Creative Structures w/ Becki DeGraw | Wilson Sonsini Startup Legal Basics

Today's show:Wilson Sonsini Partner Becki DeGraw returns to Startup Legal Basics with Jason. This time, they dive into the "have" companies — the breakout startups with multiple term sheets, competitive valuations, and unusual deal terms. From founder voting proxies to mandatory follow-on investment clauses, Becki breaks down the creative "off-menu" structures showing up in today's financings, and what founders and investors need to watch for. Whether you're a founder navigating investor FOMO or a VC competing to get on the best cap tables, this conversation will give you insight into the new rules of the game. * Timestamps: (0:00) Jason welcomes Becki back to Startup Legal Basics (0:32) The "haves" vs. "have-nots" in today's startup market (1:28) Creative legal structures: the "off-menu" items (4:19) Travis' Uber favor & modern founder asks (7:05) Rise of secondaries & unusual board structures (11:22) Mandatory follow-on investment clauses in seed rounds? (14:13) Crypto's resurgence and legal implications (15:55) The decline of proper diligence in hot deals * Check Out Wilson Sonsini: https://www.wsgr.com Check out all of the Startup Basics episodes here: https://thisweekinstartups.com/basics * Follow Becki:LinkedIn: https://www.linkedin.com/in/rebecca-degraw-639bbb62/ * Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Follow TWiST: Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups Substack: https://twistartups.substack.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:04Jason Calacanis?

  All right, everybody. Welcome back to Startup Basics. This is the program where I get the people who are my partners who help me run my businesses to basically help you founders out there, angel investors, understand the game on the field. And you get some free advice, some free mentoring and legal is where, gosh, there's so much going on. And I'm so lucky to have Becky de Gra as my attorney. She's a partner at Wilson Cincini and she's been helping me do these startup basic shows for years. God, we've done so many of these and we talked on our last episode about the have nots and protective provisions, cram down rounds, all this hand wringing that's going on. But for every two or three have nots, we're starting to see a have and have a lot. So when you're on a heater, you got a great team.

• 0:48Jason Calacanis?

  You've got cash in the bank, you got revenue, you don't need to raise. What's the playbook now for that seed stage company that's breaking out and, you know, broke a million, two million in revenue, that series A company that has five term sheets that have to negotiate and you're picking between a lot of great options. Maybe even you got some overtures to be purchased, right?

• 1:07Speaker 01

  Yeah. Well, thanks for having me. It's always great to be here and do these with you. Legal oftentimes is, okay, yeah, we've got our playbook. We're going to do the same thing. It's the plain vanilla preferred stock financing. Not in this category. This is some, some fun stuff. I've been doing this for 18 years and there's some things that I'm seeing that I've never seen before.

• 1:28Jason Calacanis?

  So do tell, do tell. I want to know where all the off menu items are. I know the standard documents. I got them all and standard documents. You know, you go to your chat GPT and pull up a standard nondisclosure agreement now, all of that. What I would call chores for y'all in the legal community, like those chores are boiler plated. It's getting easier to get those out, but man, the complexity and the importance of your first round of financing, your first board of directors, maybe taking loans, doing a secondary sale, taking some money off the table. These are things that are the high order bits. These are the. Decisions you make that my friend Ruloff from Sequoia calls the crucible moments for your startup. So let's, let's talk about those hard decisions founders have to make when,

• 2:14Jason Calacanis?

  you know, they're the belle of the ball.

• 2:16Speaker 01

  Yeah. So, you know, it feels like we're back in 2021 all over again. You would look at, wow, all this that we've went through in 2022, when things started slowing down and 23, when it was crickets and wow, everybody's a lot of uncertainty. Well, guess what? Like in this category of the have companies, it is 2021 all over again. It's heyday, it's super competitive, multiple term shades, like you said, super company friendly terms, founder friendly terms, reduced diligence. Companies can really kind of pick which investor will provide the easiest path to funding because they have multiple investors lined up who's who are willing to write checks. And right, like that kind of relates to one

• 2:59Speaker 01

  of the things that we talked about on another episode, which is there is a lot of supply out there. There's a lot of dry powder for when, so when you do have one of these hot companies, everybody wants to write a check. Everybody wants to get in and the company can't do a little picking and choosing on folks. I would say I represent companies about half the time and investors half the time. Investors are throwing their playbook out the window when it comes to these types of companies and you kind of have to in order to get in. It's that same FOMO that was happening in 2021. How fast can we do this? Yep, I've never done this before, but I'm willing to accept it. So what are some of the things we're seeing? This is, this is the off the menu.

