From the painstakingly obvious why did nobody think of it before department: London-based early-stage VC Passion Capital has updated its standard Term Sheet so that it’s written entirely in plain English. For those of you who have never had to navigate a venture capital Term Sheet, the document outlining the terms of any proposed investment, they are usually worded by the legal profession, and as a result, dense in legal-gobbledegook.
Why are they written that way, you may ask? Part of the answer is that’s just the way it’s always been done. So, Passion Capital, being one of the newer firms on the European VC block, has decided to buck the trend. And in doing so, the early-stage VC, run by Stefan Glaenzer, Eileen Burbidge and Robert Dighero, is inadvertently challenging the rest of the investment community to follow suit.
Put that in your Silicon Valley pipe and smoke it.
The inspiration for dropping the legalise of its Term Sheet came from seeing the way the photo sharing site 500px updated their Terms of Service (TOS) with a second column with explanations written in plain English, says Passion Capital’s Burbidge. However, since, unlike a TOS, the majority, if any, of a Term Sheet isn’t legally binding, Passion realised it could go one step further. “So we knew there was no restriction on us to re-write the whole thing in plain English,” she says.
Of course, in retrospect or to an outsider looking in, the idea seems pretty obvious. Why, therefore, aren’t all Term Sheets written this way? Burbidge notes that some term sheets will have 1-2 clauses that are legally binding (Confidentiality and Exclusivity, for example), so that could be one reason. “But I think generally the main reason is to dress it up,” she says. By using legal jargon it looks a lot more “real” and meaningful and “the formality serves a purpose of making it feel ‘official’ and therefore more important.”
More cynically, it could be argued that a legally-worded term sheet is “also meant to be slightly intimidating,” says Burbidge. “And of course there is the most cynical view which is that when written in legal syntax it gives an advantage in negotiations to the party that understands (or drafted) the language in the first place”.
But, either way, googling archaic legal terms or going down the rabbit hole that is Quora trying to understand the likes of Liquidation Preference, Tag-along and Drag-along, isn’t necessarily the best way for an entrepreneur to spend their time (although, perversely, I quite enjoyed it).
For example, Passion’s new Term Sheet defines Liquidation Preference in these relatively simple terms:
We’re not asking for any complex preference rights… but we do ask for a so-called simple 1x liquidation preference. This means that if the company is sold, we’ll get the higher of either the amount of our investment or our ownership percentage of the sale value. In the worst case if the company is wound down with very little left, then anything left would be distributed to us as the investor.
“I’d rather take the time saved from having them parse through a legal term sheet and use that to sit down with them to talk about their go to market strategy, user acquisition, hiring the right team members or simplifying the product proposition”, says Burbidge. “Those are the areas where they should really be tested.”
Full Term Sheet embedded below (lawyers, look away now):