Pre-Series A Startup Boards

It’s pretty well known that startups usually undergo a meaningful change in Board composition at their Series A round. At a minimum, the lead investor(s) of the round get Board seats; although they shouldn’t get Board control.

Less has been written about what startup boards tend to look like before a Series A round. Given that the time from formation to Series A has stretched out significantly for many companies in the market – due to pre-seed, seed, seed plus, seed premium, series seed, seed platinum diamond, whatever-you-want-to-call-not-Series A rounds. So here’s some info on what a board of directors tends to/should look like Pre-Series A.

A. Know the difference between a ‘Board’ of Advisors and a Board of Directors.

A lot of companies refer to their set of advisors as a ‘Board’ of advisors. That’s fine, even though they very rarely actually act like a board. There (usually) aren’t ‘Board of Advisors’ meetings where everyone gets on a conference call and talks shop. Instead, the company just has a loose set of individual advisors they work with on strategic matters, often in exchange for equity with a vesting schedule. Advisors often times are angel investors as well.

The important point here is that Advisors have no power/control over the company. They just advise. The Board of Directors, however, is the most powerful group of people in the Company, with the ability to hire and fire senior executives and approve (or block) key transactions. Big difference. Giving someone a seat on your Board of Directors is 100x more consequential to the company than naming them an advisor.

B. Know the difference between a Board Observer, Information Rights, and being a member of the Board of Directors. 

Most angel investors writing small checks are buying the right to a small portion of the Company, and that’s it. They don’t expect to be very involved in day-to-day, and are happy to just receive whatever e-mail updates the Company intends to send out.

Angels / Seed Funds who write larger checks may want a deeper view into what’s going on in the company. They’ll often ask for different variants of ‘information rights’ – which can include delivery of regular financials, and notification of major transactions (like financings).

A step up from ‘information rights’ is a Board observer right. This means the investor has the right to observe everything that happens at the Board level, which includes hiring people, equity grants, approving major deals, etc. Do not dish out Board observer rights lightly. Having too many observers can make it difficult to keep confidential matters from being leaked to the market. It also can just be logistically cumbersome for a seed stage company to keep track of who gets to attend meetings, who has to be notified of what, etc.

Also, if you do give someone a Board observer right, ensure that it’s clear that they are a silent observer. This means that they can listen in on Board discussions, but they are not entitled to provide their thoughts/input, which can have legal ramifications and influence the true decision makers.

C. Giving seed stage investors Board seats is not the norm. Take it seriously. 

The majority of companies we see have Founders only on the Board before closing their Series A. Sometimes it’s just the CEO; other times it’s 2 or 3 founders. That’s very much driven by the personal dynamics among the core team.

Occasionally a seed or VC fund writing a large seed check ($250K+) will request a Board seat for their seed investment. While not the norm, it’s also not terribly off market if a large check is being written. Founders should just understand that giving anyone a Board seat, even if they don’t control the Board vote, is inviting them to give their input on every single major strategic decision the Company will make. It is a very deep commitment, and should only be given to people you believe can deliver real value to the business, and whose values are aligned with the founder team. Otherwise you’re asking for unnecessary and distracting drama.

If the fund that wrote the large seed investment has deep enough pockets to lead a Series A, and is interested in leading your A, this adds even more layers of complexity to the decision. A *true* seed investor who only invests in seed rounds can be an asset in sourcing Series A leads, because those leads are a complement to their position. A VC who dabbles in seed investment for pipeline purposes, however, has opposite incentives; assuming you’re doing well, they may prefer to lock out other potential competitors and take the Series A round for themselves. Having a VC already on your seed-stage Board can make it harder to get term sheets from outsiders for your Series A.

This dynamic of committing early to a VC before you’re ready for a Series A is discussed somewhat in The Many Flavors of Seed Investor “Pro-Rata” Rights.  My experience has been that getting trustworthy VCs on your cap table pre-Series A is generally a very good thing, so long as their participation is not contingent on terms that effectively lock you into having them lead your Series A. That is the startup equivalent of getting married as a teenager, before you’ve had a chance to mature and really explore the market.