• 3:40Jason Calacanis?

  I like it.

• 3:41Speaker 01

  A la carte?

• 3:42Jason Calacanis?

  Yeah.

• 3:42Speaker 01

  For what you like.

• 3:43Jason Calacanis?

  Let's go. You surprised me. Give me some terms here.

• 3:48Speaker 01

  So it's not necessarily good things for the investor, though.

• 3:52Jason Calacanis?

  No, no. Yeah, sure.

• 3:53Speaker 01

  So founder proxies. The way it works is if we let you, investor,

• 4:00Speaker 01

  Buy my shares in a secondary or participate in a tender offer where you're going to buy lots of employee shares in a secondary. You have to give me the founder a voting proxy over your shares.

• 4:12Jason Calacanis?

  Hmm.

• 4:13Speaker 01

  Yeah.

• 4:13Jason Calacanis?

  Like. I like it.

• 4:15Speaker 01

  If you're on the company's side.

• 4:16Jason Calacanis?

  Yeah. Well, interestingly, some number of years into the cab company, my friend who was running at Travis was having, you know, a little bit of chippiness on his board, you may have read. And I was a shareholder with a significant number of shares, not anything close to a founder, but you know, every vote counts. And I wanted a little liquidity because the uber valuation had gotten so high that the percentage of my net worth was getting seriously out of balance. And, you know, people predicting the end of that company since the day it was born. Putting that aside, I was like, you know, maybe take a little chips off the table at an incredible price. I think I sold some shares early at like $32 a share, long before Masah bought his.

• 4:59Jason Calacanis?

  And, you know, I was talking to my friend and he said, you know, I could use a favor. It's up to you, but can I vote those shares so I have a little extra protection? You know, every little point here and there matters. And I said, sure. Yeah, you're my guy. You got me into this. You're responsible for 90% plus of my net worth. I am more than happy to give you my shares to vote. And a number of us did that to try to help him. It didn't work, but.

• 5:23Speaker 01

  Yeah.

• 5:24Jason Calacanis?

  Right there. And I guess for an angel, it's much different than a fund because with the fund, if you were to do that, you had a board seat, they could vote you off or, you know?

• 5:34Speaker 01

  So that's where, that's where the devil's in the details.

• 5:37Jason Calacanis?

  Yeah.

• 5:37Speaker 01

  And what exactly can that founder vote for? So oftentimes we carve out the director seat.

• 5:43Jason Calacanis?

  Hmm.

• 5:44Speaker 01

  We may carve out specific protective provisions, but it's not, it's not even all. So right, if you buy in a secondary, a lot of those secondary shares are getting exchanged for preferred shares. So I buy common from employee, but then the company doesn't exchange. So I now have preferred shares, but in it, in return for this gift that you gave me to participate, I'm now going to give you a proxy over my preferred shares. And then we carve out one or two things, but. It's it's kind of crazy world out there that big funds are saying, yep, all right, big checks to to to do that. And you can you can vote my shares.

• 6:26Jason Calacanis?

  And this is because of the power law, and we all serve at the altar of the power law. If a company is breaking out and you own preferred shares in it, and it's Robinhood, it's Uber, it's Coinbase, and you're lucky enough to get on those cap tables or SpaceX. The common thinking amongst investors with a lot of experience is you just need to own a piece of that company because they're so rare that if you have a chance to get on that rocket ship, in SpaceX's case, quite literally, you just take it. You take your seat and you shut up. Now, asking for those things early on, before you've proven anything, I'm assuming we don't see too much of that. Yeah?

• 7:05Speaker 01

  I would say we're not seeing this like in the C day, but we are seeing it as early as B. It's not waiting until your crossover, until your pre-IPO round. This is coming in much earlier than we than we would have. And so are secondaries, right? We're seeing a huge uptick in secondaries right now for the category of the haves because remember, there is that whole other category that we're not talking about in this connection. But when you are in that category, it is, it's it's high flying, great terms for the primary, and I'm throwing secondary on as well. Some of the other stuff we're seeing, we're seeing companies that have raised over over a billion dollars, and there are no

• 7:50Speaker 01

  preferred directors on the board.

• 7:53Jason Calacanis?

  What?

• 7:54Speaker 01

  I know.

• 7:55Jason Calacanis?

  This is crazy. Like, governance is a good thing. Somehow, we got into this very weird, you know, and it's a little bit of Paul Graham, I think, had a bad experience before Y Combinator. He's always talks about it publicly, I'm not speaking of school here, where he felt like the VCs had too much power. And certainly during that era, that was true. And then this idea that like, somebody got in their heads that the investors are the enemies, or a board of directors is adversarial, is the opposite of, I think, the game on the field today. The the board of directors shows that that individual is giving you their most precious resource, which is their reputation and their time. Whereas, anybody can buy some shares in your company and then, you know, go on vacation, go ski in Japan or whatever.

