Seed terms have gotten much better, but I still find Series A (and beyond) term sheets frustrating. I think we can change the \u201cnorm\u201d by offering entrepreneurs a better alternative. So if you have terms you don\u2019t like, it\u2019s time to try object-oriented capital (OOC).
Venture capital term sheets are neither simple nor easy to understand. The spaghetti code of VC terms include things like:
These are baked into term sheets as \u201cstandard\u201d in every deal I see.
However, there is another option \u2014 and it\u2019s one most VCs don\u2019t like because it violates their \u201cnorms.\u201d
Object-oriented capital (OOC) is when you, the entrepreneur, can pick the objects (terms) you want, and we adjust the data attached to those objects to fit your priorities, e.g.:
The concept of OOC is that terms, like code, are modular and trade-offs are logical. You select the objects (annoying terms) you most want to control (No to preference, Yes to pro rata, No to \u201cwe must own 20 percent,\u201d No on budget veto, No on veto on sale, Yes on ROFR) and we fill in the remaining objects and the data (investment amount, valuation, etc.) to execute on those objects.
However, if other investors aren\u2019t on board with the idea, typical VC terms seem to come back into the deal. So at Flight.vc we\u2019ve started writing bigger checks in order to set the terms of the round rather than just following. This means seven-figure checks instead of the typical six-figure round on AngelList. Which means that AngelList can no longer fully support the check sizes I need to compete at Series A.
To be fair, I\u2019m the only angel on AngelList who has reached the upper limit of what the platform can do\u2026 with 4,000 angels across our syndicates, more than 100 investments and two unicorn exits, AngelList remains an amazing platform \u2014 just not for everything I want to accomplish.
So rather than just bitch about it, I\u2019m doing something. I\u2019ve partnered with the team at IDG Ventures to let entrepreneurs structure their Series A the way they want. IDG gets what founders care about and is more scrappy and flexible than the bureaucratic billion-dollar funds, so they were open to being the first to move in this direction. I\u2019ve seen IDG be flexible on ownership (Krux ~10 percent), price (Fastly where they bid double the insiders), not having a veto on M&A and other terms \u2014 so this didn\u2019t take much convincing. Over time, if enough entrepreneurs use OOC as an alternative, more VCs will too.
When I do this sort of thing, people always ask, \u201cWhy break the rules if things are working?\u201d
Two reasons:
It\u2019s important to always question norms. When I was fundraising for my first VC-backed startup, I would hear \u201cthese terms are standard,\u201d for veto rights, preferences, free call options and many other terms. Yet when I pushed, I often found those terms were negotiable\u2026 and that every VC cited different norms. As did every lawyer I talked to! It didn\u2019t add up.
Apparently the rules are flexible for VCs, but not for entrepreneurs. The \u201crules\u201d are simply a polite way to screw entrepreneurs. I\u2019ve analyzed the returns of a number of funds; few things matter other than getting to invest in great companies and working with great founders. And if the venture ecosystem starts to implement the OOC concept, it would reduce an enormous amount of fundraising friction and be a great win for the entrepreneurial community.
It turns out not all entrepreneurs care about the same things. For Datanyze co-founder Ilya Semin, control over his destiny (no vetoes) was what mattered most. For Khaled at OnFleet, it\u2019s limiting round size and pricing due to earlier convertible notes. Of course, all terms matter, but priorities differ, and my belief is that if you can custom order your VC to fit your needs, you\u2019ll call the right folks when you want to raise both seed and Series A.
If you can custom order clothing and granola bars, why not term sheets?<\/p>\n