Let's Make a Deal

How Handshake Deals Work in Angel Investing

Step 1 (optional): Read this article (see credits below).

Step 2: Listen to (subscribe to beta app below) or read the key points, case study and advisor’s take below.

Step 3: Review the SAFE documents and if you have questions let’s talk!

Key Points:

From the perspective of the investor unclear communication around whether and what you’re investing and getting for that investment can lead to misunderstandings and even reputational issues. Some startups may overestimate interest, and some investors misrepresent their intentions. Don’t be that investor. The handshake protocol provides a clear framework for handshake deals, eliminating ambiguity. It requires a specific offer with a defined valuation cap, followed by a confirmation email from the startup with a time-bound deadline for acceptance. This creates a clear paper trail, reducing the risk of disputes and discouraging misleading behavior from both parties. It also forces investors to commit upfront, eliminating the "free option" loophole. Reserving the right to invest after the round gets popular by giving a Maybe instead of giving a Yes or No.

From the perspective of a founder negotiating fundraising can be slow and cumbersome. When done right handshake deals can be useful to secure funding quickly and avoid losing opportunities. A deal that lacks clear protocols leads to uncertainty and potential for investors to back out. The time-bound nature of the handshake protocol gives startups a way to move on if an investor is indecisive. It also provides a clear process for documenting the deal and resolving disputes if necessary.

Advisor’s Take:

I get a number of inbound opportunities to invest and generally try to say No quickly if I’m not interested. When I’m not sure I try to think about what could give me more clarity. If the answer is time I generally say No to the specific request. I have seen some investors ask how a round is coming along before deciding whether to join in on the action. Nothing wrong with asking but I think a fast No is better than a Let’s See.

In practice what this will look like is the following:

/pa

During an investor day the investor says “I’d be interested in investing x thousand bucks.” The startup sends an email saying “Please confirm you’re in for x thousand bucks at a $x million dollar cap.” The investor responds Yes. You should still follow-up to sign a SAFE and provide wire instructions but you’ve now made it clear that you’re on the same page and created a record. I’d recommend using the standard SAFE documents. When in doubt a post-money cap-only SAFE is the go-to. I’ve seen discount plus cap SAFEs but they’re rare and generally unnecessary. In this situation I’d recommend negotiating the cap instead of going for a discount and cap. If you must wear a belt with suspenders it may be time for a new pair of pants.

Credits: Many thanks to Y Combinator for the materials. We wrote the summary. Y Combinator wrote and owns the articles. We are consumers of the wonderful resources at Y Combinator but have no affiliation.