I’ve taken part and witnessed several big discussions about changes to how VCs should manage these times of higher uncertainty in the market.
If we should delay or even stop investing in new startups, change our approach to investments (e.g. look at new areas of interest and forget several sectors altogether), put in more protective clauses to have more guarantees if we invest from now onwards, due to these weird and very uncertain times…
The article below is very good and provides insights and details about the typical clauses that can influence investment discussions between VCs and startups now and in the near future.
Personally, I do not like most of the barbaric approaches (it’s a bad way to engage in a long term relationship that should be managed with equilibrium and fairness), but a few might make sense (if we do not over engineer everything in the process). Overall, I believe that VCs (specially the early stage ones) will have to still take the plunge and assume the risk (it’s their job to do so), but there can be fairer ways of having in place some more checks and balances that simply were most of the times put aside in the last upward movement of the VC market, due to mostly competitive deal discussions that typically were skewing things to a more founder friendly approach…
VC terms — Return of the Barbarians.
I hate complex terms in venture investments. Value is created by backing exceptional companies that return your fund, not by word-smithing aggressive legal agreements. In the last decade, we’ve seen cleaner and simpler terms become the norm, which has been great for everyone and created more alignment.
Founders beware. OG venture capitalists like myself remember vividly the days of full ratchet wiping out entire cap tables and leaving founders with nothing.
As we’re entering a new ice age, I’m hearing that paring knives are being sharpened and old weapons might get taken out of storage. I’m hoping I’m wrong and VCs will keep their term-sheets clean, but in case they don’t, here’s a detailed look at the arsenal that these barbarian investors can draw from.
So saddle up, grab you shield and get familiar with the subtleties of Participating Preferred’s, Full Ratchet Anti-Dilution, Pay-to-Plays and more by reading further. As Andy Grove would say, only the paranoid survive.