A dear friend and excellent negotiator told me that when he gets any kind of short-term exploding offer, the first thing he does is verbally reject the deadline. And the second thing he does is ignore the deadline and offer feedback only after it has passed.
I've seen him employ this many times in practice and it has always worked out. I don't want to be responsible for anyone losing a deal, but remember: when someone offers you an exploding offer, it's because they really, really want you to take it. If anything, it should be a sign there's (a) more time to be had, and (b) plenty of room on the terms.
Any deadline claim has to be concrete and believable. The start of the YC program is a good example.
This reminds me of SharkTank where Mark Cuban would make a shot-clock offer and give 30 seconds for someone to accept the offer.
Here's the thing. Mark Cuban can walk away from any deal, at anytime and not feel like he is missing out.
So, while you are certainly getting the shorter end of the stick with an exploding offer...It's usually coming from a place where the person making the offer has enough leverage to be ok with losing the deal.
In this case, waiting will make you lose the deal.
Sometimes, a good enough offer is better than a slightly better offer.
More importantly, as Robert Ringer says, "The results you get out of a negotiation is inversely proportionate to how intimidated you are when negotiating."
That, and most of the deals he (a Billionaire) is talking about investing in on Shark Tank involve him doling out incredibly small and insignificant sums of money for equally small and insignificant (in his eyes) returns.
He really doesn't care if you take the offer or not on Shark Tank, because even if you do and you succeed beyond your wildest dreams, it's not going to make him any richer than sitting through a Dallas Mavericks game would.
The one thing I've learned about negotiating is that you absolutely must know your negotiating position before evaluating your strategy. Parent post and grandparent post are both perfectly fine points, and how they apply to each of us depends entirely on our set of circumstances.
Equally as important is positioning yourself prior to the negotiation. How the other person views you is one of the strongest drivers of how they will negotiate.
Edit: This is why getting introduced to an investor puts you in a much stronger position than soliciting them directly.
"you absolutely must know your negotiating position before evaluating your strategy"
This is essentially true in any decision-making situation, not just financial negotiations.
I was a really crappy grad student, but I went into my dissertation defense knowing exactly what I was bringing to the table and it went very well. Ditto for the better job interviews I've had.
Also about how many options you have for yourself. You never want to put yourself in a situation where you might get an exploding offer without something else in hand.
Unfortunately I didn't follow this advice when recently buying a car.
It's difficult to imagine a situation where it's rational to offer another rational actor an exploding offer to buy a car. Jobs sometimes need to be filled quickly. But when is selling a car today so much worse than selling one tomorrow?
It sounds like the "exploding offer" another scumbag car dealer pressure tactic. Car dealers will do anything, including lying, to prevent you from negotiating efficiently.
Car dealers have sales targets for each month. If they hit the target, they usually get a big bonus from the manufacturer.
I've gotten a dealer to sell me a car under dealer price by e-mailing every car dealer in the area on the 29th of the month, saying I was looking to buy a (specific model of a) car immediately. All you have to do is find the one dealer who is 1-2 cars away from hitting their bonus target. It is rational for them to sell to you under cost because they will more than make it up in the bonus; it is rational for you because well, it's under cost.
For those curious, This American Life did a whole podcast on the end-of-month car sales thing. It was quite fascinating and really does exist.
One of the more interesting points in the entire thing came in the first minute where they point out that things like the end-of-month sales impact the entire US economy because it has to do with auto sales, and GM and steel working and etc follow up the chain. Weird to think of it like that.
For some reason this brings back memories of Soviet style end of month production cycles, where the goods made earlier in the month were of better quality than those made by rushing in the last few days of the month.
It'd make a lot more sense to everyone if the 30-day periods were staggered for each employee, and if they could score "assists" for fellow employees (said fellow employee would need to agree, of course). This would probably make the sales process far more sustainable and team-oriented.
Of course, companies that haven't set their own quarter ends (my employer's quarter ends on a different day than the calendar quarter) are also subject to a similar larger-scale rush-to-target by Wall Street.
It is for any corporation that has quarters to report to wall street. I used to sell capital equipment ($10-50K invoice amounts) for Snapon Tools. The specials that would come down the line two weeks before the end of the quarter would be ridiculous. I once sold a $30,000 machine for $16,000 because I could close it in June (not July) and the buyer was paying cash and would take a demo unit off my truck. I got the sale, buyer got a discount, everyone above me got some bonus, everybody was happy. Then the same thing happened 2 weeks before the end of the third quarter just thirteen weeks later - suddenly almost all the appliance sized machines were half priced to clear inventory and make numbers. I sold 33 A/C machines in 3 days. That should have taken 3 years to move that many units.
So whenever you are buying something from a corporation, try to figure out if they are ahead or behind in sales. They can get really desperate to make the numbers. If the product is selling faster than they can make it, all bets are off. That popular stuff stays a full retail. Nobody will discount since production is limiting their sales, not demand.
Also, understand flooring costs. Often a dealer of expensive stuff like cars, trucks, motorcycles, RVs etc gets a line of credit from a large bank for "flooring". This is the roughly 1% per month fee the dealer pays to the bank for interest for the line of credit. If that unit has 12 months of flooring charge against it, people can get really good deals. They just want to clear stale inventory and will take a loss to do so.
It's worth being aware that this can work both ways.
I've worked with sales teams where "I need to hit target this month" was used as a cover story to offer a moderate discount to a buyer without creating (too much of) an expectation that such discounts would available in the future, or suggesting that the company was getting desperate to close.
That is, it was a partly-but-not-entirely-true story to justify an exploding offer.
This is off topic, but I would like to appeal to your human sense of dignity.
There are a number of cars available to the Australian buyer which can't be readily had by consumers in much of the rest of the world. You can buy Lapanese-spec sports cars from Nissan. You can buy 4 wheel drive Mazdas. Most importantly, you can buy a ute.
Utes, or car-bodied vehicles with a pickup bed, are extremely practical. You can commute etc. in a low, safe, fun vehicle, yet have significant cargo capacity. This market never took off in the Americas due to our love affair with pickup trucks.
