Only Take Investment on Your Own Terms
Here’s the gist:
Bootstrap as long as you can
Standard Terms - otherwise known as things you sign just because everyone else is doing it
The one where I advocate for not jumping off a bridge just because all the other kids are…
When founders first come to me to help them structure their business, they tend to be worried about maintaining control of their company. But when they go raise capital later on, that concern seems to disappear.
Hello cognitive dissonance.
So I dug deeper. And what I realized is that founders still care about keeping control of their company, they simply don’t recognize all the terms that could jeopardize their control. Once you get past the company valuation and the amount of investment, most founders tune out. That’s what gets them into trouble.
Now, I try not to get too cynical and assume that most investors have nefarious intent. I am personally acquainted with a number of investors, and I know that isn’t true. Most early stage investors genuinely want to help and mentor the founders they invest in.
Where the investors can fall down is that they may be relying on so-called “standard industry documents.” And these documents are anything but founder friendly.
So in an effort to raise awareness about the consequences of signing a standard term sheet, I joined the team behind the Founder Friendly Standard. The Founder Friendly Standard, pioneered by Eisaiah Engel, is a framework for analyzing your potential deal. It can help entrepreneurs avoid disputes around voting rights, founder vesting, non-compete, and other factors that cause startup relationships to implode.
I performed a Founder Friendly analysis on two common term sheet templates: the Sam Altman term sheet, and the Gust Series Seed term sheet. Neither is particularly founder-friendly (shocker!), but Sam Altman’s is considerably better than Gust.
I believe that the best way to build a business is to bootstrap it as long as you can manage. The more developed and knowledgeable you are, the greater the leverage you have in funding negotiations, and the better terms you can demand. The most important thing will be that you fully understand and appreciate the consequences of each provision in the term sheet, before you sign it.
Be a Business Rock Star
The devil is always in the details. Before you take money from an outside investor, make sure you understand each term sheet provision. And if you need help, please call me!!!