Sam Altman's Approach to Equity Investment

Sam Altman, known for his role as the president of Y Combinator, shares his approach to equity investment outside of the accelerator. He emphasizes a founder-friendly approach, focusing on fairness and transparency in his term sheet.

• Altman believes in offering compelling equity terms to attract the best startups, even if it means forgoing some downside protection.
• He emphasizes that "upside risk theory" justifies offering generous terms to gain access to high-potential companies.

Striving for Fairness: Avoiding Common Equity Pitfalls

Altman's term sheet aims to eliminate common practices that he considers unfair to founders, focusing on creating a win-win situation for both parties.

• He opposes the use of option pools to artificially manipulate valuation, advocating for a more transparent approach where new hires dilute all stakeholders, including investors.
• He rejects the practice of requiring startups to cover investor legal fees, prioritizing the use of startup funds for growth and development.

Prioritizing Transparency and Trust: Key Principles

Altman prioritizes building trust and transparency in his equity investment approach.

• His term sheet avoids confidentiality clauses, allowing founders to freely discuss the deal and maintain control over their company's future.
• He encourages open communication and collaboration, acknowledging that founder-investor relationships are long-term partnerships.

Focusing on Equity Ownership and Participation

Altman's approach focuses on equity ownership and participation rights, allowing founders to retain control and maximize their upside potential.

• He avoids complex equity structures and prefers a straightforward approach with a simple 1x liquidation preference.
• He prioritizes pro rata rights, ensuring founders maintain their equity ownership percentage in future financing rounds.
• This approach emphasizes the importance of equity distribution and alignment between founders and investors, fostering a collaborative relationship.

Early Stage Equity Investment: A Focus on Growth and Upside

Altman argues that early-stage equity investment should prioritize growth and upside potential rather than downside protection. He believes that founders should have the freedom to pursue their vision without being constrained by complex equity structures.

• He advocates for a streamlined and transparent approach, focusing on key equity terms and clear communication.
• He encourages founders to prioritize building a successful company, confident that future financing rounds will reflect the company's progress.

Creating a Foundation for Future Rounds

Altman's approach to equity investment aims to establish a fair and transparent foundation for future financing rounds. His focus on simplicity and fairness aims to minimize potential conflicts and facilitate future growth.

• He encourages founders to carefully consider their equity structure in early stages, as it can significantly influence future investment rounds.
• By establishing a foundation of trust and mutual benefit, Altman aims to create a positive and collaborative environment for both founders and investors.