1. I would say that, even as of 5 years ago, it was rare for a startup to go through a Series A VC round without the VCs taking at least shared control.
2. Founders of reasonably strong startups can usually do angel rounds, also denominated Series A, without giving up board control and have been able to do so for some years now. These rounds used to be for smaller dollar amounts, often capped at $500K or so, but this has changed today in an era where founders can often turn to angels and superangels for larger fundings. VCs want to stay competitive with the angels at this early stage because, if they lose out at that level, they find themselves sitting on the sidelines as their deal-flow shrinks and they lose out on potentially strong investments made at an optimum stage in promising ventures. To stay competitive, therefore, the VCs must perforce bend a little on their traditional terms, including their former obsession with gaining board control right out the gate.
3. Founders themselves are far more savvy today, on average, than was the case a decade ago. In the bygone days, only a relatively few serial entrepreneurs had the sophistication to sit on a reputable board and still add value to it as founders. Today, the average founder is far better versed on what it takes to drive a company than was the case before. Thus, it is easier for VCs (and other investors) to accept the idea of a "founder-driven company" than it used to be. (Over the years, I have seen all too many "control-freak" founders and other variations that could only be labeled an embarrassment to sound management; based on this, I can understand the historic VC attitude, though of course this all must be counter-balanced by the many ills that the VCs themselves brought to the process when they would sometimes abuse the founders in whose startups they invested.)
4. Founders today have far more control over timing on when to do their Series A rounds. The cost of launching is far reduced today and the options for deferring larger rounds are greater, as for example by taking bridge funding from angels or F&F to allow the company to build value and minimize dilution before it goes for larger forms of funding.
When all these factors are combined, it seems clear from the trenches that a profound change is occurring by which founders have more control than ever before over their ventures. Of course, having this validated by someone such as PG, who is at the heart of this activity in Silicon Valley, goes a long way to letting the VCs themselves see it as respectable to accept as a fait accompli as they move forward.
Another observation - this is a good example of the value of YCombinator and other similar networks. In this case, some YC guy is negotiating with VCs and needs some information, so he talks to pg, who talks to some other founders, and bam there's your answer (plus the rest of us are a little more enlightened, too).
> "3. Founders themselves are far more savvy today, on average, than was the case a decade ago."
I've heard this a bunch of times. Why is this the case? Is it the information available to founders, the quality of people choosing to do startups, or something else?
I have worked closely with all sorts of founders over the years and can say that it is not the quality of the people choosing to do startups that is making the difference (though the current group is certainly as bright as any other).
It is just that founders were pretty much in the dark about how startups worked and about a lot of the business principles that tend to promote success.
Today, forums like HN (and many others as well), together with all the social networking services that connect people instantly, allow prospective founders to gather an enormous amount of information about such basic things as how companies are set up legally, how good business ideas are formed and executed upon, how marketing works, etc., etc., often tied directly to the very niche they are targeting. Founders also know a lot more about funding and funding options, where a decade ago most of them needed detailed explanations just to begin to understand what preferred stock or restricted stock or similar items even were.
People make the same types of blunders today that they always did but, with the greater information available to them (and the network of people with whom they can readily connect), the smart ones don't need to sit on the sidelines guessing or trying to get an introduction to some remote and removed VC to try to figure it all out. This has indeed made a great difference in the relative bargaining power of founders today as opposed even to a few years ago.
grellas - could you say whether these days founders can open a company quickly with these open sourced documents by YC or TechStars by filling in the blanks, or do they still need a lawyer to do it for thousands of $$? Sorry if this puts you on the spot, but I just wanted to know how much more needs to be done that is not covered by the standard docs.
I am assuming here that the investors are your friends & family and they aren't out to do a high powered negotiation -- just want to set things up correctly and keep going. Are there any specific pitfalls that could happen if one just used standard documents and a convertible note?
From your question, I assume there would be no big haggling over deal points. In that scenario, if you as a founder are pretty familiar with the pluses and minuses associated with the various early-stage startup investment options (bridge notes, common stock sales, and preferred stock sales), and if you understand securities laws and basic tax issues connected with the various options, the templates might be used in order to save costs. Even then, however, it is not wise, in my judgment, not to at least consult with a knowledgeable lawyer as a double-check on what you are doing.
I think founders get a far better deal on price from lawyers than they used to, and this is in part owing to the prevalence of templates freely available on the web. But, unless you want to fly blind in some pretty complex areas, I wouldn't recommend dispensing with formal legal help altogether.
Specific pitfalls will vary with the type of funding you may be doing but usually they involve securities law and tax issues or just not understanding the range of things that can happen (e.g., with a convertible note, if the note converts automatically into preferred stock at a pricing discount and subject to a valuation cap, all well and good, but what happens if the startup never does such a funding and gets acquired at a premium with the notes never having converted? does your dad or other family member then get his money back with a couple percent interest while others get a 10x return even though he took the biggest risk of all in being early in the game with hard cash needed by the company - this is just one item that founders often fail to consider in structuring the seemingly simple convertible bridge notes - and the issues and contingencies get much more complex when preferred stock is involved).
My advice: even in simple cases, double-check with a lawyer but make sure it is one who will approach the simple funding in the spirit of a simple funding and keep the costs in line accordingly.
BTW, if by "open a company," you mean do the initial company set-up itself on their own, of course founders can but here too they can easily get into trouble by not understanding the range of issues they need to deal with (see, e.g., my comment to a post entitled "how I incorporated myself" from a few weeks ago: http://news.ycombinator.com/item?id=1924719).
1. I would say that, even as of 5 years ago, it was rare for a startup to go through a Series A VC round without the VCs taking at least shared control.
2. Founders of reasonably strong startups can usually do angel rounds, also denominated Series A, without giving up board control and have been able to do so for some years now. These rounds used to be for smaller dollar amounts, often capped at $500K or so, but this has changed today in an era where founders can often turn to angels and superangels for larger fundings. VCs want to stay competitive with the angels at this early stage because, if they lose out at that level, they find themselves sitting on the sidelines as their deal-flow shrinks and they lose out on potentially strong investments made at an optimum stage in promising ventures. To stay competitive, therefore, the VCs must perforce bend a little on their traditional terms, including their former obsession with gaining board control right out the gate.
3. Founders themselves are far more savvy today, on average, than was the case a decade ago. In the bygone days, only a relatively few serial entrepreneurs had the sophistication to sit on a reputable board and still add value to it as founders. Today, the average founder is far better versed on what it takes to drive a company than was the case before. Thus, it is easier for VCs (and other investors) to accept the idea of a "founder-driven company" than it used to be. (Over the years, I have seen all too many "control-freak" founders and other variations that could only be labeled an embarrassment to sound management; based on this, I can understand the historic VC attitude, though of course this all must be counter-balanced by the many ills that the VCs themselves brought to the process when they would sometimes abuse the founders in whose startups they invested.)
4. Founders today have far more control over timing on when to do their Series A rounds. The cost of launching is far reduced today and the options for deferring larger rounds are greater, as for example by taking bridge funding from angels or F&F to allow the company to build value and minimize dilution before it goes for larger forms of funding.
When all these factors are combined, it seems clear from the trenches that a profound change is occurring by which founders have more control than ever before over their ventures. Of course, having this validated by someone such as PG, who is at the heart of this activity in Silicon Valley, goes a long way to letting the VCs themselves see it as respectable to accept as a fait accompli as they move forward.