• 8:38Jason Calacanis?

  People do, that's me. But you, you having John Doerr on your board, or Michael Moritz, or Ruloff, or any of these like high flutin individuals with big track records, Mary Meeker, like, that's an incredible gift.

• 8:53Speaker 01

  It really is.

• 8:54Jason Calacanis?

  Something's getting lost here.

• 8:56Speaker 01

  I think you're absolutely right. I sit in a lot of board meetings when I'm representing companies we always attend. Oftentimes, counsel is quiet in the corner, but we get to hear and see and observe it all. And man, when you have a good board member, particularly those that are the greats of the industry, you are getting one-on-one time with them to where they're paying nothing but attention to your business. And what, how can I help you improve it? Who can I introduce you to? Where do I see holes? I mean, that's just like, that's amazing.

• 9:29Jason Calacanis?

  The dream. It's the dream. It literally was the dream for Gen Xers and Millennials. And then I think this weird thing occurred. And gosh, I see some of these rudderless companies. And one of the ways we decide if we're going to do follow-on funding is, okay, the number of people who are competing for the next round, that's a really good signal for us as an early-stage investor. But we always want to see a priced round at some point. And we want to see somebody of quality join the board and governments, governance to arrive. And we say, you know, if you own over 5% or 10% of the company, we would like the option of a board observer seat or a board seat. A little flexible on the margins there. And when I had that conversation with founders, I'm like, I know you've heard from the industry, oh, you know, you don't want to have great board members, you don't

• 10:14Jason Calacanis?

  have board members, you don't have board meetings. When you have those board meetings, and something goes wrong, and you need advice, or you need money, or you need an M&A landing? If there's no board, then there's nobody to go to who can tell your story to Sergey at Google, or Elon at SpaceX, or, you know, Zuck at Meta. Those people have those connections where they could send an email and say, hey, I'm on the board of this company. Now Zuck looks at that, or Elon looks at it and goes, okay, you wouldn't waste your time, you're a quality person. And this might be an interesting thing for you to look at for an acquisition. Just like you gotta think in a decade long period here of all the things that could go wrong. Oh, God.

• 10:54Speaker 01

  But I think a lot of our, a lot of the founders are, not me, up into the right, high valuation. I have no problems in my future. Uh, but for those of us that had been around for a long time, we know there will be.

• 11:08Jason Calacanis?

  We talked about it. We talked about it on the last episode, like the half nots. Those were the people who were the high flyers who stumbled and then their boards are the ones who, you know, are going to eventually help them work these things out. Uh, so gosh, incredible.

• 11:22Speaker 01

  I've got one more for you that I got, that I got. I, I want to share because I also want to see if you've come across this or you've had to, had to deal with this. So, um, this one goes like this, like, okay. And, and I saw this in a series seed, okay? So series seed financing.

• 11:38Jason Calacanis?

  Okay. So five, $10 million financing. It's two year old company.

• 11:42Speaker 01

  This was an AI company, so.

• 11:44Jason Calacanis?

  Okay. So maybe it was 10, 20, a little higher, but you know, it's, it's a two or three year old company with 20 people in all likelihood as a footprint. But okay.

• 11:52Speaker 01

  And it says, if you invest now and I let you come into my seed round, you have to also invest in my next immediately following round at a predetermined step up in valuation. And yeah, yeah, I've, I've literally seen this to where it's like, if, if you want in, if you want to be in my seed round, you gotta agree to participate in my A round essentially. And I'm going to tell you what the price of that A round is. And we're going to agree today that this is the big step up. I've had one, I've had one, most of them have like a, a range or have a predetermined. I've had one where there was a range at the company's discretion of what the valuation would be at the next round.

• 12:35Speaker 01

  But you already signed in your series seed that you're going to invest, that you're committed.

• 12:39Jason Calacanis?

  Dangerous for all parties to do these kinds of things because if you haven't hit the milestones and the money's not in your bank account, the VC has to send the money. Now let's say you haven't performed. Now the VC could say, the reason we're not sending the money, even though we agreed to it is we believe that this hasn't, startup has not been run properly, could find some pretext. To say, we're not funding for these reasons. You guys didn't perform and they could, you know, then all of a sudden you're in a lawsuit with your venture capitalists to get them to compel them to put the next money in. It's very dysfunctional. And then what if your startup breaks out and it's worth more than the valuation, you get a billion dollar valuation and you you pinned it at 200. Now what happens?