Modern utes can be had in incredibly sporty or economical models, too. Most utes can't be legally imported to America, since no crash safety tests etc. have been done.
I suppose what I'm driving at is to please consider buying a ute (like a Ford Falcon pickup with a big v8), because there are starving drivers in America.
It used to work wonderfully in the UK each year, around August or September, that the registration letter would change. Telephone a bunch of dealerships (in the days prior to email) and tell them you wanted to buy a very specific make and model and the current year which only has a week or two left before the registration letter increments. I don't know if it still works because I haven't owned a car in the UK in over 20 years.
But every car dealership in ever country has sales quotas to meet. You just have to find out when they are.
You assume it was a dealership. A perfectly legit example of an exploding offer would be a used car with an attractive price where the deal goes to the first person to show up and claim it.
Anecdotally: last year I've tried to buy at least 5 cars that were sold before I got to the appointment. When I finally found one that was ok for its price, I bought it without asking any more questions.
> when someone offers you an exploding offer, it's because they really, really want you to take it.
Couldn't it be because they've got a lot on their plate and after a certain period of time they want to free up their brain cycles and stop wondering if you're going to accept that deal?
Couldn't it be that you're barely preferred and making the deadline shows them that you're excited about the offer? Missing the deadline shows that you're not excited and they'll know to go with the second best candidate?
FWIW, I'm relating this to exploding job offers as I have no direct VC experience.
Whenever I've offered an exploding offer in the past, it's because I had several candidates: an extremely strong candidate and several strong but somewhat weaker candidates. In general, all of the candidates have a limited timeframe to make a decision, and there's a risk of losing all candidates if I waited for an indefinite time on the strongest candidate.
In other words, candidates sometimes also need an answer within a certain timeframe (often for very legitimate reasons; a job change can often be a life-changing event) and that means that there are some real time-limits across all of the candidates (in both directions).
>Whenever I've offered an exploding offer in the past, it's because I had several candidates: an extremely strong candidate and several strong but somewhat weaker candidates.
If you had several candidates of equal ability, would you still use an exploding offer? Otherwise, it seems to be less about "giving candidates an answer within a certain timeframe" and more about putting pressure on the candidate you really want.
>there's a risk of losing all candidates if I waited for an indefinite time on the strongest candidate.
Is there nothing in between an exploding short-term offer and an indefinite open-ended offer?
If you had several candidates of equal ability, would you still use an exploding offer?
I would think you would. If you have 10 candidates but only want to hire 1, you can only issue one offer at a time regardless the fact that all 10 are equally qualified. While the first candidate would love to have all the time in the world to contemplate the offer, the employer and the other 9 candidates who are waiting in line don't want that.
>the other 9 candidates who are waiting in line don't want that [to wait for the first candidate to contemplate the offer]
If any of them have other offers, they might appreciate _some_ extra time to decide between them.
EDIT: Nevermind the previous bit--I was still thinking in the context of multiple simultaneous offers, which I guess is not a thing.
And if not, then if the first choice turns it down, you make an exploding offer to the second (to be fair to the next 8), and again to the third (to be fair to the next 7), etc. Is there ever a situation where an exploding offer is not in everyone's best interest?
> And if not, then if the first choice turns it down, you make an exploding offer to the second (to be fair to the next 8), and again to the third (to be fair to the next 7), etc. Is there ever a situation where an exploding offer is not in everyone's best interest?
The ideal scenario would be if it were socially acceptable to rescind offers—thus making the exploding offer unnecessary. An employer could make offers to everyone they're interested in, see who accepts, and then stay with them (essentially, allow parallel analysis on both sides). Instead, candidates can have multiple simultaneous offers while companies can only make offers sequentially. Hence the exploding offers.
Thanks for this. I was looking for someone to come in with basically this point. Sam's point seems to be that if you are trying to hire/fund within a ballpark range of candidates/companies, then exploding offers aren't good practice. If you were trying to hire exactly one candidate, or fund exactly one company this quarter, than exploding offers make more sense. Because companies are often hiring only one person for a role, I don't expect he would extrapolate what he says to hiring.
Depending on the timeframe, this sounds somewhat reasonable.
I'm assuming at the point where you make the offer, you and the candidate have established that you want to work with each other, and already agreed on compensation and terms.
Given that, you're already past the negotiation stage, and there is a time limit on when the deal can close. You need to hire one of your candidates, so it makes some sense to say "you have some-number-of days to accept this offer."
The key here is that you've already negotiated the agreement. In the past, I've had companies make me exploding offers with zero opportunities for negotiation.
Every time I've rejected such an offer, and every time it's been the right decision.
It's imaginable that there's a very short-term deadline affecting a deal. But remember: that puts the side with the deadline at a disadvantage, not an advantage. Consider these examples: really needing to sell something for the money, desperately needing someone to fill a job, needing to use a scarce item in the short term, etc. If one of these is happening for real, then the offer they make will have to be compellingly high and convincing, demonstrating their position of weakness. If someone offered you 5X your normal rate and explained they needed a job done this weekend, that's not a negotiation strategy on their part.
But feigning indifference and giving you a short-term deadline for an offer you're unsure you can beat -- that's just a negotiation move, and personally, I would call them on it. Again, I don't want to be responsible for failed application of this :-)
The key insight is that there's an emotion inside people's heads that's driving their decision-making. You can't see it, and if they're good negotiators they don't want you to see it, but it's there and it'll remain there even if you don't accept the offer.
If they gave you an exploding offer, then that signals that the emotion is "We really, really want you, and we're afraid someone else will snap you up." If it looks like someone else snaps you up and then you suddenly, miraculously become available a month later - what's the emotion? It's usually elation that you happen to still be available.
The one exception is people who are susceptible to sour grapes. "Well, we can't get you, therefore we didn't really want you in the first place." These offers disappear, but you often don't want to work for companies like this anyway, as it shows that management can't get over personal feelings of rejection to do what they'd judged rational a month earlier.
BTW, this is why it's usually not a problem to return to a past job that you've done well at and left on good terms. They liked you then, there's no reason why they wouldn't like you now.
It seems unlikely that someone would instantly flip from wanting to do a deal to refusing to do a deal just because it drags on a little longer than they wanted.
