Startup founders VCs and lawyers open up about the dark world of dirty term

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        Founders who aren’t careful can agree to a “dirty” term sheet from investors also called “hair on a deal.” The investor’s power to single-handedly shutter the company over a boozy dinner derived from the original investment contract they’d signed known in the venture industry as a term sheet. Insider talked to almost two dozen investors founders attorneys and VC-industry experts about term sheets that are so distorted in favor of investors that they considered them predatory. The famed investor Bill Gurley once called them “dirty” term sheets and warned that such investors are “sharks.” A more colorful description “hair on a deal ” is commonly used to describe the “dirty” terms. First-time founders particularly younger ones negotiating their first private fundraising round are often the most susceptible to accepting hair-on-the-deal terms said Zach Levin an attorney and founder of Law by Levin a law firm that provides legal advice to early-stage founders. Farrah said that when VCs examine a startup that didn’t use an industry-standard term sheet “a lot of times they’re looking back at the capitalization table and the documents are kind of a mess.” A capitalization table or cap table lists the investors and how much of the company each owns. “Hair on the deal” describes terms that are less than ideal for founders. In exchange for his initial $30 000 check the investor took 50% of the company shrinking the two founders’ shares to 25% each (known as dilution). “When we first started up the company we didn’t really have the networks necessary to raise venture-capital funding particularly at that very early stage ” the 28-year-old founder said. Though their startup had yet to raise a round from institutional VCs like TenOneTen James and his cofounder owned only about 30% of their company combined because the conversion of notes amplified the effects of the anti-dilution provisions from their previous accelerator. In addition to the difficulties Suster described —


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