• 13:23Speaker 01

  Yeah.

• 13:23Jason Calacanis?

  You just gave them a better look.

• 13:26Speaker 01

  Yeah, it's it's it's but it's it's really interesting. The stuff that investors are willing to agree to out of fear. Don't leave me out. I want in on this one. Right?

• 13:36Jason Calacanis?

  Well, it all goes back to what we discussed on the previous episode was the game on the field is there's so much dry powder. If there's too much supply and not enough demand, you could see weird things happen in the market. There was too much demand and not enough supply. In this case, it would be too much demand for investment dollars and not enough supply of startups. So there's too much demand and a small number of startups. You have people competing on a small number, you know, of, you know, hotel rooms during F1 and the price of the hotel room is going to go up. That's it. You know, there's just not that many of these rooms and you want to stay at the best place near the track. Sorry, this is the way it's going to go. Crypto seems to have been, you know, my friend David's working there in the White House and they're

• 14:19Jason Calacanis?

  trying to make some regulations. So you're seeing more activity come to your firm with regard to crypto because I know in the past, I had maybe three or four companies that pivoted into crypto, never really tried to get into crypto too much because I was worried about regulations, specifically law. I wanted to break it. But some of them did anyway, but they all used, you may not say this, but I'll say fugazi fugazi law firms in the BVI and, you know, Panama, etc. But it does seem like with onshoring, does that mean people are starting to go to the legit venture firm, legit legal firms to get advice and counsel now?

• 14:58Speaker 01

  We've had a big uptick, so much so that we have hired a few folks specifically to help on the crypto side of things. Crypto a few years ago, I was like, okay, I'll become first in it and try to understand it because a lot of mainstream investors were starting to be like, well, maybe we'll go. And then FTX happened and then. Uh, I decided, okay, that's, that's a lot of wild, wild west. I'm going to leave that for, for our other colleagues at the firm to handle, but they are very, very busy right now. And it definitely is a crypto boom happening. I think there is a lot of uncertainty still in

• 15:36Speaker 01

  terms of where is that going to go? Um, you know, we had a crypto boom and then who did it fall far?

• 15:44Jason Calacanis?

  Yeah.

• 15:44Speaker 01

  I think that, you know, I wouldn't be, I wouldn't be surprised if when it happens that there is kind of more dramatic shift in that

• 15:53Jason Calacanis?

  Yes.

• 15:54Speaker 01

  industry.

• 15:55Jason Calacanis?

  Well, you know, if you're doing something super speculative and you have a lot of participants who are momentum investors who are, don't have, we talked about protective provisions on both of these episodes, the episode with the have nots and the haves. The reason protective provisions boards, governance, Delaware law, all of this stuff became codified, refined, and the rule of law is so important is so that people feel comfortable investing. Now you look at the crypto space, if the people participating don't care about those things and they're just trying to see who has the most guts to hold on in this game of chicken longer, you know, uh, that's kind of

• 16:34Jason Calacanis?

  anarchy. Um, and you have to wonder if those people like to play a game that's based on anarchy and, you know, a big game of chicken. Some people might call them Ponzi. In some cases, they might have been, that attracts a certain element, I find.

• 16:49Speaker 01

  Uh, it is not for the faint of heart.

• 16:53Jason Calacanis?

  It's like when I played poker games, Becky, that's my counsel here. I got invited to some poker games that were not fully legitimate in their construction. I went once or twice and then I said to myself, this seems like a dangerous environment where at any minute the feds could come in or the police could come in or a rival gang or something could come in. How did I wind up at this game? Somebody who's a friend from the home game invited me to another game and they're taking a rake. And then sure enough, in the press, I hear about this high profile NBA guy who I knew through friends was playing these high stakes games in LA in that circuit. They were doing all kinds of fugazi stuff and they got, all got pinched. This is, I just decided I'll play

• 17:36Jason Calacanis?

  in the regulated game. I'm totally fine playing in a casino or regulated game with rules of the road. I don't know. It's not for me. If I can't understand how you make money and I can't understand the structure of the cap table, that's another thing that's weird. We'll end on this is due diligence. Does anybody besides me do due diligence anymore? You brought up FTX, a bunch of my friends Yolo'd money into that and it turned out none of them, I mean, these are blue chip, like best of the best investors who all relied on each other's diligence and a founder who was like mercurial and didn't want to do diligence apparently. And they were all like, well, we got to get in, therefore we'll

• 18:16Jason Calacanis?

  not do diligence? What's your advice there? What are you seeing in terms of people doing proper diligence?