But anything's possible. If you're happy with the offer and don't want to risk losing it, take it!
"A dear friend and excellent negotiator told me that when he gets any kind of short-term exploding offer, the first thing he does"
As someone who considers himself an excellent negotiator (and gets paid to do negotiating) [1] I'd really caution someone from employing a technique that someone else uses that you don't have experience with. Negotiating is all nuance it's not engineering or an exact science. Go try and read a book on it if you want. (I can always tell someone who is fresh from reading a book.)
Actually exactly for this reasons:
"I don't want to be responsible for anyone losing a deal"
Of course, it's easy when someone else is taking all the risk.
"when someone offers you an exploding offer, it's because they really, really want you to take it."
Could be. But there are cases where this is not true. How lucky do you feel in interpreting all the signals based on a limited time as a negotiator?
And getting back to what Sam has said:
"Sometimes they say they have a fixed amount of desk space, but in practice, if a good company wants to join late, they always make room."
Things are never always clear cut. Very possible your company is borderline and you don't fall into a "must have" category. By even YC's own thoughts there are many more qualified companies than they can accept. Not everyone is a superstar that can write their own terms.
"Any deadline claim has to be concrete and believable."
How so? You ask them? You investigate? You poke around? General advice the specifics are much harder.
In any case the last thing you want to do (according to at least my method which might differ from another negotiators method) when you are negotiating is tip your hand. And if someone is bluffing the last thing you want to do is let them know or that you think that they are bluffing. As such saying anything that sounds like "prove it" is certainly a way to do that.
In negotiating often people claim something that isn't true and bluff. It's part of the game. The idea is not to make them prove it. The idea is to figure it out on your own and use it to your advantage.
Deliberately waiting until the offer ostensibly expires seems like an advanced technique, but simply disregarding the time frame seems pretty safe. Exploding offers are incredibly weak; they're a way of slapping your negotiating floor on the table before your counterparty says a word.
There's something to be said for the idea that losing a seed funding deal to term explosion is a dodged bullet, too.
"but simply disregarding the time frame seems pretty safe"
All depends. Once again you could be right but I could also argue under the theory that "once you make a sale you close and get your ass out of dodge". Because things can and do change.
Keep in mind that an open offer not taken can be withdrawn. Or new information can come up which makes it less attractive or gives someone a reason to change their mind. I offer this not as specific advice given the topic but more generally that there are deals that are lost by "dicking around".
I've both seen this happen to others and have had it happen to deals I have done.
In one case Se______a Capital wanted to buy something that I had. I decided to go for a higher amount. Something happened and then they didn't want it at any price. Not even the original offer. Not at all.
Same technique I had used for years that never failed. But it failed in this case.
But there is a difference in my case. It's part of my business to sell what they were trying to buy from me. It wasn't a one shot deal. So I could afford to employ a method that had worked for me for years and be wrong in this one instance.
When a deal dies like that, it's sometimes hard to tell whether it died because of how you negotiated, or whether it died because it started out dead, and your negotiating tactics just qualified it quickly.
In your case there's an excellent chance the deal wouldn't have gone through even if you had agreed to their initial offer. The something that happened would have happened anyway, and a firm like Se____a would probably not worry too much about retracting an offer (assuming it was a term sheet or a signed-but-not-closed contract with a MAE out.)
Practice. Lots' of practice. And practice in cases where the outcome doesn't matter even if you have to make up situations to practice on or negotiate for others.
In addition to my own deals which I obviously work on, I also, some time ago, took on negotiating deals for others since it was fun to do. I ended up having enough takers that I started to have to charge for doing that. While the amount I am paid wouldn't make it attractive full time [1] (besides there are no residuals which I like) it still is something I do just to keep my mind active and since I have the flexibility to take chances where the outcome isn't as important. And to me, it's fun. I get a great buzz from having the correct analysis lead to a positive outcome. In some ways it's better than money.
Another thing that is good practice is simply to try and make deals for others that is to put deals together or what I might will call "shoot the gap". I do that all the time. I'll see something that I think could be helpful to 2 different people and without even getting paid for it I will try to convince both of them that they should get together on some business issue. Then when if reply or are negative I will try and overcome the objections to make a deal happen.
Risk always enters into negotiation. If you are willing to lose you can take more chances because you aren't as worried about going bust. If you can't lose (you really need something) you have to be more careful and can't be as reckless.
[1] Because in the end it's more money in my pocket doing things on my own account time wise although there is a great benefit to doing it for others as well I gather more data because there are more situations to work in and around.
> Practice. Lots' of practice. And practice in cases where the outcome doesn't matter even if you have to make up situations to practice on or negotiate for others.
Playing Diplomacy (and similar games) works for some.
P.S. I'd like to get in touch for some thoughts on negotiation.
Read 'Getting to Yes' and 'Bargaining for Advantage.' Use the principles when making any large purchase or changing jobs.
Most retail cashiers can also give 10% discounts without approval. Find opportunities to negotiate.
Buy things on craigslist and be patient.
If you read the books, you'll also see more everyday situations and compromises as chances to use negotiating skills. There's no reason it needs to be money.
> There's something to be said for the idea that losing a seed funding deal to term explosion is a dodged bullet, too.
Exactly. It sets the tone for how the relationship is going to develop and relationships like that you can miss like a toothache. Better to take your time and see what it is that they're afraid you'll figure out if you think about the offer a bit longer.
And geez there's a boatload of things to take into account and they have to become second nature (like playing a sport or self defense) so you just have to spend time and practice all the time and keep practicing.
I actually keep my own notes on all my thoughts and techniques that pop into my mind.
Here is one as example.
Timing. Timing is important. I take into account not only how quickly someone replies but how quickly I reply or get back to someone. There is a reason and a strategy behind what people do in most, but of course not all cases. Even the time of day they reply and the length of the reply and exactly the words they use as well. Say when you propose something how quickly do they get back to you? All context in different cases means different things.
Also timing as far as when you spring things upon people.
