We’re going through induction for the next cohort of BGV teams at the moment, part of which is sorting out the paperwork around our investment. A few months ago there was a bit of chat online about ‘handshake deals’ rather than complex legal contracts. Fred Wilson particularly would rather things were simple:
We negotiate a sophisticated set of documents when we invest in a company and for the most part, those documents never come into play. Many times when things go badly, we rip up the documents and decide what to do based on an honest discussion among the interested parties. When things go well, all we need are the stock certificates.
We get a few questions at BGV about why we make investments in the way that we do. Especially because we’re ‘social’ which means there are a whole range of options to choose from such as loans, revenue participation agreements or even social impact bonds.
We make Â£15,000 equity investments based on receiving 6% of the ordinary (sometimes known as founders’) shares in the company. We don’t ask for any preference or special rights. We don’t ask for a seat on the board. We don’t even ask the founders to draw up a shareholders’ agreement with us. The paperwork is still a bit fiddly but we try to make it as easy as possible for the teams.
Why do we do it that way? Firstly it’s the simplest and if things go well for our startups, things will get very complicated with later stage investors if we mess around. But secondly we do it because it feels right. Once we hand over the money, we have very little say over what the teams do with it. However our incentives are exactly the same as the founders because we have exactly the same type of shares as they do.
David Lee writes that ‘investors are not your friends’ and he’s right. I like his analogy of us being like fans. We’ll stick with our startups through thick and thin but that doesn’t stop us from having opinions about how they should go about getting to the top of the league. Fundamentally we’re on the same side.