It's so important that YC went through the effort to codify the process: http://www.ycombinator.com/handshake/
Example: When I met Peter (Contextlogic now known as Wish) I wrote him a physical check within a day (pretty sure it was his first) as I planned to take whatever terms he ended up negotiating. And then I immediately started brining in other investors, introductions to engineers, etc
So don't take this post as a "Brian screwed me" / the screwing was all self inflicted and a very important lesson
But those who aren't willing to pull the trigger quick enough miss the great deals.
It also sounds fairly intuitive when you verbalize it: the faster you can update your (presumably sound) strategy to new information, the "better" you are likely to do compared to someone who responds to changing information at a slower rate.
He's known for being bold and writing checks on a first meeting. Why didn't he write a check to Airbnb after months of haggling? YC, or any other investor, was free to come along and close the deal at any moment. The way an investor claims a deal is with their checkbook (or a signed term sheet). He learned his lesson and realizes his mistake. Airbnb did nothing wrong.
Is it prudent though? I understand the need for expediency, but surely you need to do some due diligence?
I think the comments have gone off on a tangent focusing on whether you getting cut out of the deal was ethical (whereas the blog post was just a flat out interesting story to read about). But at least the way your post reads, you definitely got screwed out of the deal. Sure, nothing is done until things are signed, but as many investors have told me "my reputation is everything". Seems like it should go both ways. This certainly doesn't reflect positively on the founders.
Nothing's done until the papers are signed. This goes for all things in life, too, from investing to renting apartments. If you don't have a signed piece of paper, you have no deal.
In any case, I apparently place too high a premium on paperwork. In another comment thread on this story, someone pointed out that the remedy for breach of contract is to unwind the wrong party's situation to the position they were in before the contract was signed. In this case, until the check has been deposited and spent, it's trivial to tear up the paperwork.
a) They wouldn't have turned around for advice from YC
b) YC deciding to come over the top once hearing the news
I agree with your assessment that YC was probably trying to keep dumb money out of the cap table but I also hypothesize they originally underestimated the team and once they saw they were actually able to put a TS together that was proof enough their original calculus was wrong and they circled back around. I don't think you were getting this deal either way.
Now, this particular VC has only raised about 800mm, so I don't know if that makes them a Tier-1 VC, but it still made me realize that you don't ever know until the money is in the bank account.
Thankfully, Foundation Capital (an awesome Tier-1 VC), stepped up and kept us running/covered payroll and rent, until we found someone else to get money from.
I'm curious how this works, legally. If they make the offer and you sign the papers, doesn't that legally obligate them to follow through on their offer?
So at the moment you sign the paper, but don't hand over money or burn other bridges or whatever, it is trivial to tear up the paper.
Really, the moral obligation to consummate a deal is only policed by reputation. And that is not often discussed out loud (see, for example, how parent describes the deal but doesn't name the last-minute-back-out VC).
(Plus there are whole other big cans of worms for discussing investor reputation online "out loud" -- it CAN be done and there is a lot of truth out there, but a ton of noise. The real scoop is generally spoken 1:1 over the phone, or over coffee in person.)
Interestingly, the whole gist of TFA is that investors should move fast once they have conviction. But the more they do that (instead of "front-loading" diligence and negotiation), the more like it is that you get last-minute backing out (or perceived backing out).
The way the VC firm I'm affiliated with has always handled it is to "front-load" diligence, and treat a signed term sheet as if it were very nearly binding and final. I think we've pulled ~ 2 signed term sheets, out of almost 100 new deals over the years.
Point is, you can't have your cake (enjoy super-fast handshake commitments without the diligence that is "due") and eat it too (enjoy high certainty of closing on those commitments).
https://en.wikipedia.org/wiki/Offer_and_acceptance
IANAL, TINLA.
I'm gonna go out on a limb and assume that the investor already possessed emails saying "Let's do this" with numbers in it. Is that different than a signed term sheet? You bet -- it's not legally binding! But it also meets all the requirements of the gentleman's agreement -- aka YC Handshake protocol:
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.
On the tangent of the protocol as the protocol, I also note that it is meant to be exclusive. That is, you don't construct it by piecing together the individual events -- it's written as a once off 2-phase transaction with no other intervening steps to prevent shenanigans and mistakes.
All the startup has done is repeat verbatim what the investor said. In this situation the startup has signaled receipt of the investor's offer and has not signaled intent to ratify or otherwise accept.
>1. The investor says “I’m in for [offer].”
>2. The startup says “Ok, you’re in for [offer].”
You'll notice that the startup has only repeated back what the investor said, correcting for the inverted subject-verb and adding a customary signal opening. The startup has confirmed receipt of the investor's signal.
>3. The startup sends the investor an email or text message saying “This is to confirm you’re in for [offer].”
The startup confirms receipt on a secondary channel.
>4. The investor replies yes.
Waiting on communication from startup.
If you follow sports at all, you know what I'm talking about.
edit:http://www.tmz.com/2015/07/09/deandre-jordan-clippers-may-ha...
Possibly this? Interesting term in there re: handshakes, called "promissory estoppel".