Don’t try to hide bad news/numbers from your existing investors. This is a continuation of the theme of what to avoid in founder/investor relations - aka what I’ve grumbled about recently. Revenue, runway, traction - whether it’s good or bad, once you’re in the portfolio, we’re aligned, and we should be reading from the same page. Too often we’ll receive email updates that are absolutely brimming with positivity, only to realize after re-reading the email that revenue is stagnant and we’re behind on all our milestones. Or I’ll be in a three-hour board meeting where the CEO waits until the last 15 minutes to mention that the company has 2 weeks of runway left. Startups are hard. Your investors know and expect this. We want to have all the relevant information so we can help. Now, to be clear, founders should always be their company’s biggest fans. We back our founders in large part because of their positivity and drive, and optimists have a better chance of success. You don’t need to become Eeyore. If you’re transparent, you’ll be better situated to take advantage of all the resources at your disposal.

Not to brag, but I’m a very experienced grumbler. As the point of contact for 300+ portfolio companies, I’ve had plenty of practice fielding all types of questions/requests/demands. While I love all our portfolio founders, not every single inbound email is a winner. Sometimes an exasperated sigh is inevitable. As a community service, I wanted to share some groan-inducers to avoid that will help you keep your investors happy and frictionless: Don’t send shareholder consents without context. Occasionally you’re going to need your existing investors to sign something: approval of a new round of financing, an increase to the option pool, or the appointment of a new director, etc. These are standard asks we’re used to receiving and generally happy to approve. But we need context! Too often, company counsel sends signature pages over to investors with no accompanying explanation for what’s being requested. If you’re asking for a bigger option pool, spend a few minutes to explain the percentage increase (not just the raw number of shares, which are meaningless of their own). If you’re appointing a new director, a brief bio is always appreciated. Try and anticipate the obvious questions the recipient will have and preempt them. Everybody loves less friction! Communication is part of the job. As CEO, you’re responsible for whatever company counsel sends out. Now as far as grievances go, this is more annoyance than grave. But it’s an easy thing to fix. Be proactive with your asks, and your investors will thank you for it.

We built a digital twin of @TimDraper and he’s live on our contact page, waiting to hear your pitch. As much as I love the cold emails from founders (said truly, not in jest), these emails would be much more effective and efficient if these founders had an insight into how we at Draper think about deals. Go to draper.vc/contact and talk to him. Ask him about moonshots. Ask him what Bitcoin will be worth in 100 years and what industries most need a shakeup. It’s great for understanding how we evaluate "weird and wonderful" ideas before you pitch a human and getting a gut check on your idea whenever inspiration hits, 2pm or 2am. Is it really Tim? No. Will it get things wrong occasionally? Maybe. Is it a genuinely useful front door into how we think as a fund? I think so. Tim funded Tesla, SpaceX, and Skype before it made sense on paper. Seemed worth encoding some of that thinking into something founders could talk to at any hour. Go say hi. P.S. If “he” starts sending you term sheets, let me know.

The 80/20 on how to read a term sheet, and other generally useful terms to help you speak legalese. (Part VII) ROFR (or right of first refusal) and Co-Sale Rights. If a founder wants to sell shares of the company to a third party and they agree on a price, ROFR would give the original investors the right to purchase those shares first. The purpose of this arrangement is to prevent the founders from selling all their shares to a third party and leaving the original investors holding the bag, if you will. Again, this is fairly common and standard practice, but you may have a carve out from ROFR where there is an allowance for a founder to sell a small percentage (2-5%) of their shares without needing to seek approval. In a similar vein, there are co-sale rights. This would occur if a founder has a buyer for their shares; the owner of this right would be able to sell a proportional number of shares at the same price. Say an investor owns half as many shares as the founder, and the founder is selling 10 shares. That investor would have the right to sell 5 of their shares. Next week might be the last in this series with a description of liquidity preference. Please try to contain your excitement. And as always, let me know if you have any questions regarding any of these points.

