The Handshake Deal Protocol

by pg • 13 years ago

519 215 13 years ago

webwright2• 13 years ago

This is great protocol for all discussions/agreements. It's pretty hard for any relationship to break down if there's a shared understanding of expectations.

The re-statement/confirmation email is a great weapon against what time+memory do with reality, whether it's in the investment setting, with a partner, with an employee, or, heck, with a friend/spouse.

PotatoEngineer• 13 years ago

I wouldn't expect most "handshake deals" with a friend/spouse to require that level of formality - unless money is changing hands.

webwright2• 13 years ago

Agreed with the "most" sentiment. But it is worthwhile for anything where a misunderstanding is possible and the consequences of a misunderstanding would be meaningful (to you).

pekk• 13 years ago

Money changes hands every time people marry.

stavrianos• 13 years ago

Handshake deals are reliant on trust, which friends/spouses usually have in good supply. This protocol is attempting to add enough formality to lower the trust required somewhat (because people have been welching, so enough trust is not always available), without dropping it all the way to zero (which is what a traditional antagonistic/defensive contract is for).

temphn• 13 years ago

Even more important, especially for men, is to have any woman you are dating express feelings for you via email or text (pictures not necessary). This goes quadruply true if you are dating them at the office.

Electronic records are the only way to avoid he said/she said. (Word is this is how Ellen Pao's case against Kleiner is going to unravel).

jcampbell16• 13 years ago

This seems completely sound. Is it implicitly understood that all investors get the same terms? I assume that if there is an agreement to invest $100k at $5M cap, then the startup can't go take another $100k at a $4M cap, without giving that same deal to the first investor.

pg4• 13 years ago

There are cases where that would make sense, e.g. if the second investor was some famous domain expert. That said, it doesn't happen often.

The more common case is where the cap rises for later investors. Later investors gripe about that when it happens, but it's justifiable. The earlier investors took more risk. Plus the company actually is more valuable on account of their investment; a company that has raised $1m is at least $1m more valuable than when they started raising money.

jcampbell16• 13 years ago

In my scenario, where the second investor isn't a domain expert, but says something like "I will say yes to $xxx at a a lower cap", then does the startup have a moral obligation to give the same deal to the first investor? I think so, but could be convinced otherwise. Maybe this never happens.

samiur1204• 13 years ago

There is also a case to be made that even though initial investors took the risk to get a lower cap, they benefit from later investments even if they get a lower cap since the company becomes more valuable, making it more likely that they will actually profit more. While I agree that it's not ideal to have to allow later investors at lower caps, it could still be beneficial to earlier investors for the startup to accept these later investments. I don't think the moral burden should rest on the startup to go back to the earlier investors and offer a revised deal. Not only is it inefficient, but it also gives earlier investors the advantage when it comes to a hot startup that everyone wants to investment in initially. They can just bid with a high cap, guaranteeing that their offer is accepted, expecting the startup to come back because of it's "moral obligation" later on when other investors offer them lower caps.

pc863• 13 years ago

Can someone define cap for me in this context?

samstave6• 13 years ago

Valuation.

jcampbell16• 13 years ago

This seems like a reasonably good explanation:

http://www.askthevc.com/wp/archives/2011/09/convertible-debt...

kcmarshall• 13 years ago

Think "Market Capitalization" not "top" or "limit"

lincolnq• 13 years ago

Convertible debt is the trendy way to finance seed-stage startups these days. It allows early investors to essentially "punt" on determining the true valuation of the company at an early stage, while still ensuring that they get a decent deal when a valuation does get determined.

The way it works: instead of negotiating over true valuation early on, the seed investor hands over the cash as a debt instrument (so the startup technically owes the investor the money they paid), under the agreement that if the startup later raises a "real" (venture) investment round, the debt converts to equity at the price of the later round.

Of course, to avoid screwing the seed investors over, they typically insist on a "valuation cap" -- maximum valuation -- (so if you later raise venture at $10mm, but the cap was $5mm, the seed investors get twice as much equity as the venture investors per dollar paid). But if the venture investors only pay for a $5mm valuation, then they get the same equity-per-dollar as the seed investors.

6thSigma• 13 years ago

Brb while I go make an Unofficial YC Handshake Deal Protocol app.

darxius• 13 years ago

I was just thinking about using the "bump" feature a lot of smartphones have for step 3. The bump would have a message pop up on their screen, to which they would reply yes or no and completing step 4.

derefr2• 13 years ago

I would say,

1. something with a trigger like Bump,

2. which then pops up an Etherpad-style collaboratively-edited text field,

3. with MMO trade-dialog style 3-phase mutual-assent commit,

4. that leads to a copy being saved on both your phones, to a public-but-anonymous URL both parties can cite, and also forwarded to any other parties which either of you please--for example, your lawyers.

nekgrim2• 13 years ago

And a RFC. And an API.

jasalo2• 13 years ago

I just made a little website based on the HDP, check it out: http://www.hdplist.com

rlpb3• 13 years ago

A handshake is generally not taken to be a legally binding contract in itself. An email might be. So it might be worth making it clear in the emails that you don't intend them to be legally binding.

Dylan168072• 13 years ago

A handshake sure sounds like a gesture used to signify that a deal has been negotiated to the satisfaction of both parties. Why would it not be a contract?

rlpb3• 13 years ago

You might argue later that the clear intention was to not form a legally binding contract; that you were merely accepting the general terms, for the specifics to be agreed on later, and still had the option to refuse to go ahead at that point.

On the other hand, you might argue later that you did intend it to be legally binding.

Both arguments would be valid and your intent and what a reasonable man would assume would have to be decided on later by a court.

pg's article reads to me as if the intention is for it to not be legally binding, when he says "The actual transaction comes later, when documents are signed and money changes hands."

The existence of this article might change the view of the courts.

