Four D&I Terms Founders Can Negotiate to Protect Themselves and Their Startups During Fundraising
If you’re fundraising, we’ve put together a policy gallery for D&I terms you can ask your VC for when you strike a deal.
As an entrepreneur, putting the right policies in place is a crucial fundraising exercise. What policies will smooth collaboration with investors and set you up to grow your business and working relationship?
While there’s no silver bullet, there are lots of innovative ideas from entrepreneurs who have been through it before. #MovingForward’s open source policy gallery pools examples of policies startup founders have implemented to enhance equity and fairness during fundraising. In this blog post, we’ve extended the policy concepts in the gallery with context, case studies, and steps to help you implement.
From term sheets to diligence requirements and metrics to internal policies, entrepreneurs can require equity and fairness from investors.
We hope this gallery elucidates levers for change and encourage founders to consider these policies next time they fundraise.
This post will be updated and extended as we gather more examples of policies that set the fundraising process on the right track. If you’d like to recommend a policy concept for inclusion in the post, you can submit your idea via this form or write to us at email@example.com.
Table of Contents
- Candor Clause
- VC Inclusion Clause
- #MeToo Morality Clause
- Weinstein Clause
When an investor has a track record of sexual harassment, assault, or discrimination, it’s not always apparent to the founders who pitch them. The Candor Clause requires that investors disclose past sexual harassment, assault and/or discrimination to entrepreneurs early on in the business relationship, before term sheets are signed.
Elizabeth Giorgi and Hayley Anderson are the co-founders of Soona, a same-day photo and video startup. Early in raising Soona’s Series C, Giorgi found an investor who seemed interested in the mission and agreed to invest. Later that evening he sent her naked photos of himself.
“I remember crying in the bedroom upstairs while my colleagues were having dinner downstairs because I just thought, ‘Is this what I’m going to have to subject myself to if I want to raise this money and build our dream?’ “ Giorgi told NPR, recalling the experience.
Giorgi turned down the investor’s money and blocked all contact with him. She then asked her lawyers to draw up a clause that would require investors in her company to disclose any prior allegations of discrimination or sexual harassment.
“The Candor Clause,” the language they drew up, stipulates that:
- Potential investors must reveal any complaints against them of sexual harassment or discrimination. Founders then get to decide whether past behavior is a deal breaker.
- Shareholders who lie or misrepresent themselves or their prior behavior can be forcibly removed from the board. Without such language, it can be quite challenging for entrepreneurs to remove board members.
How To Get Started
- Read about Giorgi’s story here.
- Have conversations with your lead investors BEFORE the term sheet is sent out to champion the Clause and agree to its inclusion.
- Include the clause language in the REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS section of your fundraising documents.
- Download the Candor Clause here.
- Explore the Candor Clause’s website here.
- Read The Colorado Sun and NPR’s coverage of The Candor Clause
VC Inclusion Clause (Rooney Rule)
Inclusion clauses aim to reduce the potential impact of unconscious bias for key C-Level and senior roles within a company. When implemented by VCs, inclusion clauses ask that portfolio companies write an “inclusion rule” in their HR policies so that at least one woman and/or member of a population currently underrepresented within the company is formally interviewed for any open executive position.
The VC Inclusion Clause draws inspiration from the Rooney Rule, which originated in the National Football League in 2003. Upon proof that the Rooney Role was working, it was subsequently adopted by numerous tech companies and businesses to enhance employee diversity. Even President Obama applauded the Rooney Rule at the White House’s first Demo Day and encouraged tech companies to adopt it to improve minority representation.
Research has shown that the Rooney Rule and similar inclusion rules are far more effective when at least two under-represented candidates are considered for roles — an insight worth noting if you choose to implement such a policy.
In 2017, in the midst of the #MeToo and #TimesUp movements, Mark Suster, Greg Bettinelli and their team at Upfront Ventures decided they wanted to take action. They had heard of the Rooney Rule in the NFL and were persuaded by the idea that asking owners to commit to expand the “top end of the funnel” in recruiting would have an impact on organizational diversity.
In 2018, Upfront Ventures began inserting an “Inclusion Clause” into their term sheets to align the value of inclusion across all their investments. “We do this not just because it’s the right thing to do but also we believe it will help drive large and differentiated returns,” Upfront said.