Auto is on the App Store now, worth a look. apps.apple.com/us/app/auto-y…

The 80/20 on how to read a term sheet: (Part VI) In the last post, we covered reimbursement for investor counsel expenses. For the rest of this series, I’ll try and address a few more odds and ends that pop up in term sheets. Aiming to keep these a little more bite sized. Here, the “no shop” clause. This simply means that an investor doesn’t want you to use their term sheet as a way to try and get a better offer from others. Generally a lead investor is happy to have the company share the term sheet with other prospective investors who are interested in joining the round. However it’s not ok to share a signed term sheet with other potential lead investors and say “please beat this.” Admittedly this is a grey area and not something most investors will go out of their way to enforce, but it’s reputationally harmful and frankly just rude. I’ll follow up in later posts with two remaining points worth calling out, ROFR/Co-Sale rights and Liquidation Preference. If you have anything specific you want discussed, feel free to shoot me a DM or comment below.

Exciting news from Chris and the Focused Energy team. They announced SourceLight, a laser-driven radiation-source business that is a next step in their vision of using fusion to power civilization. They also have great taste in company counsel (shout out Latham and Watkins). Congrats to all involved.

The 80/20 on how to read a term sheet: (Part V) In the last post, we covered pro rata and information and inspection rights. This time around, we’re covering reimbursement for investor counsel expenses. This is a cap or a maximum amount that you as a founder will be expected to pay for the investors’ lawyers. It tends to be a small percentage of the money going into the round and keeps VCs from having to pay out of pocket to diligence and draft documents for a company…on top of the millions of dollars they’re already investing. What’s reasonable for investor counsel reimbursement can depend, but it’s typically 1-2% of the money going in. For example, if you’re receiving a $1,000,000 investment from a fund, the investor might ask for $10,000 in legal reimbursement. More complex deals will have larger numbers and for SAFEs there is often no reimbursement cap because there is no term sheet. From the founder and company standpoint, you should want counsel looking under the hood, so to speak, because there might be clerical errors that you are unaware of because you are spending your time building your business and not checking every 409A valuation that you have ever done. As investor counsel, we are not working with external counsel to try and find things wrong with the company. We like the companies that we give term sheets to and we very much want to invest in them. We are simply trying to ensure there are no obvious red flags. Next up in Part VI, we’ll wrap up the series!

The 80/20 on how to read a term sheet: (Part IV) A summary: Part I: What to know before you dive into the document Part II: The front half of the actual document Part III: Major investment definition and founder revesting Now we’re at Part IV: Pro rata rights and information and inspection rights. As we covered last time, major investors tend to get two things that others don't: pro rata rights and information rights. Pro rata is an important concept, as it gives an investor the right to participate in any future financing the company undertakes in proportion to the amount they currently own in the company. For example, if an investor owns 10% of a company and the company goes on to raise a fresh $10 million, the investor will have the option, but not the obligation, to invest $1,000,000 - i.e. 10% of that round. The investor doesn’t get a discount, so it’s not quite special treatment; they're only allowed, if they so choose, to put in more money to maintain their ownership. At the end of the day, a pro rata right is about making sure that an investor doesn’t get diluted without getting the chance to put more money in. Typically this isn’t a controversial right and for your major investors, it's really not something worth arguing over. However, it is worth understanding because it’s not completely free to give away. If you have a series A investor down the road that wants to put in $20m and they don’t want to share with anyone else, then it becomes a negotiation where accommodations have to be made. But that’s an extreme case. In practice, it’s not really an issue since it’s something you should expect your investors to want and their participation signals to others that your existing investors have confidence in the company. Now, if you have friends and family investing in the company, I wouldn't recommend giving them all pro rata rights as it becomes a lot of rights to keep track of…so save this right for the big players. Now, the information and inspection rights. Simply put these rights are the ability to receive financial statements and to come and visit HQ. The latter doesn’t come up too often, so it’s really more about the financial statements and access to company updates. Again, as a company, you don’t necessarily want to give these rights to any and every investor on your cap table, but as a whole, you should be fond of the investors in your company as you agreed to bring them on in the first place.

