Query whether this needle can't be threaded by allowing the board to waive liquidation preferences, so long as the investor board member(s) approve. I agree with you that a certain level of investor protection is needed to prevent fraud (obviously there's the threat of a lawsuit for breach of fiduciary duty, but there are many reasons why that would not be a reasonable substitute for a liquidation preference).
The question I have is when the founders have acted in good faith and the company goes downhill, should the founders bear all the downside risk there?
I can see someone saying yes - if the company goes south, everyone should get the money they invested as shareholders back. But that's a different argument.
An additional question I'd ask - is some method of waiving liquidation preferences by the board (again, including the investor board member) a good idea from the perspective of aligning incentives?
Let's say the company has seen a downturn where there are two options at play: a sale at a value that would give the founders nothing, after the liquidation preference is exercised OR a risky (but legally defensible) Hail Mary business plan to bring the company back from the brink.
If the founders get nothing out of the sale, aren't they incentivized to choose the Hail Mary option? (Obviously there are other opportunity costs for the founders.) If the liquidation preference could be waived by the board, then that would give the founders an incentive to approve an "efficient" sale.
Note: I am suggesting the idea of the board approving the waiver, as opposed to the preferred shareholders, so that the waiver applied across the board to all preferred shareholders. And the investor board member would have to vote in the best interests of the company when voting in the role as a board member, as opposed to in their own self interest, which they do as a preferred shareholder.
All that being said, I don't think liquidation preferences are the place to focus on making "standard" term sheets more company friendly. I could write a lot about that...
This term sheet is a fair distillation of fairly standard terms. I think what adventured is looking for is something that moves the Overton Window as to what's "standard." I don't think YC was purporting to play that role here.
With organizations like the NVCA playing such a pivotal role in the terms of VC financings, I think it is critically important that thought be given on the founder side towards advocating more founder-friendly "standards."
The question I have is when the founders have acted in good faith and the company goes downhill, should the founders bear all the downside risk there?
I can see someone saying yes - if the company goes south, everyone should get the money they invested as shareholders back. But that's a different argument.
An additional question I'd ask - is some method of waiving liquidation preferences by the board (again, including the investor board member) a good idea from the perspective of aligning incentives?
Let's say the company has seen a downturn where there are two options at play: a sale at a value that would give the founders nothing, after the liquidation preference is exercised OR a risky (but legally defensible) Hail Mary business plan to bring the company back from the brink.
If the founders get nothing out of the sale, aren't they incentivized to choose the Hail Mary option? (Obviously there are other opportunity costs for the founders.) If the liquidation preference could be waived by the board, then that would give the founders an incentive to approve an "efficient" sale.
Note: I am suggesting the idea of the board approving the waiver, as opposed to the preferred shareholders, so that the waiver applied across the board to all preferred shareholders. And the investor board member would have to vote in the best interests of the company when voting in the role as a board member, as opposed to in their own self interest, which they do as a preferred shareholder.
All that being said, I don't think liquidation preferences are the place to focus on making "standard" term sheets more company friendly. I could write a lot about that...
This term sheet is a fair distillation of fairly standard terms. I think what adventured is looking for is something that moves the Overton Window as to what's "standard." I don't think YC was purporting to play that role here.
With organizations like the NVCA playing such a pivotal role in the terms of VC financings, I think it is critically important that thought be given on the founder side towards advocating more founder-friendly "standards."