Y Combinator Enforces ‘Handshake Protocol’ to Stop Dishonest Investors from Backing Out On Deals

 
 
 

Writing on Y Combinator’s blog, Paul Graham explains that — as of now — Y Combinator is implementing a handshake protocol, to ensure that investors and founders have a strict guideline for what constitutes a deal when a contract or legal papers are not immediately available.

Graham explains the protocol thusly:

  1. The investor says “I’m in for <offer>.”
  2. The startup says “Ok, you’re in for <offer>.”
  3. The startup sends the investor an email or text message saying “This is to confirm you’re in for <offer>.”
  4. The investor replies yes.

Graham encourages the texting to be done on the spot, and defines the following valuation levels as further stipulations of an agreement:

  • $100k at $5 million pre-money.
  • $100k at a $5 million cap.
  • $100k uncapped.
  • $100k uncapped with a %10 discount.

According to Graham, Y Combinator gets reports every quarter of handshake deals that fall through, either because of hazy agreement terms or dishonest investors.

Fred Wilson of Union Square Ventures touched on the importance of handshake deals this week as well, writing wistfully, “I often wish we could do business on a handshake.” We wonder if there has been some high-profile unfulfilled handshake deals in the startup community to incite a sudden embracement of the issue?