You guys are missing the point. AirBnB didn't screw me over - this wa any first deal and I screwed around debating stupid points. I was disappointed they didn't do the deal but this whole post is about lessons learned. And one of the biggest ones was move fast once you have conviction. At the time of this Airbnb event I was just learning. I thought an investor had to worry about all these little details, negotiate tons of clauses, etc. but post Airbnb I realized all that detail was stupid. After that event I learned to move fast.
Example: When I met Peter (Contextlogic now known as Wish) I wrote him a physical check within a day (pretty sure it was his first) as I planned to take whatever terms he ended up negotiating. And then I immediately started brining in other investors, introductions to engineers, etc
So don't take this post as a "Brian screwed me" / the screwing was all self inflicted and a very important lesson
Well, if it did fall apart at the literal last hour and you were going to sign the formal paper work (which only reiterates the terms already negotiated and agreed to at dinner) the next day, but didn't because YC came in overnight and took the entire round...then it does sound like you got screwed.
His general approach does indicate that belief in the product is paramount, his trust in the team second. The takeaway is not to yank the chain too hard negotiating when these two criteria are met. He could have closed a week before.
It also sounds fairly intuitive when you verbalize it: the faster you can update your (presumably sound) strategy to new information, the "better" you are likely to do compared to someone who responds to changing information at a slower rate.
Even if your initial strategy is less sound, if you can (and are willing to) update it faster, you can still win (so long as your initial strategy wasn't too horrible).
I respect you for taking this view cos it's so much easier to be a lesser man and whine about how you missed a great deal. Thanks so much for your candid sharing!
They probably shook hands after a meeting, as one always does. That is not a "handshake deal". Airbnb probably had similarly positive meetings with dozens of investors. All of them probably talked about doing the deal soon.
He's known for being bold and writing checks on a first meeting. Why didn't he write a check to Airbnb after months of haggling? YC, or any other investor, was free to come along and close the deal at any moment. The way an investor claims a deal is with their checkbook (or a signed term sheet). He learned his lesson and realizes his mistake. Airbnb did nothing wrong.
exactly! I spent three weeks haggling - I should have figures out terms in 24 hours or less or simply given them a check and let it ride into future terms.
Do you honestly think if you hadn't haggled for 3 weeks that:
a) They wouldn't have turned around for advice from YC
b) YC deciding to come over the top once hearing the news
I agree with your assessment that YC was probably trying to keep dumb money out of the cap table but I also hypothesize they originally underestimated the team and once they saw they were actually able to put a TS together that was proof enough their original calculus was wrong and they circled back around. I don't think you were getting this deal either way.
By his story, he spent some time getting to know them but then haggled terms once he'd decided to invest. The way I read the story, his regrets where that he spent that long haggling once he'd decided they were go. Had he closed then, he'd have closed 3-4 weeks before YC, and he would still have had his partners in to spread the risk.
but at the end of the day, the haggling ended, and terms were agreed upon (it seems). Handshakes done.
I think the comments have gone off on a tangent focusing on whether you getting cut out of the deal was ethical (whereas the blog post was just a flat out interesting story to read about). But at least the way your post reads, you definitely got screwed out of the deal. Sure, nothing is done until things are signed, but as many investors have told me "my reputation is everything". Seems like it should go both ways. This certainly doesn't reflect positively on the founders.
Nothing's done until the papers are signed. This goes for all things in life, too, from investing to renting apartments. If you don't have a signed piece of paper, you have no deal.
One of the main selling points of YC is that they promise not to legal obnoxious things. Saying "nothing's done until the papers are signed" is completely missing the point.
is this comment a non-sequitur or am I missing something? The deal we're talking about was between the author of the piece and Airbnb. YC may have made the offer to fund the whole round, but they're not the ones who made the decision to pull out between shaking hands and signing the paper.
In any case, I apparently place too high a premium on paperwork. In another comment thread on this story, someone pointed out that the remedy for breach of contract is to unwind the wrong party's situation to the position they were in before the contract was signed. In this case, until the check has been deposited and spent, it's trivial to tear up the paperwork.