So to avoid doubt later, you should make it absolutely clear what you intend. You can form a contract with a handshake if you intend to, as it has been pointed out. But only if you intended it. So why not save yourself some future legal expenses by making it clear what you both intend?

http://en.wikipedia.org/wiki/Intention_to_be_legally_bound

argonaut4• 13 years ago

Oral contracts are legally binding.

http://en.wikipedia.org/wiki/Oral_contract

rlpb3• 13 years ago

http://en.wikipedia.org/wiki/Intention_to_be_legally_bound

apalmer3• 13 years ago

I think that's the fatal flaw... It attempts at the same time to be a contract and NOT be a contract. If it IS a contract no one will be willing to partake without legal review, so it loses all the time saving benefits. If it is NOT a contract then its no better than what is done today without all the protocol just with a simple handshake.

I think the chief benefit I see is educational for new business people/founders as to what you should and should not consider a 'deal', and what is just networking/bullshit.

Uhhrrr2• 13 years ago

You should probably clarify that this is not intended a legal contract and violations will be dealt with socially (if that is indeed what you intend).

jcampbell16• 13 years ago

What? How is this not a legal contract? All the elements are there.

jessaustin• 13 years ago

They've left out the most important part: paying lawyers thousands of dollars!

legutierr3• 13 years ago

But might that not be a problem? Some deals must get hung up on the documentation, no? Or perhaps more reasonably, a disagreement over the materiality of something discovered in due-diligence? This can't be a promise to invest X at Y valuation no matter what, which it might be if it were treated as a legal contract.

Uhhrrr2• 13 years ago

I didn't realize it was, but I was thinking it shouldn't be for the reasons other people have already mentioned - mainly, that the resulting case would be a mess and a drag on any startup, and the social punishment for a VC would be I think worse.

snowwrestler• 13 years ago

I think it's pretty clear that it IS intended to be a valid legal contract.

IgorPartola4• 13 years ago

So I've wondered this for a while. Contracts are of course important, but if the only way you can trust the other party is through a contract and don't feel secure without one, can you really be sure that you won't get screwed over because of a hole in the contract? Seems to be that in reality a contract is only as good as the word of the person behind it, and if you wouldn't simply take them on their word, you might reconsider doing business with them altogether.

This protocol highlights that you don't need 50 pages of documentation to agree on something and I like it because of that.

pc863• 13 years ago

That's why you have your attorney look at the contract thoroughly. It's not about distrusting anyone, it's about making sure you're as protected as you can be.

Truthfully, a contract is only as good as your attorney is.

ChuckMcM• 13 years ago

Oh I like this a lot. That adds a lot of clarity around what can be a very tumultuous time for a young company. I've personally been burned by the "We would like to come in but we don't want to lead." line. I treat such statements as polite "no thank you"s now.

brador• 13 years ago

They also arise when punishment for breaking the promise is high. Tight network, word gets around.

monsterix• 13 years ago

Splendid. Was expecting something of this sort after Harj Taggar's post "We'll be circling back" [1]. Hope the protocol does good of what it intends to: i.e not letting VCs hide behind a VC way of saying no.

However from a situation standpoint, this kind of indicates beginning of incoming processes in VC funding. Bureaucracy. Like it happens in big boy industry. Seems a bit detrimental but probably dishonest and noob VCs asked for it.

[1] http://paulgraham.com/circling.html

omegant• 13 years ago

Time for a deal protocol app?

Jabbles2• 13 years ago

Surely there's a huge opportunity for the market of VCs to favour those that move quickly: Bring an accountant to the startup demo day to look over the books of ones you find impressive, a lawyer on call to prepare a (i.e. tweak a standard) contract and a free coupon for a same-day courier service for the founders to return it once they've consulted their lawyer and signed. Then an instant money transfer.

Obviously, this puts an awful lot of power in the hands of the investor that actually attends the demo day. Those VCs (and their backers) willing to do so will face the usual risk/reward tradeoff.

timjahn• 13 years ago

I think this would only work if the VCs had been regularly paying attention to the company long before Demo Day, and had done their research. I don't think they'd want to invest immediately after seeing the company for the first time.

eli3• 13 years ago

I would want a potential investor to spend a little more time on due diligence than that. Also, does the lawyer work for free? Don't you want to do some of your own research on the investor? This just sounds utterly bonkers.

akama• 13 years ago

I agree, It is just as important to trust the investor as it is to trust the startup.

Jabbles2• 13 years ago

I don't think many people turned down Yuri Milner's offer.

They may feel differently about a bigger, later stage offer, but they may have to trade that off with how quickly they want to start spending money. Would the speed and organisation of a VC impress you?

swampthing3• 13 years ago

We (Clerky) have a service that lets you do the paperwork part of that with software. It's in private beta, but will be available publicly shortly. No need to have the lawyer on call or courier service - you can just enter in the deal terms, generate docs, and sign electronically.

_jss2• 13 years ago

I could really use some advice on this, actually. It's very serendipitous to see this posted.

What if you have a handshake deal and the other person abruptly disappears? I'm incurring all costs of operation, they've gone back and not completed anything they've said they would and now don't even reply to emails?

crapshoot101• 13 years ago

Honestly? Given what you've described, they aren't interested and it isn't happening.

_jss2• 13 years ago

My concern is centered around the "What ifs" that happen in the future.

What if my site starts to take off? What if it doesn't, but is a lifestyle business? Then he decides he wants back in!

I don't want him to come in later and demand anything from me, since he's abandoned me and prior to that at least 90% of his initial promises went unfulfilled.

mhartl• 13 years ago

I continue to be impressed at how cleverly Y Combinator hacks investing. What a breath of fresh air!

kirse2• 13 years ago

Why not do something creative like have the investor sign a dollar bill (of any denomination) and give it to the founders?

