Paul Graham: When a handshake does not mean a deal

Published on March 15, 2013

Paul Graham: When a handshake does not mean a deal

Original author: John Koetsier
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According to Paul Graham, a business angel and mastermind of many startups, deals in Silicon Valley are usually secured not with a contract, but with a simple handshake. But sometimes the handshake hides not quite what one of the parties to the agreement expects.

upd: Reading the article, it becomes clear that Paul Graham lives in some completely different reality - his investment deals are concluded with a handshake, and he already considers the confirmation of his intentions by electronic means “a long and redundant procedure”. Nevertheless, many startups are looking to the West in search of investors and accelerators, so it would be useful to look at another world through the eyes of its inhabitants.

Graham, disappointed in simple handshakes, came up with something new in this area.

From now on, when concluding a deal with Y Combinator (Paul Graham's investment company), startups will have to use the protocol consisting of 4 steps preceding the conclusion of the transaction:

  • The investor expresses a desire to participate in the financing of a startup in a certain amount.
  • The startup agrees and verbally reports it.
  • The startup sends the investor a message or letter, asking for confirmation.
  • The investor responds with a confirmation.

According to Paul Graham, the problem is that so many deals secured by a handshake are not deals at all. The investor could not express himself clearly or the start-up could be so impatient that in the very polite refusal of the investor he saw consent. In any case, novice investors, or simply dishonest investors, can do much harm to a startup:

“The problem is compounded by the fact that some investors deliberately mislead startup founders about how they are actually interested in investing. Startup prospects can change very quickly. If the investor answered “no” in such a way that it sounded “yes”, in essence, he gets the right to choose whether to invest or not. Since no agreement is concluded, it does not cost the investor any money. However, if the startup suddenly turns out to be successful, the investor convinces that his “almost yes” actually meant “yes”, and now the founder of the startup is morally obligated to allow the investor to invest ”

The process that Graham came up with at first glance may seem long, and some of his steps are redundant, but Paul claims that with mobile phones this procedure can be done in a few minutes, being face to face with the investor. Only in this case will there be a significant difference in the form of an email or a message confirming what the investor agreed to and what the founders of the startup expect from him.
It is also worth noting that Paul Graham is not alone in his opinions and before the publication discussed this idea with some business angels and Silicon Valley venture capitalists, such as Ron Conway, Ben Horowitz, Chris Dixon ) and Mark Andrisen (Marc Andreesen) and others.