VCs who ask for board seats at seed stage, or who require that you guarantee them the right to a large percentage of your Series A (50%+) are trying to get you to lock yourself in early. You should want them to invest, but still ensure that they have to earn the right to lead your Series A.

D. Board composition should ‘reset’ at Series A. 

If you’ve ended up giving a Board seat to a large seed investor in order to secure their investment, it is extremely important that it be clear between everyone that the seat is not guaranteed indefinitely. Boards can only be so large. If your seed investor who put in $250K is guaranteed a Board seat forever, it makes it a lot harder to make room on your Board for the people putting in millions, or even tens of millions of dollars.

The logic here should be that if the seed investor insisted on a Board seat at seed stage in order to ‘monitor’ things early on, they should be comfortable letting go of the wheel once they know larger, more experienced institutional investors are taking over. Their interests as an investor are more aligned with the new VCs investing in the Series A than they are with the Common Stock. It simply is not appropriate for a company who’s raised $5 million, $10 million, $30 million+ dollars of capital to still have someone who wrote a $250k-500k check taking up a board seat. Board observer rights should also terminate at Series A, or perhaps Series B, for similar reasons.

So, in a nutshell, founders should start with the assumption that no one will join their Board of Directors until a Series A happens, and someone writes a 7-figure check; as that is the norm. However, for large checks from investors with strong value-add and alignment with the founders, there can be a justification for giving them a seat at the table, as long as it’s structured in a way that will not cause any issues, or prevent competition, in Series A negotiations. For investors who want (and deserve) something ‘extra’ on top of their investment security, advisor equity, information rights, and silent observer rights should all be explored as alternatives.

Electing a Truly Independent Director

TL;DR Nutshell: There are few governance-related decisions with a more outsized impact on a company’s power structure than the selection of an independent director. Do not take that selection lightly.

Background Reading:

In assessing financing terms and interacting with their lead investors, most founders instinctively focus on two core things: economics and control. And, broadly speaking, that is correct.  But the devil is in the details, and too many teams overlook extremely important details. They’ll focus on high-level issues like valuation, liquidation preference, and board composition (# of seats), and then prematurely check out once a term sheet is signed. And that’s when sophisticated players start executing their playbook for maneuvering into a controlling position regardless of what the black-and-white text says.

I’ve already written extensively on how one part of that playbook is for investors to push companies to use their ‘preferred’ company counsel. Another classic maneuver is to push the company to elect an ‘independent’ director with whom investors have significant ties and influence. 

Independent Director as Tie-Breaker

Independent directors are, arguably, the most important people on Boards of Directors.  They are supposed to serve as an objective voice on what’s best for the Company overall; balancing the incentives of common stockholders (management/founders) and preferred stockholders (investors) that can often pull in different directions. They should have no reason to be driven by control or personal payout.

It is not unheard of for there to be significant disagreement between the common and preferred stockholders on how to approach an important issue, and the independent director serves as the key vote in deciding which path will be taken. Having a trustworthy independent director is a great deterrent to stockholder lawsuits, as his/her approval makes it that much harder for a disgruntled stockholder to claim foul play.

For real independence, dig deeper

But what does “independent” really mean?

The wrong way to define “independent” is simply as “not an investor or employee.” That absolutely is part of the definition. But smart teams know that a person’s judgment and independence are heavily influenced by far more than just their front-facing professional status.

  • Does the candidate regularly invest in other startups alongside your investors, perhaps as part of a seed fund, accelerator network, or other group?
  • Is the candidate looking for other appointments, either as a director or a more-involved executive; potentially at companies where your lead investors could deliver access?
  • Does the candidate spend time in social / business circles where, if they were forced to make a hard decision that angered one side of the board, either members of management or the investor base could exert pressure out of retribution?