For example I'm currently in the process of getting my bathroom quoted for remodeling. I've settled on a particular vendor that I'm pretty sure I will use. We've been going back and forth on details for probably 6 to 8 weeks. They've given me pricing and I haven't asked or said anything regarding getting a discount. At all. I also haven't asked for any exact details on products they are using. I don't care at this point.
What I will do is most likely bring up a discount at the very end of the process. When they have already spent time on the deal and don't want to lose it. [1] I will also bring up other factors to them (non monetary but convenience for us) at the end. I know they won't be as likely to blow off those concerns after the big investment in time they have made.
[1] After listening to my war stories my ex wife used the same technique against me when we were ready to sign our divorce papers. At the very end as we sat there the deal all done and papers ready to sign she said "I'll only sign if you also pay for my trip to XYZ". While I could have walked she knew me well enough to know that I wouldn't and actually I was kind of proud that she had listened and learned. Which is another point in order to negotiate you have to know as much as you can about the motivations of the other side as possible. (So research is important).
The advice I've been given about negotiating exploding offers is that you first ask for more time. If they say yes, then you just got something of value for free. If they say no, they've improved your negotiating position.
While I applaud Sam and his statement: "an accelerator that does the wrong thing for founders will not last long.", your advice is wrong. An offer is basically giving an option to sell for free. The longer the option is available, the more you're giving away. Exploding offers are just limits on how much people want to give away for free.
Your friend has to do a bunch of stuff in 10 days to satisfy Someone. There's opportunity cost associated with that, and there's no guarantee of money yet.
Just saying no relieves a lot of that pressure. Someone has to decide if they're really interested. If you get No right away, you've saved yourself 10 days of pointless work. If they accept the new timeline, they're probably more interested than you realized.
It's kind of like poker. If you're not sure enough to make a tough decision, you can always make somebody else make a tough decision instead.
edit
Assuming no information about Someone, they're level of interest X might be .01, or .99 - they have at least a little interest, because they're meeting you.
Making a demand lets you calibrate your understanding of X a little bit. Outright rejection indicates X was really low to begin with.
Maybe they have some regulatory constraint, and the date is a huge hassle to change. Well, X is less than that cost of change. In that case, they'd tell you.
In the OK, state, you you're likely better than .01, but you don't get a ton of information about how much better. If they explain why the timeline is they way it is, it's Y effort to change those dates, you can adjust X to the new level proportional to how much extra work you've made them do by missing the deadline. - They're at least that interested.
It is without question that most people applying to incubators apply to a few of them, in case they don't get into the (obviously) best one, YC.
Its my guess that some of the less exciting incubators give these exploding term sheets to make the founder think:
"Damn, I got into Incubator X but I have to say yes in 48 hours. I wonder if I will get accepted into YC also when answers go out in 2 weeks. Should I risk walking away with nothing, or just take the offer I have now..."
Would not be surprised to see more incubators doing this anyways, with or without exploding term sheets. They will likely just move up the dates their sessions start (and the date you need to say yes by), to make sure its before YC answers go out.
On the same hand, I am not sure what you expect other incubators to do. YC is hands down the most prestigious incubator to get into and everyone knows that. So, you have a bunch of other incubators that have to think scrappy to get people into their programs. These guys don't just want YC's cast-offs, after all.
If YC was to start doing rolling acceptances for a start date, it would solve the issue of other people doing exploding term sheets. If I apply to YC today for the winter batch and can interview and get a yes in a few weeks, then the motivation for other incubators to do this behavior is gone.
YC partners need to realize they are the cause of other incubators giving out exploding term sheets. I know YC likes to make a event of doing all the interviews/acceptances on one day, but it would certainly be much more entrepreneur friendly to have it be rolling admissions. The start dates for sessions can still remain the same of course.
> These guys dont just want YC's cast-offs, after all.
That is thoughtfully provocative. I have literally zero evidence to go from, but I suspect that Y Combinator is like Harvard or Yale: they could get rid of the group that they actually admit and go for the next tier, then achieve similar outcomes. (In other words: there are so many strong applicants that they can't take them all.)
This is just to say that even taking YC's cast-offs could be perfectly acceptable. YC is dominant for now, but it's not hard to imagine a world in which there are a few accelerators which are true YC peers (just like Harvard, Yale, Princeton, and Stanford are variously preferred by different people with real differences in preference).
You raise an interesting point. James Gosling went to my university for undergrad (U. Calgary) and then went on to do a PhD from Carnegie Mellon after being turned down everywhere else. The day of his graduation, they told him that each year they randomly accept one individual they originally rejected and that he was the first one to graduate. I'd love to see the results of this after a 5-year run.
> I have literally zero evidence to go from, but I suspect that Y Combinator is like Harvard or Yale: they could get rid of the group that they actually admit and go for the next tier, then achieve similar outcomes.
I agree with this, and I don't think that actually needs much evidence. It follows straight from assuming that:
- YC has prestige and is recognized as a top accelerator (which is true)
- YC is competent at picking strong applicants (which also appears to be true)
- there is no magical cutoff in the applicant pool where applicants below it are significantly worse than above it, and the cutoff point happens to be exactly at the point where YC stops accepting people (proposing the opposite would require serious evidence)
Im sure a ton of the companies who apply to YC and dont get in are still Grade A. But you have to trust YC knows what they are doing, and the A+++ companies will be picked over before they hit second or third tier.
You have to remember that investing in companies is a lottery game. Most angels/vc's profits are made on that 1 in a million company with a 1000x return.
If YC wants access to truly the best companies, they need to institute a rolling admissions. Otherwise, these scrappy second tier incubators will get lucky a few times when a nervous founder takes a bird in the hand over two in the bush. The policy only hurts YC itself.
But you have to trust YC knows what they are doing, and the A+++ companies will be picked over before they hit second or third tier.
IMO, there is still too much luck involved to make this true to the extent it matters in this case. YC has picked several things that didn't pan out, and of course several that did. There have also been multiple follow ups from YC rejects that went on to be much more successful than some companies that WERE picked
We turned down an exploding offer from another incubator in order to have time to interview at YC. We ended up getting into YC, so in hindsight it was absolutely the right decision, but scary at the time.
