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Times are good for internet entrepreneurs. VC money is flowing again, supporting a startup boom the likes of which hasn't been seen since the late 1990s.

Large companies aren't shy about acquiring technology and talent, and for the most promising companies, the public markets are once again open for business.

Although much of the startup investment activity and buzz is focused on startups in Silicon Valley and New York, Europe isn't without startup action of its own.

In an effort to facilitate the kind of seed-stage investment activity seen across the pond in the United States, 22 VC firms that provide early funding to startups have come together to agree on two standard financing documents for seed investments.

According to SeedSummit, which led the initiative, "The documents are meant to serve a common goal for the community: making seed funding easier to access, better to understand, and fair for all parties. We are looking forward to them being used, adapted, and spread."

On paper, this sounds nice, but is this really good for entrepreneurs?

The short answer is 'no'. Although many entrepreneurs, particularly those who are younger and don't have much experience, may not be able to negotiate the most favorable investment terms in the first place, the notion that investors have come together to make their investments "fair for all parties" is a tad naive.

As The Guardian points out, "it is worrying that this is a term sheet designed not for experienced entrepreneurs likely to know when they are being sold a pup, but for first-timers taking seed funding." One unnamed source tells The Guardian:

It's a sign of too much capital. The first thing a supplier of a commodity tries to do the minute there's an oversupply is control the terms ... What they are trying to do is force an investor-friendly set of docs onto the ecosystem under the guise of transparency for the ecosystem and making it easier for the founders who don't know what standard terms are.

With this in mind, young entrepreneurs should be careful about assuming that because certain terms are "standard", they can't or shouldn't be negotiated. Take, for instance, the following terms:

That the investors must approve all "important decisions."

This goes well beyond future financing decisions and includes any decision to pivot ("effect any material change to the nature of the business or the agreed business plan").

What's important to note, of course, is that seed investors typically acquire a minority stake in young companies for a relatively small amount of money (usually six figures). In these types of deals, giving up total control to investors through an "important decisions" clause is absolutely insane in my opinion.

That founder shares vest over three years with a one year cliff.

Such a vesting schedule may be common and reasonable in larger financings, but more and more startups today are gaining traction and revenue before they look to raise money. In some instances, they don't even need money.

Entrepreneurs in these situations might want to think long and hard about having to earn back equity they might reasonably argue they've already earned, particularly when raising a small (sub-seven-figure) seed round.

That founder share vesting be accelerated when there's a change of control subject to a double trigger provision. 

What this means: if your company is acquired, the vesting on your unvested shares will only be accelerated if you are terminated or demoted by the acquirer.

This is popular with VCs, but there are plenty of reasons why entrepreneurs who agree to vesting in the first place would want to question why acceleration should be subject to a double trigger provision.

That the startup pay for the transaction.

Again, this may be commonplace, but for many startups today that don't even need capital or that have significant interest from multiple investors, having to take five figures from the proceeds of a small seed round to pay for the costs of the financing (legal, accounting, etc.) is probably worth pushing back on.

At the end of the day, young entrepreneurs would be wise to seek the counsel of an experienced advisor or attorney before agreeing to any standard financing terms -- "standard" or not.

SeedSummit's financing documents may or may not facilitate easier access to seed capital in Europe, but they almost certainly will not facilitate pleasurable experiences for young European entrepreneurs.

Patricio Robles

Published 8 July, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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