A few days ago, Seedsummit released a Term Sheet intended to be (or become) standard across Europe for early stage investment.
It’s been several days since the announcement and so far I haven’t seen much in-depth commentary on it (other than acknowledging its existence and how difficult it must have been to achieve consensus). That might be because the announcement seemed to come as a surprise, so perhaps folks haven’t had a chance to digest it yet. Or maybe nobody cares?
One post from the Guardian offered some criticism, but beyond that it’s all been a bit quiet. Since no-one else has posted any thoughts, I thought I’d go through the document and offer my opinions. I’ve put the notes in a more comprehensive post and summarised the main points here (mostly because going through a legal document is a little bit dreary).
There are a few of things that founders should be careful of. First is the liquidation preference, where founders should be getting the non-participating option (Option 1). Second is vesting, since founders probably want to adjust the values described. Third is how the option pool is set up (before/after the funding). Finally, the anti-dilution provisions don’t seem to provide any useful information so founders should check this carefully if they’re presented with it. For more detail on any of these points, see the relevant section in the detailed review.
The overall impression I got was that these are documents for dealing with VCs (edit: It seems an additional note was added to the download page to this effect). Unsurprising since it was put together by 21 VC firms from across Europe. Surprising because I’m guessing no Angel investors were involved, despite the term sheet being advertised for ‘early stage’ financing. Since Seedsummit is trying to build a network of european investors (and credit to them for that), I did find it a little odd that there didn’t seem to be any Angels listed as helping to create this document. Perhaps it’s because the Angels aren’t investing on a pan-european basis? I’d love to see a Series A term sheet for comparison and my gut feel is that the Seedsummit document has a lot more in common with Series A than with Angel docs. This does beg the question, what does ‘seed’ actually mean?
In 2009, I set up and ran the first iteration of Springboard (a seed accelerator). We were helping early-stage teams to get a product out the door and to start getting feedback from users (customer development). When teams came out of the programme, I considered them ‘seed-stage’, i.e likely to be ready for seed investment, wherever that may come from. Ideally, the team would have a version of the product that was being used by early adopters. The team would be adapting that product based on feedback, although they would likely have little/no revenue. That basically sums up what I picture in my head when I think of ‘seed-stage’.
Over the last week I’ve met several VCs from different firms and asked them directly what seed means to them. For each of them, seed-stage investing involves companies that have a product, customers and revenues. This was pretty much the case for all the VCs I spoke to. I wish I’d probed for more detail as to what kind of revenue/customer numbers they expect but never mind.
In any case, despite using the same language, there’s obviously a gap between the above viewpoints. I’m not suggesting either of them is right or wrong but I think it’s important to point out such differences, especially in the light of the new ‘standard’ term sheet.
In brief, founders should do their homework. In going through this document, I spent quite a while researching and there’s actually a lot of information out there about what the terms mean and the impact they might have. As we now have a European VC term sheet in the open it’ll make comparisons with US VCs a lot easier. Any major disparities will quickly be picked on by the popular startups who might go elsewhere to raise money. Indeed, the real test will be whether or not a ‘hot’ new startup uses these terms and as they stand, I doubt that will be the case. Founders will still need lawyers and VCs will still be willing to negotiate terms.
We’re not quite at the point-and-click stage for early stage financing but with more and more information being put into the open, it does become easier for startups to make better informed decisions.
If you haven’t already, you can go check my review of the Seedsummit terms now.
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