I'd love to see YC innovate in this area rather than shame other incubators into better behavior. Accepting applications on a rolling basis instead of once every 3 months with a 2 month wait, for example. I'm not sure how well that idea would work, but I'm sure there's something that could be done.
It's occurred to me that competing for business by making the process better for the founders, rather than worse, would be the way to go, or at least one business model that other incubators should explore.
When my co-founders and I were applying to accelerators in 2008, we had been accepted into a Philadelphia based accelerator called DreamIt shortly before our YC interviews. Not knowing if we would get into YC, we accepted with DreamIt as it was an exploding offer. A few weeks later we found that we got accepted by YC. After deliberating it for sometime, we went back to the DreamIt team and told them that we wished to rescind our acceptance. This started a shitstorm with the DreamIt team as they seemed to take this very personally. It was the first year of doing the accelerator and they went as far as threatening to take legal action. Not knowing what to do, we turned to PG and Jessica for help, a bit hesitantly, as we were afraid of what they would say. PG expressed his extreme disappointment with how DreamIt had reacted to this and was supportive of our situation. He send them an email telling them to back off and that this was not an acceptable way to be treating founders.
Just one anecdote out of many of how YC has gone to many lengths to protect founders.
Since that experience, I've realized that it really doesn't do accelerators any good to introduce these conditions in their funding offers. It creates a bad reputation amongst founders in the increasingly competitive field of accelerators. And founders ultimately need to pick based on what they think will have the most impact to their business. Compete on benefits you can offer to founders, not legalese.
So many accelerators behave wildly unprofessionally and inappropriately for the space that they're in.
Perhaps all that's needed is more high-visibility guidelines like what YC is doing now. Perhaps we need better platform for evaluating investors from the founders perspective, instead of networks that really only care about evaluating startups.
Either way, the situation seems to be getting worse, with the continued explosion of accelerator programs around the world. I hope we find an effective solution.
So basically you made an agreement with one set of investors and then went back on your word because another, "better" set of investors wanted to put money in? Maybe it's just me, but this doesn't reflect that well on you.
The effectiveness of the relationship between investors and startups in SV is built on upon being upstanding and not being overly manipulative. Founder/Investor agreements that are born from the manipulation of unexperienced founders always should be EXPECTED to turn out badly.
There's a child-like expectation that once the deal is signed or agreement is made that it's over. It never is, that's just the beginning. If you're expecting that everything is finalized as soon as an agreement is made, regardless of the conditions, then you're simply bad at business and taking risks that you haven't yet realized.
(Of course this isn't true in Europe. They love taking contracts extremely literally, and their economies suffer enormously for it.)
The founders could always threaten not to work enthusiastically (or basically at all). Nothing the investors can do about that. So the investors are better off taking their money back.
If DreamIt accepted you then a few weeks later after you had plans to move there pulled their offer in order to accept another team how would you take it?
I am not saying I would have not taken the YC admit but I would understand DreamIt being a little pissed.
Of course PG helped you wriggle out of your DreamIt acceptance. He sees you as an investment. Who wouldn't try to protect their investment?
I'm an MD for Techstars and I completely agree. This is the approach we've always taken for the programs that I've run, (Techstars Cloud and the Austin TS program).
In several cases, just as a consequence of the calendar, the timing of when we've given offers out can create tension for a company, particularly if it lands in between the YC interview notification and the actual YC interview. When it's come up in the past I've aways encouraged founders to notify YC and see if they can either take the interview early or if our timeline permits, to let them take their YC interview knowing that they have a standing offer from me regardless.
I've had some people mention to me that this is merely bolstering these companies' applications to YC, but I don't view it that way and regardless of which program they end up in, it's the right thing to do imo. It's actually worked out quite well and I'm happy with the companies that chose Techstars in those scenarios over YC, and also completely happy for the companies that chose YC.
I went through YC in '07. But prior to getting into YC, I got into Techstars' very first class. David was a total class act in letting me go through the YC interview process before making a decision and completely understanding when I decided to go with YC. Although I went with YC(and would do so again), that one experience left a positive impression in my mind of TS.
Is this a change for YC? YC previously required getting an answer the day you're accepted because "you have all the information". So this is an update to allow people time to decide, right?
I always found the justification of having all the information a bit self centered. Founders have all the information... about YC, but not about other options.
That said, as a YC alum, I think you should almost certainly say yes if accepted.
I don't believe that is correct. A page that asks to be kept confidential from one year ago (S13) clearly indicates that founders are to decide the same evening that they receive a call back.
I think it's a good opportunity for YC to improve the acceptance process. Why don't you review the applications in a FIFO basis and give an immediate green light to invitations? If they are ready for an interview why not have weekly interviews till the deadline? Clearly the waiting isn't founder-friendly neither..
At a guess because that would eliminate the largest advantage the classes system gives: batch acceptance gives YC the opportunity to evaluate all the potentials against the backdrop of every other entry. If they start accepting along the line then they're going to disadvantage themselves because there is only a limited number of slots for interviews. So by sorting them in decreasing order they operate more efficiently.
When I was reading this I thought to myself "wait, didn't YC have exploding offers before"? Glad you dug this up. It was widely known back then that PG viewed it as a "intelligence test" if you didn't accept on the spot. If you didn't, he didn't want you. So I guess now the tide has turned.
That all said, I'm very much against exploding offers. The person offering the deal may have a reason to do so but you should resist the urge to rush to a decision.
F|R: I read that when you call Y Combinator winners, the founders have only five minutes to accept. ("If people turn us down," he says, "as far as we're concerned they've failed an IQ test.") Have startups turned you down? Are there any that have turned Y Combinator down and still gone on to succeed with a liquidity event?
Graham: You're confusing two separate things. The reason people are supposed to decide quickly whether or not to accept is that they already know everything except the percent we'll ask for. They've already seen the deal terms, and they already know as much as they're going to know about YC before actually working with us. So they should already know when we call what percentage they'd be ok with. Since all they have to do is subtract one integer from another, five minutes should be enough.
