Why do startups believe it is preferable to sign “simple” term sheets?

Why do startups so often believe it is preferable to sign “simple” seed/series term sheets?

It is preferable for a simple, telling and important reason: at least at the seed stage, the economics of founders and investors are very aligned.

Put differently, at the end of the day, it’s not likely there will be a huge economic difference between Common / Founders Stock and Series Seed Stock issued to founders. Yes, there is a small liquidation preference usually. But even that is unlikely to be material in a small seed round in the end. And that’s usually the main term that matters.

Where things start to diverge is when the valuations go up, and you raise lots and lots of money. Then complex terms protect against complex downside scenarios. Complex terms may make sense here.

But at least up to say the first $2m-$3m raised, there isn’t a ton of difference between Preferred and Common in the real world.

And experienced seed investors know this, and that price and ownership are the only terms that truly manage at seed stage … so they don’t mess around with tons of other terms. They know that investing at say $4m pre with 10,000 terms won’t make you any more money than just 1–2 terms.

And so when you see tons of terms in an early-stage deal, it is a flag.

A flag the deal may not close.

A flag you are dealing with investors that don’t do a lot of venture-style seed deals.

That may be OK. Just be wary.

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Published on October 15, 2019

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