I just finished up stock paperwork for a new venture-funded startup. Each time I do this, I’m shocked by the complexity in stock terms. I’ve written before about the general problem of venture capital overhead, but there’s a slightly different issue here.

I think the core problem is a kind of “feature creep”. Preferred stock terms are designed to protect investors in downside scenarios. Everything some new bad thing happens, the lawyers come up with a new term that protects investors the next time around. Examples:

• Had a company go on forever (e.g. not go public, not shut down — no closure)? Let’s put in redemption rights.
• Had a co-investor bail in a later round? Let’s put in pay-to-play so they get spanked (converted to common) for not participating.
• Had an entrepreneur buried in preference resisted an exit where the commons make nothing? Let’s put in drag-along rights.
• … etc …

Stuff gets added, but never taken out. Trying to get rid of it gets responses like, “we always do things this way”.

Unfortunately, I think, entrepreneurs have to get educated, get good representation, and live with it. Two excellent resources: Brad Feld’s series on term-sheet terms, and the National Venture Capital Association’s model financing documents.