The "IQ test" quote refers not to how fast they have to decide, but the amount of equity we usually ask for. In the median case it's 6%. If we take 6%, we have to improve a startup's outcome by 6.4% for them to end up net ahead. That's a ridiculously low bar. So the IQ test is whether they grasp that.
There was one startup that turned us down because they received an acquisition offer during the weekend when we did interviews. It was a pretty good offer. I'd have taken it in their position, and they did. But other than that I don't know of anyone who turned us down and went on to succeed. There have only been about three others who turned us down.
It's a little different for a lot of other accelerators. YC takes batches of, what? like 40 companies or so in a batch? Most other accelerators are smaller with class sizes around 10. If YC is shooting for 40, and gets 37, it's maybe not a huge deal (8% under target). You could even make 42 or 44 offers and plan for a certain acceptance rate, end up with 44 probably isn't the end of the world (110% capacity).
If another is shooting for 10 and gets 7, that's a 30% drop which is probably enough to mess with the economics of the accelerator. Similarly, if they make 12 offers planning for a certain acceptance rate and end up with all 12, they're at 120% capacity, which also might be enough to mess with the economics.
I still think exploding offers suck, but YC is in a much stronger position to be relaxed about them than others.
I agree. Also, it is not like they house the people, which is more complicated that office hours. In this case, they are talking a negative about YC and spinning it into a positive.
I agree, but exploding offers tend to explode sometime after "immediately". i.e., the deadline can be enough time to think everything through and do your due diligence. Still an exploding offer.
While I agree with the points made in this post, it's important to note that the strategy of condemning offers with a short term plays in the favor of YC and other established/larger accelerators and to the detriment of newer/smaller accelerators.
As others have noted, there may be compelling reasons to require an offer be accepted on a short timeline or not at all. In fact, as raised elsewhere in this thread, YC itself used to require acceptance the same day the offer was made.
From an entrepreneur's perspective, given two offers at equivalent valuations and terms it's rational to take the offer at the more established accelerator (e.g. YC) over a less well known one. It's also less important for large accelerators to allocate each open position in each cohort, and thus easier for larger accelerators (e.g. YC) to tolerate losing a few deals last minute.
Again, I agree with the points made in the post, but it's important to note that making longer term offers the norm plays in YC's favor.
I'm sure Sam's heart is in the right place but I'm not sure I agree with him here:
"Exploding offers suck. Founders should be able to choose the investor they want to work with, not have to make a decision based on time pressure."
and investors should be able to choose the founders they want to work with. And accelerators are the one's who make it all about the calendar. So they inject the notion of time and deadlines (YCSpring12 etc)
"where an accelerator tries to force a company to make a decision about a funding offer before the company has a chance to finish talking to other accelerators."
The risk here is that sounds like sour grapes.
"after we make you an offer, we’ll give you until the beginning of our program to decide (though most companies accept quickly, because you can’t start having office hours with us and participating in other ways until you accept). We ask companies to be transparent with us about needing more time--we won't rescind our offer. It’s usually about 45 days from interview to the start of the batch."
- We use "soft" deadlines. You don't get access to important resources until you say yes. And yes look we have 45 days from interview to the start of the batch (there's that pesky calendar coming into play)
"We encourage all other accelerators to join us on this. It should be an easy yes. Exploding offers are the wrong thing for founders, and an accelerator that does the wrong thing for founders will not last long."
- We're the pre-eminent accelerator and other accelerators should play by the same rules as that way we'll stay the pre-eminent accelerator!
"And founders should think very hard about joining an accelerator that puts forth a short-fuse offer."
Once again makes me feel like they're losing out to this tactic and it's hurting. And a bit of FUD?
Are you creating startups that have to go out and compete in a very competitive world? Seems like insulating them from making important business decisions is a little counter intuitive.
Again, I'm sure Sam's motives are pure. This is a little tin can ear to me and whiny.
It seems like the other accelerators are doing this so they don't end up with only YC-rejects. Since YC is probably considered the top accelerator, it's also better for YC to have other accelerators not give exploding offers. Because then the few companies that would have accepted the exploding offers AND also would have gotten into YC, can now actually go to YC instead of accepting an exploding offer. If I missed something, I'm sure you'll point it out ;)
1 - If you're good enough to be accepted by one incubator, you have an incubator-worthy idea and team. If they go away, another will arrive.
2 - The person forcing your hand is trying to use their temporary leverage over you until you have leverage over them. It sets the tone of the relationship on leverage.
3 - That said, people with lower acceptance rates (whether it's accelerators, colleges, etc) have to play yield games. Harvard yields ~80% of admits so they can wait their time because they are confident of admits, and it won't impact their capacity. Amherst accepts ~40%, so they have to play the waiting-list game. The 2nd tier accelerators have to play waiting list games, and that's what drives this behavior. 48 hours is unreasonable, but a few weeks isn't. (Or having a formalized waiting list too)
I accepted an exploding offer. It was a harbinger to a larger detonation.
There's a simple way of looking at this type of behavior: If someone is willing to go negative on you at the beginning (evidenced by 'denying' you an investment because you didn't take it when they wanted you to take it) then you should assume they will be willing to go negative on something else of a similar or greater magnitude at a later date.
This seems like a step forward. Exploding offers are generally unpleasant, usually a power play from the side that has less to lose.
It's also common practice for companies to extend exploding offers to new hires. Replace "accelerators" with "companies" and "founders" with "hires" and you get a very similar argument for not forcing people to take a job until they've completed their own decisionmaking process (this ultimately benefits the company as well, in my opinion).
I've used it for new hires. Helps get quick closure on those whose decision is right on the edge. Also you get to know how strong an interest they have. But if they ask for more time, I usually give it. They just have to be confident enough to ask.
This is a tactic I see used on the micro level on Shark Tank where usually Mark Cuban will be like "25 second shot clock, you gotta decide right now." Being a Shark Tank and Dragons Den addict (both Canada and UK versions) I can say the greatest difference between the US version and the others is this tactic. I have never seen any of the Canadian or UK investors do anything remotely similar. Usually they are more impressed by companies that take the time to think about the offers. Just an observation.