I don't know about Handshake Deals, but everybody says it's bad form to back out once term sheets have been signed- but in the single round of VC funding that I had internal insight into, our VC backed out at the 59th minute after term sheets had been exchanged and agreed to, paperwork signed. On the basis of that, we even went out and brought on our first external board member.
Now, this particular VC has only raised about 800mm, so I don't know if that makes them a Tier-1 VC, but it still made me realize that you don't ever know until the money is in the bank account.
Thankfully, Foundation Capital (an awesome Tier-1 VC), stepped up and kept us running/covered payroll and rent, until we found someone else to get money from.
> VC backed out at the 59th minute after term sheets had been exchanged and agreed to, paperwork signed.
I'm curious how this works, legally. If they make the offer and you sign the papers, doesn't that legally obligate them to follow through on their offer?
Approximately 100% of institutional VC term sheets have a "conditions precedent to closing" section that includes something like, "completion of due diligence to sole satisfaction of Investors." Often there are other "outs" as well.
Really, the moral obligation to consummate a deal is only policed by reputation. And that is not often discussed out loud (see, for example, how parent describes the deal but doesn't name the last-minute-back-out VC).
(Plus there are whole other big cans of worms for discussing investor reputation online "out loud" -- it CAN be done and there is a lot of truth out there, but a ton of noise. The real scoop is generally spoken 1:1 over the phone, or over coffee in person.)
Interestingly, the whole gist of TFA is that investors should move fast once they have conviction. But the more they do that (instead of "front-loading" diligence and negotiation), the more like it is that you get last-minute backing out (or perceived backing out).
The way the VC firm I'm affiliated with has always handled it is to "front-load" diligence, and treat a signed term sheet as if it were very nearly binding and final. I think we've pulled ~ 2 signed term sheets, out of almost 100 new deals over the years.
Point is, you can't have your cake (enjoy super-fast handshake commitments without the diligence that is "due") and eat it too (enjoy high certainty of closing on those commitments).
A contract isn't complete until someone actually spend money (or something of value) in reliance. The standard remedy for breach of contract is to unwind the victim's situation to the position they were in before the contract was signed.
So at the moment you sign the paper, but don't hand over money or burn other bridges or whatever, it is trivial to tear up the paper.
FTA: "At the end of September, we agreed on terms and I flew up to San Francisco to do a closing dinner at a little café next to Brainwash. We had some good food and wine and I thought things were solid. We shook hands and planned to formally close the investment the next day."
I'm gonna go out on a limb and assume that the investor already possessed emails saying "Let's do this" with numbers in it. Is that different than a signed term sheet? You bet -- it's not legally binding! But it also meets all the requirements of the gentleman's agreement -- aka YC Handshake protocol:
1. The investor says “I’m in for [offer].”
2. The startup says “Ok, you’re in for [offer].”
3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”
I believe contract law doesn't require signed physical paper to have an agreement be legally binding (it just makes it easier to litigate disagreements on either side).
I'm starting to get out of range of my recollection of law at this point.
On the tangent of the protocol as the protocol, I also note that it is meant to be exclusive. That is, you don't construct it by piecing together the individual events -- it's written as a once off 2-phase transaction with no other intervening steps to prevent shenanigans and mistakes.
Sorry, but this protocol should be improved: "in" is ambiguous.
All the startup has done is repeat verbatim what the investor said. In this situation the startup has signaled receipt of the investor's offer and has not signaled intent to ratify or otherwise accept.
Yes, an eager investor might interpret that as acceptance.
>1. The investor says “I’m in for [offer].”
>2. The startup says “Ok, you’re in for [offer].”
You'll notice that the startup has only repeated back what the investor said, correcting for the inverted subject-verb and adding a customary signal opening. The startup has confirmed receipt of the investor's signal.
>3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”
The startup confirms receipt on a secondary channel.
It's so important that YC went through the effort to codify the process: http://www.ycombinator.com/handshake/