Comments on: How do the sample Y Combinator Series AA financing documents differ from typical Series A financing documents (or what’s the difference between seed and venture financing terms)?

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Thu, 02 Apr 2009 21:42:50 +0000

[...] A little taste: How do the sample Y Combinator Series AA financing documents differ from typical Series A financing … [...]

By: Free Model Angel & Venture Round Equity Financing Documents | CorpAngels.com

Sun, 19 Oct 2008 05:00:22 +0000

[...] before you start using it, this StartupCompanyLawyer.com article is a MUST READ. It explains the difference between Angel and Venture financing terms, and the [...]

By: Yokum

Yokum — Mon, 13 Oct 2008 05:43:53 +0000

@Shafqat – The term sheet already shows (or will show once blanks are filled in) the aggregate amount to be raised in the round. As a practical matter, the company is typically providing this kind of term sheet as a “straw man” to potential investors as a solicitation, rather than vice versa in a typical financing with institutional venture capitalists. Thus, unless the identity/investment amounts of lead investors is already confirmed and is important, the term sheet will be silent on the identity of the investors.

By: Shafqat

Shafqat — Sun, 12 Oct 2008 22:12:04 +0000

Hi there – I was looking at the Series AA Term Sheet and it seems catered towards a single investor model (i.e. Y-Combinator). Most angel rounds would have a syndicate (even if its a few friends and family). Could you just rinse and repeat with this one or is it important to have details of the syndicate and total amounts of the round in each term sheet for each investor? Thanks much!

By: Yokum

Yokum — Wed, 27 Aug 2008 04:01:06 +0000

@Sachin,

1. Generally speaking, I think that a company is better of with convertible debt rather than an equity round, because the valuation in the equity round is likely to be very low. Even a significant conversion discount is likely better than a low valuation in the equity round.

1A. I think that legal fees for convertible debt will still be less than an equity round using these stripped down documents. An equity round still has more variables and will require stockholder approval and a secretary of state filing of the COI.

2. In my experience, most early stage pre-VC financed companies do not get a 409A valuation. Whether the seed round is equity or debt wouldn’t necessarily materially change the risk analysis on whether or not to get a 409A valuation.

By: Sachin Agarwal

Sachin Agarwal — Tue, 26 Aug 2008 14:20:53 +0000

This is a fantastic commentary on the docs, especially for the intelligent founder who is already looking a step ahead to the Series A and should be prepared for that conversation. In particular, the note that founders should be issued preferred, rather than common, stock for significant cash investment is most welcome – many people I’ve spoken to are unaware of how that benefits the company in the long term by keeping the common stock option grant strike price low.

A couple of quick questions: given the increased legal expense of an equity raise versus a convertible note, should this Series AA structure really be used for friends and family money? I understand that they are likely to be more friendly than a sophisticated angel, but the legal expenses (even with these as a base) are sure to be higher. Also, does the Series AA avoid having to have a 409A valuation done? That’s another additional expense for a “by the book” equity round that is not addressed.

Your commentary is excellent for both the entrepreneur and investor as they move from the term sheet to the legal documents stage of a Series AA angel investment. I’ve written a simpler, introductory piece on the term sheet here: http://www.sachinagarwal.com/2008/08/an-analysis-of.html

By: Review of Y Combinator Angel Investor Series AA Legal Documents | The Startup Lawyer

Sun, 24 Aug 2008 20:16:07 +0000

[...] finally, I think you should take a look at this article at the Startup Company Lawyer. It is written by Yokum Taku, a partner at WSGR (the law firm that [...]