Sophisticated business players are masters at finding leverage in their social / business relationships to push a deal in the direction they want it to move. And some founders are quite good at it too. truly independent director should be minimally exposed to the carrots or sticks that either side of the Board might use to sway a key decision in their direction.

Ideally, an independent director will be someone who has a relatively equal pre-existing relationship both with the founders and with the investors. But because founders often have significantly narrower networks than their lead investors (who are repeat players), that is easier said than done.

More often than not, VCs will propose someone from their preferred ‘roster’ of independent directors; people whom the founders (particularly first-time founders) don’t know at all, or only barely know. Given the loyalty and history that ‘roster’ will have to the VCs for dishing out serial appointments, those people should almost always be avoided. They’re not independent at all, no matter how much they might argue the contrary.

Specialized industry expertise is valuable.

If no viable candidates are available whom both sides can trust, then agreeing on a list of well-known industry players and pursuing their service together is often a very good idea.  Any arguments that an independent director must be local should be pushed back against if the right person is located elsewhere. Videoconferencing and teleconferencing are highly effective, as are airplanes.  If your independent director doesn’t ‘feed’ from your local ecosystem, that can be a good thing in the right context.  Skillset trumps geography.

Someone who not only has the necessary character to be independent, but has specialized knowledge that management and (often) generalist VCs do not, can be invaluable by opening up industry contacts, and helping overcome challenges that are unique to the market a company is engaging.

If you’re building a health tech, or energy tech, startup taking on a massively complex and entrenched market and no one on your board has engaged deeply with that market, that is usually a red flag that politics has trumped performance in determining the board makeup.

Avoid an empty seat.

When no one is available locally whom both sides can trust in the independent director seat, companies will often be pushed to leave their independent director seat empty until after closing. I typically suggest that companies avoid a vacancy if they can, unless they’ve built such a strong level of trust/rapport with their VCs that they’re 100% confident a true independent will get selected, relatively quickly, post-closing.

If you are closing with a balanced board structure of 2 common, 2 VCs, and 1 independent, but your independent seat is empty, you are set up for a stalemate; and stalemates work (like a game of ‘chicken’) against the people with the most to lose; which means founders. By simply refusing (often with any number of excuses) to approve a key transaction, a key hire, or a new fundraise, investors can push founders into a corner to get their preferred independent director elected. Yes, this happens.

Agreeing on a ‘temporary’ independent director to take the seat at closing, to be replaced when a permanent one can be found, is sometimes a good idea. Not ideal, and you should still be very careful who gets chosen, but it is often better than an empty seat.  If you are stuck with an empty seat at closing, push hard to keep the selection of an independent director on the near term agenda, and call out delay tactics when you see them. Your leverage decreases proportionately with your bank balance.

It’s not cynicism. It’s experience.

If in reading the above, you feel the advice carries a perspective that is a tad too cynical and untrusting, I suggest that you go talk to multiple founder CEOs who have gone through rounds of funding with institutional investors.  They will educate you, off the record. Some stories will have happy endings. But others will teach you the value of a little preparedness and skepticism.

Trust is extremely valuable in business, and I always tell companies that if they’ve found people that they can really trust, and who have proven themselves to be trustworthy over time, hold onto those people with their lives. Make them directors, advisors, officers, your kids’ godparents. Surround yourself with people you can really trust. See: Burned Relationships Burn Down Companies.

But institutional investors have a job to do, and it’s not to be your BFF. It’s to make a lot of money by (1) getting into attractive deals (buttering up), and then (2) once inside, pushing companies to achieve lucrative exits as fast as possible (turning up the heat). Pay close attention to how the behavioral incentives at stage (1) and (2) are very different, and prepare for it, so you don’t end up as the cooked turkey.

The best analogy I’ve found for how companies should interact with their lead investors is that of foreign diplomats engaging in high-stakes trade negotiations. They have something you want, and you have something they want. And while you’re visiting, smile, crack jokes, share photos of your kids and focus on growing the pie together. Try as hard as you can to make the ‘partnership’ resemble something close to a friendship. But when you get back home, make sure the arsenal is well-oiled; just in case.

