{"id":46,"date":"2007-11-28T20:12:44","date_gmt":"2007-11-29T00:12:44","guid":{"rendered":"http:\/\/blog.payne.org\/2007\/11\/28\/startup-financing-terms-severe-feature-creep\/"},"modified":"2007-11-28T20:12:44","modified_gmt":"2007-11-29T00:12:44","slug":"startup-financing-terms-severe-feature-creep","status":"publish","type":"post","link":"https:\/\/payne.org\/blog\/startup-financing-terms-severe-feature-creep\/","title":{"rendered":"Startup financing terms:  severe feature creep"},"content":{"rendered":"<p>I just finished up stock paperwork for a new venture-funded startup.  Each time I do this, I&#8217;m <strong>shocked<\/strong> by the complexity in stock terms.  I&#8217;ve written before about the <a href=\"http:\/\/blog.payne.org\/2007\/09\/25\/venture-captial-less-overhead-please\/\">general problem of venture capital overhead<\/a>, but there&#8217;s a slightly different issue here.<\/p>\n<p>I think the core problem is a kind of &#8220;feature creep&#8221;.  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 <em>next time<\/em> around.   Examples:<\/p>\n<ul>\n<li>Had a company go on forever (e.g. not go public, not shut down &#8212; no closure)?  Let&#8217;s put in <a href=\"http:\/\/www.feld.com\/blog\/archives\/2005\/03\/term_sheet_rede.html\" target=\"_blank\">redemption rights<\/a>.<\/li>\n<li>Had a co-investor bail in a later round?  Let&#8217;s put in <a href=\"http:\/\/www.feld.com\/blog\/archives\/2005\/03\/term_sheet_payt.html\" target=\"_blank\">pay-to-play<\/a> so they get spanked (converted to common) for not participating.<\/li>\n<li>Had an entrepreneur buried in preference resisted an exit where the commons make nothing?  Let&#8217;s put in <a href=\"http:\/\/www.feld.com\/blog\/archives\/2005\/02\/term_sheet_drag.html\" target=\"_blank\">drag-along<\/a> rights.<\/li>\n<li>&#8230; etc &#8230;<\/li>\n<\/ul>\n<p>Stuff gets added, but never taken out.  Trying to get rid of it gets responses like, &#8220;we always do things this way&#8221;.<\/p>\n<p>Unfortunately, I think, entrepreneurs have to get educated, get good representation, and live with it.  Two excellent resources:  <a href=\"http:\/\/www.feld.com\/blog\/archives\/term_sheet\/\">Brad Feld&#8217;s series on term-sheet terms<\/a>, and the National Venture Capital Association&#8217;s <a href=\"http:\/\/www.nvca.org\/model_documents\/model_docs.html\">model financing documents<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>I just finished up stock paperwork for a new venture-funded startup. Each time I do this, I&#8217;m shocked by the complexity in stock terms. I&#8217;ve written before about the general problem of venture capital overhead, but there&#8217;s a slightly different &hellip; <a href=\"https:\/\/payne.org\/blog\/startup-financing-terms-severe-feature-creep\/\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-46","post","type-post","status-publish","format-standard","hentry","category-entrepreneurship"],"_links":{"self":[{"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/posts\/46","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/comments?post=46"}],"version-history":[{"count":0,"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/posts\/46\/revisions"}],"wp:attachment":[{"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/media?parent=46"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/categories?post=46"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/payne.org\/blog\/wp-json\/wp\/v2\/tags?post=46"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}