Every founder comes prepared with some cash in their wallet, and then when you confirm a deal the founders ask the investors to sign the dollar bill with a Sharpie/pen. On it would be some sort of short-hand for the deal valuation... Cash is more ubiquitous than phones - even impromptu, it's highly likely one person will have a cash on them - plus you don't have to deal with sharing emails, phone signal, phone battery, waiting for that text/email message to come through, blah-dee-blah.

And then you can frame it and do all sorts of other creative/cutesy stuff. If YC made it a tradition to do a "signed cash" deal as a way of indicating the confirmation of a deal, it'd make for a cool way of looking back at all the great (or not-so-great) investments... sort of like that whole "my first dollar" thing some people do.

rthomas6• 13 years ago

>Cash is more ubiquitous than phones

Are you sure? Right now I have a phone but I don't have any cash.

zheng• 13 years ago

Unless I'm explicitly buying something with cash, I'm almost always in the state of no cash, but with my phone.

wuest2• 13 years ago

The last time I had cash on my person, it was because I was traveling, and wanted some on hand. I haven't carried cash, as a rule, in almost a decade.

mfringel• 13 years ago

I have a feeling that it's regional. I live in Boston, and there are still significant amounts of restaurants that don't take credit cards.

sbashyal• 13 years ago

I just created a poll to find out the statistics among HNers. Please vote: https://news.ycombinator.com/item?id=5377521

te_chris• 13 years ago

Yep, here in NZ I never have cash and make electronic payments for everything (even $1 convenience transactions).

samstave6• 13 years ago

This is a fantastic idea, and there is no reason that this couldnt be an option to the Handshake Protocol.

Also, these bills will be sold off and collected when massive failures happen in later years.

brohee• 13 years ago

Don't forget to do it before witnesses, preferably a Secret Service agent.

"-STATUTE- Whoever mutilates, cuts, defaces, disfigures, or perforates, or unites or cements together, or does any other thing to any bank bill, draft, note, or other evidence of debt issued by any national banking association, or Federal Reserve bank, or the Federal Reserve System, with intent to render such bank bill, draft, note, or other evidence of debt unfit to be reissued, shall be fined under this title or imprisoned not more than six months, or both. "

18 USC CHAPTER 17 - COINS AND CURRENCY http://uscode.house.gov/download/pls/18C17.txt

pg4• 13 years ago

That's an amusing idea. It would be fine with me if that variant evolved. But it would have seemed frivolous if we'd proposed that.

larrys7• 13 years ago

The more you do things like that the idea becomes balkanized and you move further from your intention which is nice, simple, easy to remember and understand.

mtrimpe3• 13 years ago

I keep wishing someone takes up the frighteningly ambitious idea here: developing a low-friction government approved (through e.g. legal precedent) service for signing data.

After a passport/identiy check it would technically just be a highly available service to cryptographically sign blobs, coupled with a mechanism to handle retractions of signed data in case of compromised keys and a decently advanced notification system for early detection of suspected fraud.

On a societal level however, this would enable anything from frictionless contract signing apps to building a Kickstarter for organizing ad-hoc grass-roots referendums whose results are provably meaningful.

ghshephard3• 13 years ago

Numerous Reasons:

o Everyone has a mobile device at all times, trying to remember to carry cash and/pens is an extra step. Cash, in the valley, is not as ubiquitous as a phone. In fact, it's not as ubiquitous as a smart phone.

o Texting is instantaneous. In fact, when we're sitting at a table having a conversation, it's not unusual for some people to be texting each other instead of talking to avoid creating a break in the conversation / side conversation.

o Central, Secure, two-party tracking with SMS/WhatsApp/iMessage. Nice Audit trail as well, and you have it all handy on your phone to keep track of things. Nobody wants to deal with more little pieces of paper.

kirse2• 13 years ago

OK people, I get it, you don't carry cash, etc etc. I'm just imagining myself using whatever I have on me to come to a quick agreement on a precise valuation and secure a solid "affirmative" from an investor, beyond a basic verbal agreement.

So whether that's scrawled on a dollar bill, transmitted officially via the "PG Handshake Protocol", or signed on your ass with a picture in the mirror for posterity... doesn't matter, have fun with it and get it done!

rohin• 13 years ago

At least for us, almost all of our "handshake" confirmations for funding came over email after we had met with the investor in person or the phone.

larrys7• 13 years ago

"And then you can frame it and do all sorts of other creative/cutesy stuff."

Restaurants do that frequently with their first sale. (Cynically: The other $$ end up in their pockets, untaxed).

minimax• 13 years ago

What I like most about is that it embodies the idea that funding is an end rather than a means. Rather than commemorating revenue you're celebrating funding. It's perfect for the VC centric world of Silicon Valley.

jwp• 13 years ago

This is exactly the same handshake deal the founders of Fairchild Semiconductor did with each other.

tempaccount9473• 13 years ago

People are more likely to carry a smartphone than a sharpie.

Other than that, I really like your idea.

tobyjsullivan• 13 years ago

If a dollar bill is signed, only one party has a record (which can easily be spent and conveniently lost forever). If an email is sent, both parties have a record.

lominming• 13 years ago

Reminds me of Ron Conway's Google receipt investment story. Signing on a dollar bill is interesting. Small shops/cafes frame the first dollar bill they earned. Similarly, founders can frame the first 'dollar' investment.

quizotic• 13 years ago

The databaser in me wonders about the applicability of a two-phase commit protocol.

Suppose PG/YC (s/PG/{FW or BF or ...}) acted in the role of a transaction coordinator.

Instead of sending confirmation messages directly to each other, the parties would send their confirmations to the coordinator. Like an escrow agent, the coordinator would wait until all parties had confirmed and then send agreement notifications to all.

