Most investors are going to demand standard terms. Any time you go with non-market terms, you better have a very compelling product. And in a down economy that's even more important.
To some degree negotiating a term sheet is like poker. There's some provisions/terms you feel really strongly about, but there are other terms you're secretly willing to sacrifice (as a negotiating tool). And the cardinal rule to bluffing is not telling the other side your true intentions. If I'm the investor, since Mr. Ressi has already stated he'll waive the provisions if necessary, why wouldn't I just demand the provisions be waived?
I don't pretend to understand this stuff, but the summary seems to be:
When you raise money by selling stock, you give away power in your company in exchange. This is a scheme to retain power by making the stock that you keep more powerful than the one you sell to other people.
Pros: you retain more control. Cons: You might not find people to buy your stock under those terms.
I did a little reading and I think I understand it.
1.So basically it seems like board directors are voted in one of two ways, through an election that includes all of the company's stockholders, and through an election that only includes members of a certain class of stock.
The agreement guarantees that Class F stockholders (founders) will elect one one board member. This director has two votes on the board, while all other members only have one.
For all elections involving other stock holders, the Class F stockholders will have more voting rights. One Class F share has the same voting power as 10 common shares.
The agreement also gives Class F stockholders protective provisions. Basically any action that affects the rights of Class F stockholders will have to be approved by a majority of Class F stockholders. This gives them power over things like mergers and board reorganizations.
Class F shares cannot be sold or transferred to non-founders. If a founder transfers the stock to anyone who is not a Class F stockholder, the shares are converted to Class A shares. Class F shares can be converted to class A shares, and are automatically converted on death. So basically, these special rights are only for founders. The voting rights can't be transferred.
All the talk about vesting just describes what happens if if control of the company changes.. The absence of a cliff means that you get stock no matter how early you leave. Single trigger means that if there is any change of control or ownership, all of your stock vests. You don't need to get fired or resign for a good reason.
The Founders Institute also created a fund for the founders of the companies using this scheme. Company founders own 60% of the fund, and the Founders Institute owns 40%.
2. So if a founder is forced off the board, the company has to pay 100k to the fund.
3. The fund gets the right to buy 3.5% of the company at Series A valuations.
It sounds great for founders, and bad for investors. Basically, founders will need to approve any major company changes, be able cash out immediately on an acquisition, and get stock options at Series A valuations.
To some degree negotiating a term sheet is like poker. There's some provisions/terms you feel really strongly about, but there are other terms you're secretly willing to sacrifice (as a negotiating tool). And the cardinal rule to bluffing is not telling the other side your true intentions. If I'm the investor, since Mr. Ressi has already stated he'll waive the provisions if necessary, why wouldn't I just demand the provisions be waived?