Upfront also reported that the clause has unequivocally started to work in companies they’ve funded since its implementation and have made the clause available open source so that other VCs can use it and/or improve upon it.
How to Get Started
- VCs or founders can add an inclusion clause in their term sheet.
- If not doing so already, VCs can start tracking metrics with respect to i) who’s getting invited to pitch, ii) who’s moving through to diligence, iii) who’s getting funded. Founders can choose to do the same for i) applicants, ii) interviews, iii) hires, iv) tenure.
- VCs can also amend their policies to include a provision for hitting an “at least X in 10” target for entrepreneurs who are under-represented in their portfolio to pitch or receive investment.
- Inclusivity doesn’t end once an investment is made or job is filled. Make sure codes of conduct and workplace norms are in place that will help diverse entrepreneurs / hires thrive after they are hired.
- Marketplace: “The Pros and Cons of the Rooney rule”
- Forbes: “What Corporations Can Learn About Diversity From The NFL’s Rooney Rule”
- HBR: “If There’s Only One Woman in Your Candidate Pool, There’s Statistically No Chance She’ll Be Hired”
- Both Sides blog: “The VC Inclusion Clause #MovingForward” by Mark Suster
- Upfront Ventures: “Upfront VC Inclusion Clause”
#MeToo Morality Clause
A #MeToo Morality Clause provides grounds to remove stockholders, board members, and directors if they are found to be guilty of sexual harassment or discrimination misconduct. It is similar to the Candor Clause, but focuses on investors’ potential future behavior. The Candor Clause is concerned with disclosing investors’ past behavior.
In October 2018, Elizabeth Gore and Carolyn Rodz were raising their Series A for Hello Alice. Their company’s business model assumes a monetary value of inclusivity, so they decided they wanted to be intentional about imbuing this central value of their company in their fundraising terms.
To them, that meant including a #MeToo Morality Clause on their Series A term sheet. The clause states that should a “#MeToo event, racial discrimination, and/or sexual orientation discrimination incident” occur, stockholders are empowered and required to utilize corporate governance functions to address the situation — which could include removal from the board.
How to Get Started
- Set expectations with investors early about with incidents of harassment and discrimination will mean for their involvement at your company at the board level
- Incorporate morality clause language into funding agreements. You can build on the #MeToo Morality Clause that Hello Alice used.
The Weinstein Clause
Weinstein Clauses can take several forms, but their common theme is encouraging proper social due diligence on both sides before striking a deal.
These clauses stand as a reminder that harassment poses a considerable liability and that the reputation risk of engaging with organizations and individuals with harassment track records can be immense. A study from researchers at UCLA and the University of Amsterdam has shown that even one sexual harassment claim can tank a company’s image — a risk that entrepreneurs and investors understandably would want to avoid.
In the context of VC fundraising, a Weinstein clause could mean:
- LPs committing to conduct social due diligence on both investors and firms before investing in a fund
- VCs committing to conduct social due diligence on founders before making an investment
- Founders committing to conduct social due diligence on both investors and firms before accepting an investment
- Founders requiring all firms that invest in their company have a publicly-available anti-harassment / anti-discrimination policy that applies to founders and third parties in addition to employees. VCs who have joined #MovingForward as full supporters are all great examples of this leadership.
The first known use of the Weinstein Clause was in a merger agreement between SJW Group and Connecticut Services. The March 2018 merger agreement included the following: “to the knowledge of SJW, in the last five years, no allegations of sexual harassment have been made to SJW against any individual in his or her capacity as (i) an officer of SJW, (ii) a member of the SJW board or (iii) an employee of SJW or any SJW subsidiary at a level of vice president or above.”’
The clause is included in the “representations and warranties” of the deal agreement, in which the seller affirms compliance with particular laws and rejects liabilities. As this section is also part of VC term sheets, similar language can be used by investors and founders in deals.
How To Get Started
- Read examples of Weinstein clauses and their effects on participating parties
- Learn more about social due diligence, #MeToo representatives, and disclosure schedules
Links / Resources
If you do decide to implement one of these policy ideas in advance of a raise, we’d love to hear from you.
#MovingForward’s Policy Gallery for Entrepreneurs is open source. Anyone can contribute a policy idea and we will update our website and this blog post to reflect new ideas we receive. You can submit your idea via this form or email us via firstname.lastname@example.org.