This might allow investors to commit with contingencies, such as requiring other investors or a minimum investment greater than their own investment.

OnyeaboAduba2• 13 years ago

great idea would add alot of extra work on the plates of yc mentors tho

notatoad• 13 years ago

Totally unrelated to the topic at hand, but what is PG's obsession with tiny fonts? this article is set in 8.5pt font - can anybody read that? at 10pt HN itself is almost as bad.

samstave6• 13 years ago

Well, you know the old saying: "It's not the size of your font, but the quality of your content..."

pg4• 13 years ago

Screen resolutions have been increasing.

koko7752• 13 years ago

But people's eyesight declines. My dad now puts his 27" iMac at 1024x768 because website font sizes are typically too small for him now.

msellout• 13 years ago

You don't use your browser's zoom feature?

JosephRedfern• 13 years ago

Should you really have to?

kayge• 13 years ago

Interesting timing. A similar post landed in my inbox this morning, from the blog of a VC in NYC: http://www.avc.com/a_vc/2013/03/doing-business-on-a-handshak...

dsr_• 13 years ago

Not coincidental, given that pg thanks Fred Wilson (avc.com) for feedback/input at the bottom of the handshake protocol page.

tc• 13 years ago

This protocol causes a valid and enforceable contract to be formed.

In fact, the constraints imposed by the protocol are almost exactly what you might learn about contracts in the first year of law school. A contract is composed of a 1) reasonably specific offer, 2) acceptance of that offer, and 3) some consideration between the parties.

By forbidding vague offers, PG is assuring that obviously questionable or unenforceable agreements aren't made. The consideration in this case is the startup reserving space in its round for the investor.

As far as steps 3 and 4, documenting the agreement is obviously valuable, but the contract is formed at the end of step 2 [2].

Now, it does seem unlikely that anyone would try to enforce this in court, in the same way that few are going to start a legal case over someone backing out on a term sheet, but if you could show damages based on your reliance on the other party's performance, you would in theory have a case.

Interestingly, it seems that either PG et al. must have aligned this protocol with the constraints of contract law, or in trying to achieve their ends, they independently reinvented the contract formation protocol that has been with us for at least hundreds of years.

Edit #1: Regarding the questions along the lines of, "this can't be a contract because there are many other terms to address," a contract can always be longer. If you don't address a term in a contract a court will try to divine the intent of the parties, or look at industry norms, or use defaults established by statute law, and try to do something reasonable. A valid contract isn't dependent on covering every possible, or even every usual, term. The fact that one party reasonably relied on the agreement and was thereby harmed by the other party's non-performance is often going to be sufficient.

[2] (edit): By reducing the contract to writing, even just one sentence in an email (steps 3 & 4), you would fulfill many statutory requirements for written agreements on certain kinds of transactions.

Edit #3: To be clear, I believe the contractual nature of this protocol is a feature, not a bug. You really do want the elements of a contract regardless of whether this is going to be enforced by a court, a person's own conscience, reputation networks, or public shaming.

argonaut4• 13 years ago

Thanks you. A lot of people commenting on this thread don't seem to realize that oral contracts are just as legally valid as written contracts (as long as all the elements of a contact are present), email records notwithstanding.

driverdan• 13 years ago

Not necessarily. In New York state for example, it's required that any contract worth $500 or more be written. Oral contracts over $500 aren't enforceable.

johnrob• 13 years ago

This might be by design. I think all investors probably realize the legal ramifications. The net effect of this could be to sniff out the ones who don't make good on their handshakes, since the ones who do probably won't mind putting terms in an email.

larrys7• 13 years ago

"This protocol causes a valid and enforceable contract to be formed."

Don't agree but if that were the case it would be a good reason not to use it. Details matter and this protocol doesn't have enough details (nor can it) that I would ever use it to form an legally binding agreement.

I already to a version of this with other types of investing (email back and forth essentially or sometimes a text) and the underlying assumption is that it is always subject to a formal contract which needs to be signed.

rscale2• 13 years ago

It's likely that other casual agreements that you don't think of as contracts are also contracts.

I'm not a lawyer, I'm a guy who took a business law class during undergrad, but my prof drilled it into my head that a contract consists of offer, acceptance, consideration, capacity, and legality. It can be on a napkin, it can be verbal, it can be in a text message, so long as those elements are present.

The difference between an offer and preliminary negotiations is the intent to contract, and language can be used to provide evidence on either side of this one. "Would you take $100k with a $5MM cap" is negotiating language, while "I'll give you $100k with a $5MM cap" is an offer.

Again, not a lawyer, but this "handshake protocol" appears to create valid contracts.

rayiner• 13 years ago

The general rule is that intent of the parties to bind themselves forms a contract, even if the parties intend to draft a formal agreement later.

brandall10• 13 years ago

Having a light shined on activity that pollutes an environment based on trust IME is a better disincentive than fear of legal threat, esp. considering the power disparity between the parties.

FlukeATX2• 13 years ago

Though this does follow the qualities of a contract, it's important to note that oral agreements only get you so far in many jurisdictions and particularly have an upper limit on the value, around the order of $500. So while its great this is an explicit and clear conversation, I don't think you can say that it is assuring unenforceable agreements aren't made.

jarrett3• 13 years ago

There is a written component to the protocol: The follow up email/text. "This is to confirm you're in for X." "Yes."

joshAg• 13 years ago

that's what steps 3 and 4 are for, aren't they? Wouldn't that make it a written contract instead of just an oral one?

jarrett3• 13 years ago

There is much to be decided about any investment deal beyond what is contemplated in the protocol. For some examples:

http://mashable.com/2011/05/27/term-sheet-startup-investing/

Just as a thought experiment, let's imagine what would happen if you tried to enforce this handshake deal (complete with email confirmation per steps 3 and 4). How would the courts decide all the issues that would normally have been negotiated and agreed to in a terms sheet?

