offer on that house, because someone else might beat my offer, or maybe exactly match it and the seller could choose that other offer."
And even if VC3 swoops in during negotiations with VC2, it requires the founders to be pursuing that (and VC1 would be aware). Whereas with the ROFR the founders have no choice.
Finally, VCs suffer from herd behavior. So it is very plausible that many VCs arrive at the same valuation - the valuation of the VC leading the round / the valuation of the best-reputation VCs. If foo VC values a company at $10M, but Sequoia comes in at $20M, 99% of the time foo VC will second-guess their valuation and match Sequoia.
Your point about herd behavior is well taken, though. And the result is that the VCs moan and groan, but ultimately the price goes up, and the entrepreneur wins, because they get the best valuation possible. (I've been in the room as an angel investor, and I was sure happy when the valuation went up 25% when a second VC got interested in the B round.)
The only counter-argument I can see is, in your example, if Sequoia's money really is greener than fooVC's (which there are long-standing arguments for and against).
I cited an article explaining how this can steer away competition. Another scenario you might not have considered is that if VC1 would've bid $15M, but the highest other offer is only $10M, then VC1 gets it at $10M.
[1] https://www.youtube.com/watch?v=R-UAjGVPFIE