This Week in Startups - Creative Structures w/ Becki DeGraw | Wilson Sonsini Startup Legal Basics

Episode Date: September 4, 2025

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.comCheck 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/JasonLinkedIn: https://www.linkedin.com/in/jasoncalacanis*Follow TWiST:Twitter: https://twitter.com/TWiStartupsYouTube: https://www.youtube.com/thisweekinInstagram: https://www.instagram.com/thisweekinstartupsTikTok: https://www.tiktok.com/@thisweekinstartupsSubstack: https://twistartups.substack.com

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 DeGra as my attorney. She's a partner at Wilson-Sucini. 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've got a great team. 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 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? 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 for first stock financing. Not in this category. This is some fun stuff. I've been doing this for 18 years, and there's some things that I've seen that I've never seen before. Do tell. I want to know we're all the off-manual.

new items are. I know the standard documents. I got them all. And standard documents, you know, you go to your chat cheapy team, pull up a standard non-disclosure agreement now, all of that, what I would call chores for y'all in the legal community. Like, those chores are boilerplated. 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 talk about those hard decisions founders have to make when, you know, they're the bell

of the ball. Yeah. So, you know, it feels like we're back in 2021 all over again. You will 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 are willing to write checks. And right, like that kind of relates to one 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 the off the menu. I like it. Alicart. Yeah. Let's go. Almost you. You surprised me. Give me some terms here.

So it's not necessarily good things for the investor, though. No, no, yeah, for sure. So the founder proxies, the way it works is, if we let you, investor, 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 of voting proxy over your shares. Yeah. I like it. If you're on the company side.

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 about. and, you know, people were 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 Masa bought his. 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 we were 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. So that's where the devil's in the details.

Yeah. And what exactly can that founder vote for? So oftentimes we carve out the director seat. 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 stairs. 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, it's, It's kind of crazy world out there that big funds are saying, yep, all right, big checks to do that. And you can vote my shares. 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 Robin or 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 experiences, 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?

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 would have. And so our secondaries, right? We're seeing a huge uptick in secondaries right now for the category of the halves. 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 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 a billion dollars, and there are no preferred directors on the board. What?

I know. This is crazy. Like, governance is a good thing. Somehow we got into this very weird, you know, and it was a little bit of Paul Graham, I think, had a bad experience before White Combinator. He always talks about it public. I'm not speaking of our 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 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. People do. That's me.

But you having John Doer on your board or Michael Moritz or Rulhoff or any of these like high flute and individuals with big track records, Mary Meeker, like that's an incredible gift. It really is. Something's getting lost here. I think you're absolutely right. I sit in 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. 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 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.

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 rudder list 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 governance to arrive. And we say,

if we 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 have 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 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 Sergei at Google or Elon at SpaceX or, you know, Zoc 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 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've got to think in a decade-long period here of all the things that could go wrong. Oh, God. 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. But for those of us that had been around for a long time.

And we know there will be. 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. So, gosh, incredible. I've got one more for you that I got it. 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 this one goes like this, like, okay, and I saw this in a series seed.

So, series seed financing. Okay. So $10 million financing. Two-year-old company. This was an AI company, so. Okay, so maybe it was $10.20, a little higher. But it's a two or three-year-old company with 20 people in all likelihood as a footprint. But okay.

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 literally seen this to where it's like, if you want in, if you want to be in my seat round, you got to 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 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. but you already signed in your series seed that you're going to invest, that you're committed.

Dangerous for all parties to do these kind 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 agree to it,

is we believe that this hasn't, startup has not been run properly. They 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 capitalist 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 pinned it at 200. Now what happens? Yeah. You just gave them a better look. Yeah. But 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. 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. Or it's 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 of, 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 trying to make some regulations. Are you 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. I never really tried to get to crypto too much because I was worried about regulations, specifically law. I'm wanting to break it. But some of them did anyway, but they all used, you may not say this, but I'll say Fulgazi, Fugazi law firms in the BVI and, you know, Panama, etc.

But it does seem like with insuring, does that mean people are starting to go to the legit venture firm, legit legal firms to get advice and counsel now? We've had a big uptick, so much so that we have hired a few folks specifically to, 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 I decided, okay, that's a lot of Wild Wild West.

I'm going to leave that 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 terms of where is that going to go. You know, we had a crypto boom and then who did it fall far? I think that, you know, I wouldn't be surprised if when it happens that there is kind of more dramatic shift in that industry. Well, you know, if you're doing something super speculative and you have a lot of participants who are momentum investors who don't have. 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, that's kind of anarchy. 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, some cases they might have been. That attracts a certain element, I find. It is not for the faint of heart. It's like when I played poker games, Becky. That's my counsel here. I got invited

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 with 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 Fugasey stuff and they all got pinched. This is I decided I'll play in the regulated game.

I'm totally fine playing in a casino or a 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. I'll end on this is due diligence. Does anybody besides me do due diligence anymore? brought up FTCs, a bunch of my friends, you'll load 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 not do diligence. What's your advice there? What are you seeing in terms of people doing proper diligence? I think in the early stages, we're still seeing diligence. So your C to A, companies absolutely. Maybe here or there, there's one 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 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, 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 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. Yeah.

Not you. So what we're having to do on the investor side of participating in these transactions 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, uh, 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 right now. 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. 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? 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. up in diligence in order for it to just be passable. Like, you didn't do IP assignments? You don't have documented the equity structure. 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-seed investors, really, in this world. And we just try to prepare people for what's going to come next. You have to get these things done. And if you have a great lawyer like Becky, he's going to tell you, hey, I know this is your first time at the rodeo,

but you need to wear a saddle, and you may want to put a helmet on it because, 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, investing schedule, basic stuff. Yeah. It's just, it's 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, then they become less diligent, they become more thoughtful, less thoughtful. During all of this, these weather patterns, these increasingly chaotic startup weather patterns, you'd have a great attorney.

That's why I got Becky. Thanks, Jason. Another great one, a good banger, and WSGR.com. That's it. They're the best in the business. Larry Sincini. That was the character right there.

He still shows up to work. He still comes to where I met him. He said, yeah, you know, I was talking to Steve. And I was like, jobs? Yeah. Hey. I was like, hey, Mr. Sincini. Yes, sir.

Yeah, you know, I was talking to Larry number one and Larry number two. And I was like, Larry Page. Larry, Allison. Yeah. I mean, he was like literally, I don't know if he still is, but at that time, he was literally those three people's attorneys. Yeah. Yeah. It's pretty amazing. Oh, 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. It is. It is. And what a legend. I told him. I said, hi. I haven't seen it for 20 years. I literally met him when I was in my 30s in New York. I was running one of my magazines. I mean, interviewed him. And just Wilson's Cincinnati had to open their first office in New York, if you can imagine that, like, five years ago. They're like, I think the Silicon Alley thing's going to be big,

and I had Silicon Alley reporter. We did an interview with him when he opened the office. Awesome. All right. Startup Basics. Find it at this week in Startups.com slash basics. You got to get your basics right. Have a great partner, yada, yada. See you next time. Bye-bye.