When all your eggs are in one basket, and you’re sharing that basket with money-driven people who are 10x more experienced than you are, a healthy dose of skepticism keeps you alive. Others will say to relax, let your guard down, and not be so cautious; but their net worth isn’t riding on one horse. Do your diligence, and then build a relationship that you can leverage for the success of your company. But never lose sight of where everyone’s incentives lead. The moment you do, the reality check will be costly and painful. 

Having a balanced power structure, instead of a founder-controlled or investor controlled one, is a great way to build trust and alignment. If your VC terms call for a balanced board, make sure what gets implemented is actually, not just superficially, balanced. Treat the selection process of your independent director as seriously as that of your company counsel, and don’t let anyone take it off the agenda.

Startup Advisors: Best Practices

Background Reading:

Advisors. The best startups have great ones. They save you lots of headaches, time, and money. In fact, I’m not sure I’ve come across any successful client that didn’t have a strong set of advisors. Here’s some advice on how to not screw it up:

Advisory ‘Boards’ Rarely Exist.

A set of advisors is sometimes referred to as an advisory ‘board,’ but 99% of the time that’s just a term to make it sound cool. The advisory ‘board’ never meets as a group, and often doesn’t even know each other. They’re just a loose set of advisors that a company works with 1:1, or occasionally in smaller groups. Nothing like a Board of Directors, which actually does have to coordinate schedules.

Don’t Stay Local.

As the first linked post above explains in depth, 20 minutes on the phone with someone who has the right expertise is 1000x more valuable than days spent with someone who is more accessible, but can’t provide real insight that isn’t available already via blog posts or books. This means that if you’re relying solely on the very limited pool of people available via your local business ecosystem, you’re doing it wrong.

LinkedIn, Twitter, Angellist, E-mail, Phone. Work ’em. Connect with the key people in your local ecosystem who can make things happen, but don’t fish only in your little pond.

Don’t Confuse Mentors with Advisors.

Mentors can be really valuable to new founders. They can provide emotional support, friendship, coaching, and all kinds of other things. But are those the kinds of things that deserve an equity grant?

It’s ultimately the team’s call. But just realize that those are not the kinds of things that real advisors are meant for. Advisors provide real strategic insight, connections, recruiting, investor introductions, things that go beyond moral support for the founders and actually move the ball forward for the company in an obvious way. That’s the kind of value-add that typically merits equity.

Get Independent Viewpoints

For high-stakes, complex questions for which the answer isn’t clear, advice needs to be triangulated. You don’t treat any particular person’s perspective as gospel; instead you speak with multiple people and combine all of their viewpoints to make your judgment call.

That sort of triangulation is not possible when all of your advisors have the same background, are part of the same circles, etc. Especially when the questions involve big decisions for which various stakeholders have incentives to favor one option over another, you want advisors who are detached from those incentives, so their advice is objective. This, btw, is also the case with lawyers.

Favor Intellectual Honesty over Politeness

The whole point of getting outside advice is to help you see things you can’t see on your own. If your strategy for choosing advisors is to work only with the people who are agreeable to your own opinions, you’re wasting your time. People who are blunt with their advice, but deliver real insight when they give it, can be game changers for a company. 

Use an Advisor Agreement.

It’s not magical; templates abound. The Founder Institute’s FAST Agreement is perfectly acceptable, and even simplifies equity calculations. The most important thing is that an Advisor Agreement removes any ambiguity as to (i) compensation owed for advisory services, (ii) who owns the contributions, IP, etc. that result from the advisory (the company), and (iii) confidentiality of any info shared. Yes, any vc lawyer has seen founders get in trouble with these issues for not taking the time to document it properly.

Equity; %, Vesting Schedule, Cliff, Acceleration.

If an advisor expects cash from an early-stage startup, that’s usually a red flag, short of a really unusual circumstance.

