From Click to Contract: Why Reviewing Standard Terms Matters

I came across a thoughtful essay by José Ancer partner and CTO at Optimal [The Problem with “Standard” Term Sheets (including YC’s] - a bit old (2019) but still highly relevant. He makes some great points using YC's Series A Term Sheet as an example. (the bullets below our my words - so I recommend you read the full essay)

• Being short by design, YC's Series A Term Sheet benefits investors due to it providing speed at the expense of leverage for startup founders, and VC get full veto rights on equity financings

Another great example of "standard" being not necessarily favorable to startups is the YC Post Money SAFE. It effectively provides investors "full rachet anti-dilution".

• Being "standard" is somewhat a self-fulfilling prophecy, in that if a dominant player such as YC labels something as "standard" the market moves it into "standard".
• Misalignment of "risk" between investors and startup founders, create incentives for investors to push their "standards" onto startups through ways that don't make themselves look aggressive.

Again, I thought it was thoughtfully written. Inspired, I wanted to add a point about the benefit of knowing the "standard terms" as a startup founder.

Standard= Common ≠ Good terms

Most contracts or agreements are never reviewed by legal professionals before they are signed (or agreed to by clicking "accept"). It’s estimated that there were 4.7 billion e-signature transactions in 2023. [1] The vast majority of contracts I have signed have not been reviewed by a legal professional on my behalf. Why is that? Is it because of the relatively small amounts of money at stake? No. Most people, including me, don't have lawyers review contracts for large purchases, such as cars or even homes. The reason is the belief that most of these contracts are "standard" contracts with standard terms.

No one in their right mind would sign a contract handed to them by a stranger on the street, but they will sign, without hesitation, the terms and conditions (T&C) for the app they downloaded from the App Store. This is based on trust in the "market" or "norms"—the belief, for better or worse, that what is common is also standard, and what is standard is considered "fair" or "market."

But as José stated in his essay, 'common' or 'standard' doesn’t mean those terms are the best for you; it just means they are what is considered "market." So, what is the value of knowing what the standard terms are?

Standard Terms as Red Flag Filters

'Standard terms' act somewhat like the Kelley Blue Book Fair Market Range. If a certain term is standard (or common), it’s probably within the 'fair market range' for that term. However, if it's outside that range, it might indicate a bad (or good) deal. Depending on your unique situation, being outside the fair market range could be expected and acceptable.

By comparing your terms with the common ones, you can identify out-of-market terms, which may signal a bad deal or at least indicate terms that could be negotiated. In this way, comparing the terms in your contract with standard ones is an efficient way to scan for potential 'red flags.'

You know the contract you are going to sign because you think its standard? Run it through JIGO and check if you should send it to a lawyer.

JIGO helps you quickly check the contract you were asked to sign, or the one you generated with ChatGPT, for terms that are not standard or out-of-market.