See how YC’s model term sheet would be reflected in actual agreements

Early in 2019, Y Combinator (YC) published a model Series A term sheet reflecting what YC considers to be “standard and clean” terms for a financing from Silicon Valley VCs. The term sheet is based on YC’s extensive experience investing in hundreds of early-stage startups.

In two years, Atrium attorneys have guided hundreds of clients through over a billion dollars raised in venture financings. To provide further guidance to founders, we put together a set of financing documents, based on the forms published by the National Venture Capital Association, to show how YC’s model term sheet would be reflected in actual agreements. These documents assume that the startup is set up as a Delaware corporation.

A set of preferred stock financing documents normally includes the following five agreements:

  • Amended and Restated Certificate of Incorporation (here)
  • Preferred Stock Purchase Agreement (here)
  • Investors’ Rights Agreement (here)
  • Right of First Refusal and Co-Sale Agreement
  • Voting Agreement (here)

The Right of First Refusal and Co-Sale Agreement (ROFR or ROFR/Co-Sale) is a document that, with the right of first refusal, helps to keep the shares of common stock held by the company’s founders and/or other major common stockholders either with the company or within the company’s existing investor base, and with the right of co-sale, helps to protect a company’s investors against unfair stock sales.

In the event that a company’s founders or other major common stockholders (usually referred to as the key holders) enter an agreement to sell their shares of common stock to a third party, the ROFR portion of this agreement requires such key holders to offer such shares on the same terms, first, to the company, and second, to some or all of the company’s existing investors, before the key holders may complete a sale to the third party.

To the extent that the company and/or the investors have not purchased all of the shares pursuant to the ROFR, the Co-Sale portion of this agreement allows investors who have not purchased shares pursuant to the ROFR to sell their own shares to the third party alongside, or in place of, the key holders.