mjn• 13 years ago

Courts have some leeway in what remedies to use, precisely for some of those pragmatic reasons. One remedy for a contract breach is for a court to issue an injunction ordering performance of the contract. As you note there are some practical problems with a court ordering VCs to invest on the basis of this kind of agreement. But another remedy is for the court to just award monetary damages (how to calculate damages for nonperformance of a contract is a whole other can of worms, but it's something courts do).

devinmontgomery• 13 years ago

Some background on what makes a contract from Nolo (http://www.nolo.com/dictionary/contract-term.html):

"A legally binding agreement involving two or more people or businesses (called parties) that sets forth what the parties will or will not do. Most contracts that can be carried out within one year can be either oral or written. Major exceptions include contracts involving the ownership of real estate and commercial contracts for goods worth $500 or more, which must be in writing to be enforceable. (See: statute of frauds) A contract is formed when competent parties -- usually adults of sound mind or business entities -- mutually agree to provide each other some benefit (called consideration), such as a promise to pay money in exchange for a promise to deliver specified goods or services or the actual delivery of those goods and services. A contract normally requires one party to make a reasonably detailed offer to do something -- including, typically, the price, time for performance, and other essential terms and conditions -- and the other to accept without significant change. For example, if I offer to sell you ten roses for $10 to be delivered next Thursday and you say "It's a deal," we've made a valid contract. On the other hand, if one party fails to offer something of benefit to the other, there is no contract. For example, if Maria promises to fix Josh's car, there is no contract unless Josh promises something in return for Maria's services."

swampthing3• 13 years ago

Taken literally - yea. But you can fix it pretty easily just by adding the standard "this is nonbinding" language that all term sheets have. That's a little inelegant though. Probably what would be best is just to have a page defining the protocol (and clarifying that it is nonbinding) and have people link to it in their handshake email.

tomp• 13 years ago

What's the point in making a non-binding agreement? Isn't it easier to just not make one?

jcampbell16• 13 years ago

While I agree this is a legal contract, more importantly, I think this is pg setting expectations for both founders and investors.

I speculate that the underlying motivation is that YC partners are spending too much time on handshakes that have gone wrong, rather than helping building businesses.

samstave6• 13 years ago

Not to try too hard here; but is there an opportunity to have an app that one could click a button, and have a confirmation email sent to both parties, but also have the data captured (anonymously, if preferred) so that the volume/type/frequency of deals could be looked at?

Maybe even a YC sponsored app - as part of an industry barometer/metric.

Keep the thing SUPER simple so that its "select offer" enter email addresses, hit "confirm"

davidw• 13 years ago

Quite an impressive list of "thanks for reading this". Will we see some of them publicize and affirm their commitment to the "handshake protocol"? That would lend a lot of weight and credence to the idea.

larrys7• 13 years ago

"Sam Altman, Marc Andreessen, Paul Buchheit, Ron Conway, Ronny Conway, Chris Dixon, Ben Horowitz, Ash Patel, Geoff Ralston, Joshua Schachter, Harj Taggar, Albert Wenger, and Fred Wilson for reading drafts of this."

So we can assume that the VC's named in the above have agreed to this protocol and will be using it?

nwenzel• 13 years ago

I saw the same thing. PG is pretty consistent with that tagline. So presumably the VCs knew it would be there. If those VCs didn't want to give the appearance of agreement, they probably would have asked to have their names witheld.

PG also specifically mentions VC "noobs" as being a motivation for this protocol. I would think that experienced VCs would be in favor of such a protocol so that "dishonest" or noob VCs wouldn't disrupt a potential deal or increase the cost of the deal with disingenuous offers.

apalmer3• 13 years ago

This doesn't make sense to me. Fundamentally, you either have a signed legal contract, or you 'just' have a verbal agreement aka handshake deal. The problem that this supposedly solves, is that verbal agreements are non binding and leave wiggle room.

If you cant trust the other party, the only recourse is the full legal contract. If you can trust the party then the handshake and the intention is enough.

Further more even handshake deals made by trustworthy agents with the best intentions sometimes fall apart before the full legal contract is signed. This will never go away.

Bottomline, handshake deals work in situations where the reputation of the individuals with each other is more valuable than the benefit of breaking a given handshake deal. Its just game theory really.

Further if the protocol did get buy in and become widespread, it will eventually reach a point where there are true legal ramifications for breaking a handshake deal. At which point everyone will (and should) refuse to make these deals for the same reason no one signs million dollar contracts without having the lawyers review the details.

larrys7• 13 years ago

Agree in general but note that it allows the investors who agree to use this framework the ability to put FUD into the minds of founders who deal with investors who don't.

Especially with startups with so many newly minted noobies coming on board every day who don't have any history or business knowledge they will soon might accept that this is the way "business has always been done".

karamazov• 13 years ago

Verbal contracts are fuzzy. They rely on reputation, and an investor's reputation won't take a substantial hit from a "he-said she-said" situation.

Having the agreement recorded in writing might not be legally enforceable, but it makes it clear that there was a concrete agreement in the first place.

icegreentea• 13 years ago

As pointed out elsewhere in the thread, verbal agreements that contain all the other aspects of a valid (for example written) contract is infact every bit as binding as a written version providing you can prove it occurred. You can do this all sorts of ways - witnesses for examples. The wiggle room that enters verbal agreements are typically not the result of it being a verbal agreement, but that verbal agreements are typically more concise than written agreements, and therefore lack the specificity and breathe.

In summary, a concept of a legal contract is largely abstracted away from the medium it is expressed it. The medium only effects the ease at which you can prove that your version of the contract is infact the version that both parties agreed to.

apalmer3• 13 years ago

I understand completely verbal contracts are enforceable if all the 'wiggle room' is squeezed out, by specifying in detail the specifics of the contract and witnesses to remove the 'he said she said'. That's all a written contract with all the legalese and signatures in triplicate etc really provides.