The FAST Agreement has pretty solid guidelines for what’s appropriate in terms of equity %, depending on the Company stage. Pre-equity round, 0.25%-0.5% is a typical advisor. 1% is someone extremely strategic whose name you absolutely want behind your company. After an equity round, the %s naturally shift down a bit because the company is more valuable.

1 or 2-year vesting schedule and a 3-month cliff, and full single-trigger acceleration on a change of control.  Advisors get full acceleration because acquirers never expect them to stick around after a sale, unlike founders or executives.

Use that cliff.

We regularly see founders engage an advisor expecting tons of value to be provided, and then crickets once the equity is granted. But the founders don’t do anything about it. 3-months should be more than enough time to know whether a new advisor will really deliver the goods, and if not cut the cord and get that equity back for re-use.

 The hard part, of course, is finding the right advisors and selling them on your vision, so they’ll give you the time. If no one on your team knows how to hustle and sell, either start learning yesterday, find someone who can, or (honestly) just give up now. Selling, in a dozen different ways (including to advisors), is 75% of what a competent founder CEO does.

Founder Education

TL;DR: Accelerators have emerged as elite universities of sorts for tech entrepreneurs. But they offer a bundled value proposition at a price (in terms of time and equity) that doesn’t work for everyone. For those teams in need of just the educational aspects of an accelerator, other (quality, but lower cost) offerings are starting to be developed that should be considered.

I’m a huge proponent of curation and leveraging the knowledge of trustworthy domain experts to avoid burning time; time that could otherwise be spent running a company.

The value of curation in the lives of founders is perhaps reflected best, above all else, in the rise of accelerators. Accelerators’ core value proposition to founders is that, in exchange for (i) several weeks of their time, (ii) an equity stake, and (iii) rights to invest in future investment rounds, founders in accelerators gain virtually immediate access to significantly curated resources: investors, mentors, other founder teams, prime office space, educational content, etc.

And on the flip side, great accelerators are able to attract quality resources by promising the people who provide those resources access to a curated set of startups; saving them time from having to sort them out in the general marketplace.

Of course, the value of those resources and their curation varies wildly depending on the quality of the accelerator. Top accelerators have proven invaluable to many young, inexperienced founder teams who’ve saved countless time searching, networking, vetting, etc. by tapping into an accelerator’s network and resources. Lower quality accelerators, however, are often a time suck, and much like the “Top Startups to Watch” lists we all see get thrown around, can serve as a damaging and distracting vanity metric.

But as much of a fan as I am of great accelerators, the reality remains that accelerators offer a bundled value proposition. And not every founder team needs, or is willing to ‘pay’ for, the entire bundle. Some founders have already arrived at a successful business model showing strong traction, and are good in the advisor department, but just need connections to Series A investors.  Other teams are well-funded, and already have their own office space, but could really use some guidance on the ‘fundamentals’ of recruiting, managing a scaling company, etc. It shouldn’t surprise anyone if resources are developed in startup ecosystems to address these types of companies for which a typical accelerator isn’t the right fit.

Every now and then I use SHL to spread awareness about new resources in the market that I feel are really adding something differentiated and high value for founders relative to what’s currently available. Years ago I wrote about Clerky and how it filled a void in the market of startups that just need a super-fast, totally standard incorporation and corporate organization, and due to capital constraints are willing to go through it without a lawyer. I also wrote about how eShares was using a SaaS model to liberate early-stage startups form burning money on 409A valuations. I later wrote about how services like Bad Ass Advisors can help companies connect with specialized advisors/mentors beyond the limited roster of people available in their local market.

Today, I’m writing about another topic: Founder Education; meaning how founders can get access to the wisdom/pattern recognition of people who’ve observed dozens, or even hundreds, of startups. It includes best practices on topics like starting a company, finding advisors, finding product-market fit, using advisors, compensating people with equity, targeting investors, understanding metrics, building sales/distribution channels, etc. etc. Books and blogs are great, but they can only go so far, and sorting gold from garbage gets hard. Top accelerators have developed internal curriculums for these sorts of topics, but (remember) they come bundled with a lot of other resources, and at a price, that don’t necessarily work for all companies.

