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Understanding Side-Letter Arrangements
Read time 1.9 minutes
Last year, I had loads of people come to me from September to December with the same scenario.
They had pitched to loads of VCs in the Spring/Summer.
They had a handful of VCs interested and looking to close the deal in the Fall.
They had agreed to terms with an Angel/VC to lead their round and had either turned down other funds or told them they would need to follow.
The lead VC told them it was “standard practice” to sign a side-letter arrangement before they signed the SAFE.
That side-letter arrangement gave the lead VC more rights than all other round investors.
The founders didn’t know what to do cause they felt played but didn’t want to go back to other firms they had already turned down, so they felt forced to agree to the side letter arrangement.
How can we avoid this?
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Before you make any decisions about who will lead your round, who you want to work with, etc., ask them if they have a standard side letter that they have firms agree to.
Never turn down investors until you have a signed agreement in hand. As soon as you turn aside the rest of the competition, the remaining VC has all the bargaining power.
Insist on standard documents. The YC SAFE is well-known in the industry. Instead of trying to negotiate the terms of a SAFE or drafting your own fundraising documents, make sure that you are focused on using the YC SAFE and having investors on board who recognize the value that comes from using a pre-prepared industry standard document.
Have you ever signed a side-letter agreement? |
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