My point is IF you create a handshake protocol that meets all the criteria to be fully 'enforceable', no one will actually partake, because business people do not enter legally binding contracts without lawyers reviewing etc.

The handshake deal in addition to the legal aspect really requires a level of trust. a handshake deal works because both parties trust the other really is making a deal, that both parties are operating in good faith, AND that if their is some technicality does occur they can still back out, but trust exists that neither party will back out unless such a technicality does occur.

eli3• 13 years ago

Raising money relies on trust. If you don't have any faith in the other party holding up their end of the deal, the contract doesn't matter and you should probably reconsider the transaction. In practice, you can get pretty jammed up regardless of what the contract says.

joonix• 13 years ago

Sorry but this is completely incorrect. Oral agreements are just as valid under the law (except where something called the Statute of Frauds comes into play) as written agreements. You just need a somewhat specific offer, an acceptance, and consideration. That's it.

001sky3• 13 years ago

completely incorrect

This comment is "completely incorrect" because its making a jugdment absent any contextually relevant fact.

mikeash• 13 years ago

I don't understand why this would be called a "handshake deal" when the last two (and most important) steps involve e-mail. Call it an "e-mail deal" or "e-mail contract" and a lot of the mystique just sort of floats away. Now it's obvious why you need to call it off if either party doesn't want to send an e-mail, it's obvious that the handshake itself isn't enough, etc.

mercurialshark• 13 years ago

Holy fuck, y combinator is on the bar exam.

JOnAgain• 13 years ago

>> Finally, it isn't possible to add conditions to a handshake deal. For example, there is no way for an investor to use this protocol to offer, as some investors try to do, to invest if other people will—e.g. to say that they'll invest as part of a larger round if you can find a lead.

I disagree with this statement -- specifically about having a lead. As an angel, I would use this condition because I wouldn't invest without a lead institutional investor. What they bring to the table is: a) diligence during the investment period b) lawyers that know what they're doing c) taking a seat on the board

I feel these add material value to a deal (when it's the right lead, there can be bad ones). I hope I'm adding value, both with money and with advice / monitorship / whatever, but I'm not going to in a positon to look after legal, finance, or accounting issues, I'm probably not going to insist on auditing books, I am probably not interested in a board seat, etc. etc.

There are definitely angels and institutions who invest largely on social proof. But there are real reasons to want a "real lead". I will probably never invest in a party round unless it's really a friends and family round.

I will say "$X with $Y cap, but only with a lead". As a "small time" investor, I am not willing to set or negotiate the valuation. I am not going to judge based on who else you get or who your lead is but I do want there to be a lead.

ohazi• 13 years ago

This is a perfectly reasonable attitude. If your constraints don't allow you to make a handshake deal until later (when a lead is found), then you shouldn't be making a handshake deal until then.

hkmurakami• 13 years ago

This is fantastic. Like putting more leverage and negotiating power to engineers (who have traditionally been marginalized by the suits), providing more knowledge and leverage to founders and taking away grey-zone-hand-waving-smoke-and-mirrors wiggle room from the comparatively powerful party (the VCs) can only be positive in bringing about parity in the relationship.

nym3• 13 years ago

Why not have both parties sign a contract digitally with crypto?

https://itunes.apple.com/us/app/opengp/id414003727?mt=8

nym3• 13 years ago

In fact, you could make everyone who attends register by signing a message- that way everyone at your event would be ready (and have a public key registered with YC) to sign any contract digitally.

Welcome to the future.

jwhitlark• 13 years ago

I really like this idea. But "handshake deal" is too ambiguous. pg couldn't have proposed it without sounding crass, but I think it should be called a...

"YC handshake"

3pt14159• 13 years ago

The idea here is good, but the execution leaves far too much room for the startup founder or the investor to get screwed. In contract law any ambiguities are judged against the person that wrote the contract. Since the startup founder wrote "This is to confirm you're in for $100k at a $5 million cap." This is the contract that they have offered. Why bother making things so formal and binding when everyone knows that things still need to be dotted and signed.

My main concern is that this is forcing contracts onto normal negotiation. Maybe if the wording was changed to "strongly interested in" so that you can still publicly shame repeat offenders, without having the contract being formed when there are still other things to consider.

danenania• 13 years ago

It seems like the point here is that 'normal negotiation' is flawed. If you're really planning to invest (or accept investment), you're going to be filling out a large and thorough contract fairly soon anyway. What's the harm in starting out with a mini-contract, unless you want an option to weasel out? If there are other things to consider that prevent you from doing this, then you shouldn't be verbally making those same commitments. There's still room to say "strongly interested" or whatever instead, but you shouldn't expect your place in line to be saved if others say "definitely" and follow the protocol.

OnyeaboAduba2• 13 years ago

Im confused what other things are there to consider if you say your in for a certain amount you should have no problem having that put in writing right?

tomasien• 13 years ago

Not having money is fine, thinking you have money when you don't will kill you.

It's amazing to me that even after having a company utterly destroyed by broken promises from handshake deals that I still trust them, but I do EVERY SINGLE TIME! I'm going to use this protocol for the next few and see how it works out.

pjscott• 13 years ago

This sounds very simiar to the medieval merchant law: a non-state-affiliated system of lightweight customs for helping people trust each other in business transactions.

http://en.wikipedia.org/wiki/Lex_mercatoria

thrush• 13 years ago

I think that there needs to be some "time-cap" associated with the handshake protocol. If I don't hear back from step 4 within 24 hours or some other agreed time, I feel it'd be safe to assume the deal is off.

jgross206• 13 years ago

Seems like a good idea. One issue--

What if the investor doesn't immediately respond to the e-mail? Wouldn't that be sort of like the "partial yes" free option from the article, where they could wait until terms are (or are not) more favorable but still have a seemingly valid claim on an initial agreement?