In Austin, I was recently introduced to Founders Academy; an educational curriculum designed for tech founders. It’s run by Gordon Daugherty, a very well-known and respected (including by me, and SHL readers know I’m jaded from experience) startup advisor in Austin who’s had a front seat for some time at one of Austin’s best known accelerators, Capital Factory. Gordon’s built Founders Academy into a packaged, structured curriculum for new tech founders; offered both as a set of online videos that you can buy, and also as an in-person course (taught by Gordon over a few days) that founders can sign up for.

I got some feedback from a few teams that participated in the in-person course, and they all said it was extremely valuable for the price of a few hundred dollars.  I’ve reviewed much of the material myself, and have also interacted with Gordon enough, to say that he knows what he’s talking about, and because his background is in Austin / Texas, his curriculum will resonate well with founders operating in markets that aren’t Silicon Valley.

As I’ve written about before on: Bad Advisors: The Problem with Localism, many tech entrepreneurs operating in second and third-tier ecosystems run into a serious problem when they limit their pool of advisors to their city’s geographic boundaries: they get bad (sometimes really bad) advice. Founders Academy, and other programs like it (if you know of them, leave comments please) thankfully help solve that problem by scaling the wisdom of domain experts (advisors who aren’t charlatans) in ways that are more structured and digestible than just blog posts or books.

Education means leveraging the wisdom of others, so you can avoid the mistakes that they made. For tech entrepreneurs who don’t have time or money to waste, the right kind of education is invaluable. And while top accelerators have emerged as the elite universities of the tech startup world, they clearly aren’t for everyone. It’s great to see quality educational resources popping up to fill the void.

p.s. Like Clerky, eShares, and Bad Ass Advisors, I don’t have any ownership interest in Founder Academy. The mention was entirely earned.

Don’t Rush a Term Sheet

TL;DR: No matter how many blog posts and books are out there (many of which I recommend) attempting to explain the mechanics of VC term sheets in simple terms, the reality is that VC term sheets are complicated, both in terms of how their math works and in how the various control-related provisions will impact a founder team over time. Take time to understand them, and don’t rush to sign, even if investors make you feel like you have to.

Background Reading:

Similar to the ‘automation delusion’ that I’ve written about in Legal Technical Debt, which has led some very confused founders to think that most of what startup lawyers do is getting eaten (as opposed to supplemented) by software, there’s a sentiment among parts of the founder community that VC deals have become so standardized that the only kind of analysis needed before signing a term sheet should look something like:

“$X on a $Y Pre?”

“5-person Board, with 2 common, 2 Preferred, and 1 Independent?”

“Great, here’s my signature.”

Take this approach, and you are going to get a lot of ice cold water splashed on your face very quickly, and not at all in a good way. I’ve seen it many times where founders run through a VC deal, so excited about how awesome their terms were, only to realize (sometimes at closing, sometimes years later when things have finally played out) that there were all kinds of “Gotcha’s” in the terms that they failed to fully appreciate. Having solid, independent, trustworthy advisors to walk you through terms before signing is extremely important, and it needs to be people whose advice you take seriously. See: Why Founders Don’t Trust Startup Lawyers and Your Best Advisors: Experienced Founders. 

Some simple principles to follow before signing a term sheet are:

A. Fabricated Deadlines Should be Pushed Back On – It is very common for a term sheet to end with something like “this term sheet will expire on [date that is 48 hours away].” That deadline is very rarely real. It’s just there to let you know that the VC expects you to move quickly.

It is unreasonable to sit on a VC’s term sheet for weeks without good reason. By the time they’ve offered you a term sheet, they’ve likely put in some real time diligencing your company, and the last thing they want is for you to take their term sheet and then “shop” it around to their competitor firms to create a bidding war.  Doing so is not how the relationship works, and will almost certainly burn your deal. So expecting you to move somewhat quickly in negotiating and then signing is fair, but if a VC is pressuring you with anything remotely like “this needs to be signed in 24/48 hours, or the deal’s gone,” what you have there is a clear picture of the kind of power politics this VC is going to play in your long-term relationship.