Just a point about Shark Tank and similar shows: the actual meeting is a lot longer than the ~6 minutes that they show you. Some go on for hours, and they just cut to the interesting bits, so that 30 sec shot clock thing is often just theatrics, they've been discussing things for a while and know before whether they're gonna say yes.
I learned this recently, the most interesting part of which was that the founders stand silent in front of the investors for at least a few minutes while the lighting and sounds and such are set.
I wonder, don't you think the shot clock offer is real even though they've been talking longer than we've seen?
It might be kinda real, but I think it's a lot easier to see coming and prepare for than the show implies. I've only watched the last two seasons of shark tank, but from what I remember the offer always seems to come out of left field, Mark doesn't appear interested and then he suddenly makes an offer. I don't think it's usually like that, but it makes for some great television.
A good alternative for YC to consider is to change to a 'continuous' mode.. where you incubate companies on 1st Tue of every month. The companies in a batch are already in variety of stages, some just starting with an idea, some with some market validation done, some may even have raised $500K round before.
This is very much unlike a college or a vocational class, where all participants are in more or less same stage.
I agree with the concept for the most part, but have a few gripes.
First, the desk space argument is very real. Y Combinator takes 60+ companies and has no real space constraints since they do not offer office space. Other accelerators take far fewer companies and do have office space, so they need to know ahead of time 1) that their batch will be full and 2) that each company has passed their own due diligence process.
Also, as with term sheets, founders can take their offer from one accelerator and shop it to others. It's happened before (with people I know), who take an offer from one accelerator and use it to trigger FOMO from the other.
Couldn't an accelerator just position it's start date before Y Combinator's decision date, and therefore not need an exploding offer but have the same effect?
Exploding offers should be reasonable, and I'm not against being fair to founders. But doesn't democratizing this essentially involve accelerators colluding to have the same offer/acceptance date?
The distinction is this: "exploding" typically refers to a very short period of time, designed to prevent shopping the deal, extensive legal review or advice, or exploring other options. A legitimate deadline for an offer wouldn't be called exploding if it spans many weeks and lets a participant fully understand it.
Clearly, no offer (in any realm) will ever be perpetually valid. Giving a reasonable amount of time to evaluate options and make a better decision is considerably less explosive than one that puts an artificially tight deadline on the decision.
I used an exploding offer effectively once. I was buying a house in 2002, during the crazy bull market on housing. Houses in the neighborhoods we were shopping regularly went for more than list, with competing bids. We finally found a house, at the very top of our price range, and put an offer in for it just a few hours after it first listed - for list price. The seller's agent was furious! She really wanted to drag it out to the weekend and get a bidding war, which we absolutely could not afford. But what were they going to do... turn down a list price offer? Why not just sell it at a higher price, then?
We still have that house, 12 years later. It's finally worth what we paid for it again. Sigh.
Employment offers tend to be exploding because a company has a single need and doesn't want to lose every candidate because they are waiting for their top choice.
Almost every offer of every kind 'explodes' at some point. It's the duration until the explosion that varies. I'm sure YC will make you reapply for future consideration, just as companies can not be expected to honor your employment offer if you defer for a year.
In my experience two days is low. 5-10 days is more common, and most companies are fairly willing to negotiate beyond that given some circumstances. It's not common to see candidates rejected if they try to accept an offer after it explodes.
I'm not sure anyone 'should' be offended by an exploding offer. There are lots of potential factors at play. You only see people talking about exploding offers of employment when the window is relatively small - no one bats an eye when given 45 days to accept a job offer, as that should give plenty of time to find other competitive offers. It's those 3-5 day figures where candidates tend to think they smell a rat.
No one wants to be forced into a decision at gunpoint, which is essentially what a short notice exploding offer becomes. Part of this is also dependent upon the length of the interview process and how much detail is given. If you interview with a company 10 times over a 6 week period, I don't think a short window for acceptance is overly limiting for most candidates.
We often see candidates trying to expedite the offer process in order to receive offers around the same time. Candidates are at their most advantageous position when they hold multiple active job offers, and they have the opportunity to leverage them off each other (I'm not suggesting this tactic). Yet when companies try to expedite the acceptance process, suddenly we feel that there is something dubious at play. Candidates want companies to make quick (and positive) hiring decisions, yet want to take their time to maximize their ability to shop for offers.
More senior talent is less of a commodity than an entry-level candidate, so you might expect more junior level candidates will see exploding offers more often than senior candidates. Senior talent can also leverage their experience a bit more in order to get windows increased if necessary.
I don't think they should be offended as much as they should be curious as to why the company employs such tactics (assuming again that the window is short).
> We often see candidates trying to expedite the offer process in order to receive offers around the same time.
As a candidate, what would be the best tactics to achieve that objective? Say I have 6-8 candidate employers, from mature startup to enterprise in size, and I'm moderately senior. My approach would be to do the phone screens with them all, and narrow it down to about 4 companies to interview with in person, then do that all in a single week, planning on accepting somewhere at the end of the next week.
To maximize the chances of offers coming in around the same time, I generally suggest that candidates stagger applications as a first tactic. Generally speaking, we expect smaller companies or firms with lower levels of bureaucracy (not always the case) to move quicker, so one should apply to those last since they can usually be more agile.
Once in the interview process, you can try to expedite some interview processes while slowing down others. So you might ask one company to push an interview up and another to push an interview back. Once an offer is about to be presented, asking questions can help delay a bit as well - you could ask all your questions at once in an email if you want a speedy reply, and you could ask questions in a live meeting or call (that requires scheduling) if you want to buy yourself a few days.
> Thanks. Also wondering: should more senior people be offended by exploding offers. Architects, team leads, etc?
If anything, they should be less offended. Companies are often simultaneously hiring multiple junior developers, so it's less necessary to make purely sequential offers.
Technical leads, on the other hand, are typically hired for a specific need. Given their cost, companies rarely are hiring multiple leads simultaneously. Hence, parallelism of offers is impossible. Plus, since all senior devs are in high demand, employers want to make offers to as many as possible—before someone else snaps it up.
Hence, exploding offers are a completely justifiable hiring tool.
> I don't see a CEO or even vp being given two days to decide.