• 18:22Speaker 01

  I think in the early stages, we're still seeing diligence. So your C to A companies, absolutely. Maybe here or there, there's, there's one that, that gets through with a lighter touch, but I would say that tends to be fairly normal. Where I am seeing some differences, and this is on the investor side I can speak to, is that those like super hot companies that we are all watching for the next wave of companies that might go IPO. And those companies have a, a line of investors out the door that are willing to invest. And when they decide, when they decide, it's not the investors, but when the company decides, okay, I'm ready to sell some shares,

• 19:05Speaker 01

  they know they have the line to go to. And they want to do it fast. They want to do it painless. And if that means if you're the, the investor at the front of the line and you say, okay, here's my laundry list of diligence that I want to do and I want to have these calls and it's going to take me two weeks to get through it, they're going to say, uh, next. Not you. So what we're having to do on the investor side of participating in these transactions.

• 19:36Speaker 01

  Is instead of just, you know, throwing across the bow, kind of a full laundry list. It's like, okay, let's be, let's be very specific about the things we care most about because we don't want to upset them and get kicked out of the room. I mean, it's, it is a, a little different mentality for those types of companies.

• 19:54Jason Calacanis?

  It's a negotiation. It's a dance. We try to prepare our startups in year zero, one and two of like, here's what a proper series A diligence is going to look like. Uh, let's try doing it at the seed round. And okay, these 20 don't apply, but these 10 do. Like, are you incorporated? Where are you incorporated? You know, show us your bank account. Show us the money in the bank account. Show us the cap table. Man, I would say half the time, there is a significant thing that needs to be cleaned up in diligence in order for it to just be passable. Like you didn't do IP assignments?

• 20:30Speaker 01

  Mm hmm.

• 20:31Jason Calacanis?

  You don't have documented the equity structure? There's, there's literally no cap table. You just have an oral agreement about this? Okay, there's no vesting schedule for you? Okay, we're seed investors, we're pre, we're pre-seed investors really in this world. And we just try to prepare people for what's going to come next. You, you have to get these things done. And if you have a great lawyer like Becky, she's going to tell you, hey, I know this is your first time at the rodeo, but you need to wear a saddle and he may want to put a helmet on because that buck, that buck, that Bronco can buck. You may want to put some elbow pads on, maybe a pair of gloves. I don't know, just thinking here out loud, you might need an IP assignment, vesting schedule, all basic stuff.

• 21:12Speaker 01

  Yeah.

• 21:13Jason Calacanis?

  It's just, uh, it's a really interesting to watch the market go through boom, bust cycles and just people suspend disbelief and then people are incredibly pessimistic and they become more diligent and they become less diligent, they become more thoughtful, less thoughtful. During all of this, this, these weather patterns, these increasingly chaotic startup weather patterns, you'd have a great attorney. That's why I got Becky.

• 21:41Speaker 01

  Thanks, Jason.

• 21:42Jason Calacanis?

  Thanks for coming on Becky. Another great one, a good banger, uh, and WSGR.com. That's it. They're the best in the business. Larry Cincini. That was a, that's a character right there.

• 21:54Speaker 01

  He's, he's still, still shows up to work.

• 21:56Jason Calacanis?

  He still comes to where I met him. He said, uh, yeah, you know, I was talking to, uh, Steve and I was like, Jobs? Yeah. Hey. Okay, Mr. Cincinnati. Yes, sir. Yeah, you know, I was talking to Larry number one and Larry number two. And I was talking to Larry and I was like Larry Page. Larry, yeah, I mean, he was like, literally, I don't know if he's still his. At that time, he was literally those three people's attorneys.

• 22:26Speaker 01

  Yeah, yeah. It's pretty amazing. Oh, it's, it's, it's, it's really fun when we have like our partner retreat and he will share some of the more lively stories. It's going back in a time machine. It's awesome.

• 22:40Jason Calacanis?

  It is, it is. And what a legend. I told him, I said, hi. I haven't seen him for 20 years. I literally met him when I was in my 30s in New York. I was running one of my magazines and I interviewed him. And just Wilson Cincinnati had opened their first office in New York. If you can imagine that, like 25 years ago. They're like, I think the Silicon Alley thing is going to be big. And I had Silicon Alley reporter. We did an interview with him when he opened the office.

• 23:01Speaker 01

  Awesome.

• 23:02Jason Calacanis?

  All right. Startup basics. Find it at thisweekinstartups.com/basics. You got to get your basics right. Have a great partner, yada, yada. See you next time. Bye bye.