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A Silicon Valley vet explains how to properly execute a handshake deal

In Silicon Valley, getting things done quickly is crucial. In the time it takes to get contracts drafted and papers signed, your funding could fall through along with your investment. So most deals in the high-tech hub start out with a low-tech handshake. This is meant to satisfy all parties involved until lawyers sign off and checks clear. But in a world where old pros are a dime a dozen and most investors are “newbies,” it’s not surprising that many of these handshake deals fall through — why honor a handshake with someone you barely know?

To curb the dishonesty spreading through the Valley, Paul Graham, the founder of Y Combinator — an outfit that provides seed money and mentoring to a selection of startups in exchange for a portion of the company’s future profits — has created a handshake deal protocol (which, counterintuitively, also involves new-fangled email).

The protocol dictates that you have a proper deal if, and only if, the following four things happen:

1. The investor says “I’m in” for a certain dollar amount.

2. The startup says “Ok, you’re in” for a certain dollar amount.

3. The startup then sends the investor an email or a text message that confirms that the investor is in for that same dollar amount.

4. The investor replies yes.

Until these steps happen, the startup is under no obligation to take the investor’s cash, nor does the investor have to follow through on the funding. And, crucially, it is verboten to make a handshake deal conditional. For example, investor A can’t say “I’ll back you if investor B backs you too” anymore.

Suffice to say, Silicon Valley is still figuring things out.

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