Why “Dirty Term Sheets” Don’t Really Matter (and the 10X Rule)
Bill Gurley set the VC internet slightly on fire with his post on “Dirty Term Sheets” and seeming bad actors in late-stage venture investing.
He raises great and thoughtful points. And he’s far more successful and experienced than I am. But — I’m going to suggest for almost all of us — terms are what they are. The market sets them. And because of that, at a zen level — they don’t matter.
What does matters is The 10x Exit Rule.
Whether the last round has a few advantageous / risk-mitigating terms or not, 9 times of out 10 won’t matter:
- If the company is wildly successful and hasn’t raised $250m-$500m+, and either IPO’s at a high (>$1.5B+) valuation or is acquired for $1b+ … these terms don’t matter. They either go away, don’t come into play, or have a trivial impact.
- If the company isn’t successful, you won’t make any money as an employee.
OK so let’s figure out the other cases.
Rough-and-tough, figure on this rule: a company has to be sold, or IPO, for a valuation >= 10x the amount of capital invested for everyone to make any real money. If this happens, everyone wins, and the “lay” employees (who often own a very small % of the company) should be in the money.
So do the best you can with this analysis: Do I believe the company I am working at can be worth >=10x the amount Crunchbase says they’ve raised?
If so, don’t sweat this. Just do what you can to help them get to 10x the $$$ raised.
But if you don’t see it — worry. If they’ve raised $200m, but things don’t seem to be going well — there’s a good chance your equity will be worthless as an employee.
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