211 national soccer teams recognized by FIFA 193 member states in the United Nations 48 teams in this year’s World Cup 8 countries that have ever won 1 more day until it starts! Happy World Cup Eve everyone. Reminder to sign up for the Draper Associates World Cup Bracket Challenge here: sm.app.splashsports.com/shar… And a bonus…the first game tomorrow is Mexico vs. South Africa. Last time these teams played in the World Cup, we got to witness this magic (youtube.com/watch?v=HFISx1j0…). Let’s hope there’s more in store this time around.

In law school I wrote two papers on soccer. One on FIFA Financial Fair Play and another on the controversial awarding of the 2022 World Cup to Qatar. (I also wrote a 30-page treatise on Bird Law…but that’s a story for another post). Anyway it should not surprise you that I am incredibly excited for the start of the World Cup this Thursday. It’s a quadrennial Christmas Eve where the table is set for athletic drama to play out on the international stage…and this time on home soil! Even if you don’t love soccer, it’s impossible to ignore the immense scale of the World Cup. The last World Cup final was the most simultaneously experienced event in human history, followed in real time by 5 billion people! VCs love scale and you simply can’t beat the World Cup on that front. Now to celebrate the occasion, I’d like to invite you all to join me in filling out a March Madness-style “bracket” for the World Cup knockout rounds. This is completely free to join and the winning entry will receive a Draper gift box. It’s been a great privilege of my job to host Draper’s annual March Madness bracket and now I’d like to extend that joy to the rest of you. The World Cup starts this Thursday, but the knockout round, and therefore the bracket to fill out, won’t start until June 28th. At that point, you’ll need to fill out your winning guesses, but for now just sign up and I will be following up with reminders as we get closer to it. If you’re confused about the rules the website has a helpful explainer, and prior soccer knowledge is not necessary. Here is the link to sign up: sm.app.splashsports.com/cont… And even if you don’t want to play, I hope you get the chance to soak in some of the majesty of the World Cup. There’s simply nothing like it.

Quite the honor to play a part in funding a company that is so committed to expanding human life. It has also been fun to revisit Oyster Point - a street I remember well from my dad’s days in Biotech. Great to see the work continue! Well done to Jacob Kimmel and the team.

The 80/20 on how to read a term sheet: (Part III) Now we’re at major investor definition. This is a defined term in the doc, usually pegged to dollars invested. Something like: any investor who puts in $250,000 or more qualifies as a major investor. Major investors tend to get two things that others don't: pro rata rights (the right to participate in future rounds to maintain their ownership percentage) and information rights (regular financial reporting, visitation rights, etc.). Neither of those is inherently bad to grant. The issue is mostly operational. If you're raising $2M from eight investors and six of them clear the $250K threshold, you now have six relationships with contractual claims on your cap table in future rounds. If the threshold is set too low and you end up with twelve major investors in a $3M round, your Series A is going to be more complicated than it needed to be. Check the threshold, do the math on your actual investor list, and decide whether the number of people who'll qualify feels right for how you want to run the company. Your lead will almost always be a major investor by default. That part you don't need to worry about. Founder revesting. This one surprises people. Standard practice is four-year founder vesting from company inception. By the time you're raising VC money, you might be two or three years in which means you only have one or two years left on your schedule. From an investor standpoint, putting $3M into a company where the founder's shares fully unlock 14 months later is an alignment problem. If things get hard and the founder walks, the investors are holding equity in a company that just lost its most important person with no retention mechanism left. So VCs may ask for a revest or a reset of some or all of your vesting clock tied to the new investment. You still own the same percentage of the company, but the revest reinstates the time-based incentive structure. At Series B and beyond, a full revest is less common. Usually it's a top-up on a portion of shares. But at seed and Series A, be ready. It’s important to note that most of this is standard and your counsel will confirm that. The goal isn't to fight every clause, it’s to understand what you're agreeing to so you can get back to focusing on building the business.