Perhaps there should be a time limit, or the start-up can have the option of sending a second e-mail withdrawing the initial one?

redblacktree• 13 years ago

I think in that case, the expectation is that you (as a founder) have no obligation to "keep a place in line" for them. If they never responded, you can consider it a "no."

quantumhobbit2• 13 years ago

When is the investor considered to have "stepped out of line"? an hour, a few days, a week or more? What happens if the investor doesn't reply, the startup assumes the no reply is a no, and weeks later the investor sends an out of context "yes" hoping to cash in on the terms of the earlier deal?

I know this sounds like a petty concern for a "handshake deal" but the startup's e-mail at step 3 creates a paper trail that an unscrupulous investor could abuse.

jermaink• 13 years ago

pilots call this cockpit-tower protocol a "closed-loop communication".

matthuggins• 13 years ago

There should be some time limitation mentioned in step 3. Otherwise, there's nothing to stop step 4 from occurring several months later, which ideally would nullify the deal.

shin_lao2• 13 years ago

The protocol is flawed at step 4.

The investor should reply "I confirm I'm in for <offer> for <startup>" otherwise the investor could say it said yes to the wrong text message/mail, and that's it's all a misunderstanding yada yada yada

Hard to do that if you have to answer something explicit.

kaliblack• 13 years ago

"Yes" is sufficient. Remember that this purpose is to formalize a usually in-person handshake deal. Even out of that context, claiming "oh I signed the wrong paper" won't fly.

shin_lao2• 13 years ago

In a restaurant crowded with founders and investors I think it's easy to say "I said yes to the wrong sms"... Otherwise a malicious founder could overhear a conversation and send a sms at the right time to have a yes "proof"...

My main point is that it doesn't hurt to be explicit when confusion is possible.

jamieb• 13 years ago

In fact this doesn't solve the problem of investors who wait and see. If they wait a week, and things look good, they can come back and say "we have this legally binding email that says we're in". Startup comes back and says "well we didn't get your response so as per PG's handshake protocol you're not in." To which their lawyer replies "what is this handshake protocol you speak of?"

Seriously, though, isn't this whole thing giving everyone flashback of interview questions involving philosophers sending stone tablets to each other trying to verify whether the other one got it or not?

joallard• 13 years ago

Replies are usually embedded in email.

bgmasters• 13 years ago

One thing to note is that the CA statute of frauds renders certain kinds of oral contracts invalid, unless there is some memorandum of the oral contract is in writing. One such contract, as outlined in CA Civil Code Section 1624(a)(7) is:

> A contract, promise, undertaking, or commitment to loan money or to grant or extend credit, in an amount greater than one hundred thousand dollars ($100,000), not primarily for personal, family, or household purposes, made by a person engaged in the business of lending or arranging for the lending of money or extending credit.

This wouldn't seem to apply to equity financings, but I suspect it applies to debt financings. If that's right, an actual "handshake deal" is not legally enforceable absent the kind of e-mail memorialization that PG is talking about. Of course, a "handshake deal" starts to look a lot like a simple written contract if a handshake alone cannot a deal make.

jconley• 13 years ago

Nice! A simple 2PC [1] for deals!

[1] http://en.wikipedia.org/wiki/Two-phase_commit_protocol

001sky3• 13 years ago

The startup sends the investor an email or text message saying "This is to confirm you're in for <offer>." The investor replies yes.

== This not a handshake deal, de-facto or de jure.

Therefore, this is a terrible, misleading article. A/k/a why god invented lawyers.

[0] The Handshake Deal Protocol (ycombinator.com).

preinheimer2• 13 years ago

Step 4 needs to be:

The investor replies with Yes within 96 hours.

Otherwise it's the equivalent of having one party execute a contract, and the other party just sit on the contract to wait for more information. Either executing if it's clearly beneficial, or ignoring if it's not.

ghshephard3• 13 years ago

If this is a handshake deal - then doesn't the investor reply yes immediately? It would be nice if those who are more knowledgeable than I would weigh in and indicate whether these things happen in real-time. I.E. The "Handshake" deal takes place within the space of a few minutes.

preinheimer2• 13 years ago

The conversation seems to happen in real time, then flips over to email for a written record. Without a defined expiry it's not clear what happens if the investor says "yes" two months later after the startup receives some fantastic press.

dd0002• 13 years ago

Is this done before or after due diligence?

davros• 13 years ago

before, its like a really minimal term sheet and they are alwasy subject to due diligence, failure to reach agreement on the long-form, etc

dd0002• 13 years ago

this is only for YC companies right? not just any company. investors assume YC has done its homework

grellas• 13 years ago

YC has helped shape many ways in which modern startups do business and I could see this protocol adding to this by setting minimum expectations for defining who is truly "in" on a funding round before the binding documentation is done.

I see it as a remote risk that any such exchange would be treated as a legally binding contract. Too many essential terms would be missing, as for example in the case of a bridge note such things as time to maturity, interest rate, size of equity raise triggering mandatory conversion, etc. While the otherwise missing essential terms might be supplied by a term sheet used by the startup as a basis of discussion, such term sheets invariably make clear that they do not become legally binding until definitive documents are signed. To say, then, that one is "in" on such a term sheet would signify no more than what one signifies by actually signing it: that is, the investor becomes morally bound to negotiate in good faith until the documentation is prepared and signed and also morally bound to participate when such documentation is prepared in good faith and along customary lines. Of course, beyond the legal hurdles, there is the not insignificant issue of how either an investor or a startup would be treated in a tight-knit community such as YC if the person becomes known as being "sue happy." Could such lawsuits ever come about? Yes, and there may be unusual cases where the parties had had a true meeting of the minds, or where one party relied to his detriment on the other's statements and conduct such that a court might find an enforceable contract, but the practical risk of this happening would be near zero for almost all such cases - enough so, I think, that it may be effectively disregarded.