In an early-stage company, even two days is a lot for a high-level executive hire. At the point that an offer is made, the interview process should have been so thorough that it can be accepted within hours.
There could be some highly specific situations where a two day exploding offer could be necessary for the business. That in itself doesn't make the offer unacceptable, and that also doesn't necessarily warrant a 'steer clear' warning for readers without more context. I wouldn't judge this company based on a single known two day exploding offer without further details.
If you had ever worked with me you'd know how protective I am of my candidates, sometimes to my own detriment financially. Companies pay the bills, but when they act poorly I don't defend them - I try to correct their bad behavior and explain to them why it will hurt them in the long run.
I would encourage any client that a policy of having all offers explode in 2 days would be bad from a PR perspective and probably result in losing good talent.
If it happened once, and the company had a strong business justification, I personally would not think that this singular action would reflect the company's overall business tactics. Again, it would have to be a good reason - perhaps one that even protects another candidate or current company employee.
It's simple: if you're being pressured just say 'no'. There is no upside to negotiations under pressure, only downsides. Likely the pressure is there because if you thought about it long enough you'd refuse the deal anyway, so you might as well refuse it right off the bat and tell the counterparty the time-limit is what caused you to refuse.
If you have no other options then likely you already made a series of mistakes. Exceptions exist but don't happen often enough to go and make a series of qualifications here, adding pressure is similar to being blackmailed, the only reasonable course is to refuse to play.
Actually, if you're being pressured, a better response is, "If you need an answer now, it's going to have to be 'no', so I hope you can adjust your schedule so we can consider your offer more fully."
Exploding offers are unfortunate and a significant negative data point about the behavior of the organization but they are not the only data point. The above answer will defuse the threat and give you the upper hand in the negotiation so you can make the right decision for your team, whether it's 'yes' or 'no'. This is helpful for exploding offers in any circumstance - jobs, M&A, etc.
As a side note, while short-horizon offers are terrible, it is reasonable to have some expiration date. Techstars Seattle, for example, has 10 slots and while they might be able to add an extra one or two, logistics don't allow for the kind of flexibility that YC has[1]. I believe there's a good way for an accelerator to handle this ethically:
1) Tell applicants when the decision date is when they apply (so they can plan accordingly) rather than surprising it on them as a negotiating tactic
2) Provide all relevant information when they apply, so they can consider the possibilities in advance, versus (for example) springing restrictions, valuations, or fees on them when they get the offer
3) Allowing enough time between the acceptance and the notification for the team to make a good decision - a week seems reasonable.
YC's behavior is exemplary here; their model and position in the industry lets them be super-flexible. Other programs may not have the ability to be quite as flexible but that doesn't mean they're unethical if they're thoughtful about their implementation.
[1] My understanding as a mentor for the program - I don't have inside knowledge
This is sensible and good for the entrepreneur. If its good for the entrepreneur, its good for the prospective accelerator, its good for the prospective investors and so on and so forth. The virtuous cycle is for real. The issue is the not-so-famous accelerators bear the brunt because almost all applicants are awaiting response from YC and not the other way around. If the conclusion of this is you give you short-term exploding offer, the accelerators have got it all wrong. Instead, the right perspective is that they need to make their value prop as strong as a YC. Glass half-full/half-empty, remember?
There's a balance between "exploding" offers and hang-around-forever offers. You don't want someone to come back 6 months later and say they're finally ready to accept your offer.
Its not difficult to balance these factors. Just ask,
"how long do you need to consider this deal?"
"Two weeks? Four weeks?"
"If you need more time, just give me a call."
Exploding offers make perfect sense in situations like this. Especially if you're given 48 hours, that's plenty of time to accept/decline. And if it's not enough time then you weren't ready to play ball yet anyway. If I'm making someone an offer, I'm not giving them weeks to decide so that they can go shop around for something better.
I'd feel a bit more ok with exploding offers for organizations where there are a finite number of slots -- e.g. if an accelerator is very small and capital or other resource constrained, or has a hardware lab and limit space, or something like that. None of that applies to YC, of course.
Most exploding offers don't represent credible threats. That being said, if someone jumped at one of my exploding offers, I'd definitely try to negotiate a better price ex post facto given my read that the counterparty is so jumpy.
> It may be the best thing for accelerators to use time pressure to get founders to accept their offer, but it’s definitely not the best thing for founders.
isn't that 'not the best thing for accelerators' in the long run as well? if you're using a strategy which is clearly not win-win, you're going to lose _good_ deals to people who aren't doing that - so you'll get stuck with a portfolio of companies run by founders not smart enough to see this for what it is. enjoy, sucker!
> It may be the best thing for accelerators to use time pressure to get founders to accept their offer, but it’s definitely not the best thing for founders.
Why should accelerators should do what is best for someone else, not themselves?
The world is full of expiring offers of all kinds; they are everywhere. Rarely does any kind of offer stand for as long as we would like. Expiry of offers is the norm.
Also, Golden Rule: he who has the gold, sets the rules.
Legally binding (if so) is not the same as something will actually happen. It's an important distinction.
Don't confuse what the laws says can happen with what will happen.
Look people don't need much of a leg to stand on if they want to sue if the pot of gold is big enough. But at least, in my experience, people are usually hard pressed to sue over verbal contracts or for that matter obviously even many written and executed contracts.
Keep in mind that the advice that many lawyers will give you is going to generally steer away from telling you to take chances lest you then go and pin the blame on him when you are the edge case.
Email and Oral acceptance of terms can be legally binding in contractual agreements.
You don't need to dig up a civil court case to know that verbally accepting a contract without intending to fulfill it is naive and potentially dangerous.
Yes. There's lots of caselaw that says verbal contracts are legally binding.
But verbal contracts are a legal clusterf#¢&. Always always get your contracts signed in writing and you will save tons of $$$$ on lawyer fees.
I've seen him employ this many times in practice and it has always worked out. I don't want to be responsible for anyone losing a deal, but remember: when someone offers you an exploding offer, it's because they really, really want you to take it. If anything, it should be a sign there's (a) more time to be had, and (b) plenty of room on the terms.
Any deadline claim has to be concrete and believable. The start of the YC program is a good example.