If a startup agrees to that, they're obliged to save $150k of space but the investor is only obliged to invest $50k. Investors will sometimes try to make a deal to invest, say, $50k to $150k. It also isn't possible to make a handshake deal on an offer to invest a range of money. Otherwise it's incompletely defined and thus not even an offer. An offer to invest has to specify a valuation or cap, or no cap. Investors who do that can escape their commitment later by claiming the price turned out to be too high. For example, an investor can't just say they'll invest $x, without specifying a valuation or cap. The protocol deliberately makes it impossible to say certain things. Market terms are well enough understood that it should be easy to see who's at fault if one party is making difficulties about the terms, and that's all we ask from this protocol.
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People either use one of the standard documents (for small investments) or negotiate in good faith (for large ones). I don't think the offer has to specify the documents to be used. A definite protocol that leaves a trail will both prevent founders from misleading themselves, and discourage investors from misleading them. They should each regard it as suspicious if the other is unwilling to.Īt the very least this protocol will tell us who's at fault if we get a report of a handshake deal falling through. Since both parties will usually have mobile devices from which they can send such messages, they should ordinarily do it in person as the final step of the agreement. So it is in the interest of investors to complete the 4th step, because until they do the startup is under no obligation to take their money. Unless and until this process is completed, there is no handshake deal. You agree to fund your investment no later than 10 business days from the date of your acceptance of this offer." This offer is valid for 48 hours, please confirm acceptance. The startup sends the investor an email or text message saying "This is to confirm you're in for.Here are some example offers:Īccording to the protocol, you have a handshake deal if and only if the following happens:
HANDSHAKER UPDATED NEEDED PLUS
The protocol defines an offer as an amount to be invested, plus a valuation or valuation cap (or no cap), plus an optional discount. We're going to start using this within YC, and we hope it will spread to the rest of the startup community. The Protocolįortunately there is a way to fix most of these problems: to define a standard protocol for handshake deals. They haven't actually committed, so it costs them nothing, but if the startup turns out to be a hot one, they can retroactively claim that their almost-yes was an actual yes, and that the startup is morally obliged to let them invest.
HANDSHAKER UPDATED NEEDED FREE
If investors say no in a way that sounds like yes, they can essentially take a free option to invest. The problem is compounded by the fact that some investors deliberately mislead startups about how interested they are in investing. Without video of the conversation it's hard for us to be sure whether there really was a deal and the investor welched, or there wasn't and the founders are just victims of their own wishful thinking.
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Many participants in the funding market are noobs, and some are dishonest.Įvery cycle we get reports of supposed handshake deals that fell through. This is not a closed community of pros who deal with one another day after day. Unfortunately, things don't work as smoothly in Silicon Valley as among diamond dealers. Diamond dealers apparently use them a lot. They tend to arise wherever trust is sufficiently high and speed is sufficiently important. Handshake deals are not unique to Silicon Valley of course. Founders need it because creating documents and getting them signed would slow down their fundraising, and investors need it because if they had to wait for documents to get created and signed before they could commit, they'd miss out on the hotter deals. So both investors and founders need a way to reserve space in a transaction. Why do we need handshake deals? Why not just wait till the actual transaction? Because things can happen fast in the startup world. The actual transaction comes later, when documents are signed and money changes hands. A handshake deal is a verbal commitment to a transaction. Intro Silicon Valley runs on handshake deals.