What the protocol does do is help prevent misunderstandings, inadvertent outcomes, and the occasional deliberately weasly overreaching that can occur with informal verbal exchanges. It says to the investor: do I really have a commitment from you such that, should you back out, your reputation will take a hit? It says to the startup: pin your investors down to the point where you can't be double-dealt but also make sure the commitment you think you have is real and not a product of your own wishful thinking.

I can see this working beautifully as a first step within YC. Beyond that, it will work as people come to terms with its existence and see it as useful. For its purpose, it is really an elegant solution to a knotty problem and therefore worthwhile.

washedup• 13 years ago

Dishonest men live at all levels.

This doesn't solve the original problem: What you suggest won't solve the issue of investors taking advantage of startups or the other way around. They will simply play another looser version of the handshake as you want it to exist. Anyone that is eager enough will get into this space before they are ready and be subject to the same sharks.

But not every investors is bad, for if they were they would earn an untrustworthy reputation.

The handshake deal first started as a way to avoid legal or financial promises. By giving the handshake such rules, you are diminishing it's intrinsic value as a "safety zone" for both parties to freely communicate. But of course, this shared information can be used to one of the parties advantage over the other.

Now, as another step towards building confidence in the investor/startup relationship, this is a great idea. It refines, offers some support, and starts communication between the parties on a smaller scale.

evolve2k• 13 years ago

To avoid confusion I personally think it also makes to be able to define the applicable standard as part of the protocol.

'$100k at a $5 million cap on standard YC terms'

Where standard YC terms refers to an existing terms template or you could refer to another set of standard terms by name.

Explicit Doctype

damoncali• 13 years ago

Doesn't this encourage rushing complex decisions? Aren't handshake deals best suited for inherently simple transactions? Diamonds were mentioned, futures traders (in the old school pits) are another.

In other words, does this solve the wrong problem? If venture deals were as simple as diamonds, would such a proposal exist?

I'm no VC, but it seems like it's easy to get a contractual "meeting of the minds" when you're talking about simple things, and this does nothing to simplify things unless you have standard paperwork to go along with it. Are those details not the main destabilizing influence? (this could very well not be the case - as I said, I'm no VC).

CurtMonash2• 13 years ago

I found the acknowledgements interesting -- folks who've read this and presumably not vomited all over it include Messrs. Andreesen, Horowitz, & Conway.

CurtMonash2• 13 years ago

I am baffled by the idea that this is a binding contract. You agree to a loan without specifying an interest rate -- how is that a done deal??

coopdog• 13 years ago

I smell an app

Google Glass (or even a simple voice recorder in an app designed for the purpose) would also be great to reduce the friction of having to type something into a phone while talking to an investor.

ichirotherager• 13 years ago

Where I come from, you ask a man if he wants to grab a BEER. Much more productive conversations that way :)

johnthebeloved• 13 years ago

Of course, there's always the "Johnny Lingo Method" of negotiation and deal making: http://nobudgetbudget.com/be-a-master-negotiator-with-the-jo...

aganek• 13 years ago

I like this proposal very much.

On the other hand, it reminds me of a quote by Sam Goldwyn... "A spoken contract isn't worth the paper it's written on."

caf• 13 years ago

Given that messages without guaranteed delivery will tend to be used for step 4, isn't this protocol susceptible to the Two-Generals problem?

jasalo2• 13 years ago

I made this website inspired in the Handshake Deal Protocol: www.hdplist.com for both investors and startups to use it.

amix• 13 years ago

Not being in SV and not following the SV way of building companies I really don't understand the rush, especially for something as important as picking the right investors. This would be like picking your wife on the first date and doing a handshake on it... Why not go for a more slow and more thoughtful route? As I see it great companies are not built in days, but years of hard, concentrated and thoughtful work and decisions.

saurik• 13 years ago

There are laws surrounding what is and is not a valid agreement. This website claims to somehow set a "standard" that would define when "if and only if" an agreement had occurred, but they do not have the right to just unilaterally do that. Even when dealing with people themselves, unless they can demonstrate that the other person had seen this website and known its contents ahead of time (and that thereby the contents of this website were to be taken as part of the overall oral agreement), the fact that they publish this website doesn't change what is or is not an agreement.

jholman• 13 years ago

I think this protocol has a flaw, in a corner case.

In the seventh paragraph, PG explicitly points out that it's in the interest of duplicitous investors to delay commitment while retaining the ability to retroactively commit. Delay between stages 3 and 4 gives investors that power, and isn't explicit.

The twelfth paragraph does address this ("both parties will usually have mobile devices... ordinarily [send messages] in person... suspicious if the other is unwilling to"). However, as it acknowledges, only USUALLY. Mobile devices get forgotten, or they run out of battery, or founders might be really crazy frugal.

It seems obvious that the fix is for Step 3 to include an expiry date/time, to be agreed upon just prior to step 1.

If only there were a discipline that had already studied things like this...

http://en.wikipedia.org/wiki/Consensus_%28computer_science%2...

dlss• 13 years ago

This should be the top comment.

One of the explicit reasons for the protocol isn't met by the protocol.

hahahanononono• 13 years ago

So...What happens when the VC hires a few hookers to close really bad deals for startups?

ronaldx• 13 years ago

Startups should think carefully about any source of bias behind Paul Graham's advice, and whether or not following pg's advice blindly is in their best interest.

Since the startup gave their (legally-binding) confirmation first, the entrepreneur may be able to stake a legal claim whenever they later choose to do so - or not.

The Handshake Deal Protocol

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