Move quickly and be respectful, but make sure you’re given enough time to consult with your advisors to fully grasp what you are getting into. It should be in everyone’s interest to avoid surprises long-term.

B. Model The Entire Round – VC Lawyers are usually the best people to handle this because they see dozens of deals a year and will be the most familiar with the ins-and-outs of your existing capitalization, but having multiple people running independent models is always a good idea, to catch glitches. You want to know exactly what % of the Company your lead VC expects for their money, before agreeing to a deal.

I have seen many situations where founders get distracted by a ‘high’ valuation, but when everyone is forced to agree on hard numbers they realize that the VC’s definitions were very different from what the founder team was thinking.  This is absolutely the most crucial when you have convertible notes or SAFEs on your cap table, because how they are treated in the round will significantly influence dilution. The math is not simple. At all.

C. Understand The Exclusivity Provision – Most term sheets will have a no-shop/exclusivity provision “locking you up” for 45-60 days, the amount of time it typically takes to close a deal after signing a term sheet. This is reasonable, assuming it’s not longer than that, to protect the VC from having their terms shopped around. But it also means that if you are talking to other potential VCs, the moment one term sheet arrives, everyone else should be told (without disclosing the identity or terms of the TS you have in hand) that it’s time to put forth their terms, or end discussions. Because once signed, your job is to close the signed term sheet.

D. Focus on Long-Term Control/Influence Over Decision-Making – Thinking through the various voting thresholds, board composition, and consent requirements is extremely important. Will the board be balanced, with an ‘independent’ being the tie breaker? Then being extremely clear on who the independent is, and how they’ll be chosen, is crucial. Will one of the common directors have to be the CEO at all times? Then understanding exactly how a successor CEO will be chosen is crucial, because usually at some point it’s not a founder.

If X% of the Preferred Stock is required to approve something, then you need to know (i) what %s of the Preferred will each of your investors hold, and (ii) who will the other investors be? Usually the Company gets discretion as to what money gets added to the round apart from the lead’s money, ensuring there are multiple independent voices even within the investor base, but some VCs will throw in a provision requiring that only their own connections fund the round. That heavily influences power dynamics.

There will be many situations in the Company’s life cycle where everyone on the cap table doesn’t agree on what’s the best path for the company. Ensuring balance on all material decisions, and preventing the concentration of unilateral power, is important, and yet not simple to understand without processing terms carefully. 

E. Shorter Term Sheets are Not Better – There is debate within the VC/VC Lawyer community as to whether shorter, simpler term sheets are better than longer, more detailed ones. I fall squarely in the camp that says you should have clarity on all material terms before signing and locking yourself into exclusivity; not just the economic ones.  That means any sentences like “the Preferred Stock will have ‘customary’ protective provisions” (meaning they will have the right to block certain company actions) should be converted into an exact list of what those provisions will be. I can guarantee you your counsel’s perspective on what’s ‘customary’ is going to differ from their counsel’s.

The view among those who prefer shorter term sheets is that you should sign as soon as possible, to avoid ‘losing the deal’ (as if VC investment is that ephemeral). I don’t buy it. The moment you sign a term sheet, you are going to start racking up legal fees, and you are now bound by a no-shop/exclusivity. That means your leverage has gone down, and you are much more exposed to being pressured into unfavorable terms to simply ‘get the deal closed.’ Politely and respectfully negotiate a term sheet to make it clear what all of the core economic and control terms are. The alignment and lack of surprises on the back end is well-worth the extra time on the front end. 

In short, the core message here is know what you are signing. Make sure your VCs know that you are committed, and aren’t going to play games by shopping their terms. But also make sure you are talking to the right people to ensure that the deal you think you’re getting is in fact the one in your hands.