How I Got Started: Tome (how to evaluate term sheets from a former venture lawyer)

Excited to share the story behind Tome & co-founder Nadia Dugal!

Nads is a FORCE. She’s a former venture lawyer turned VC-backed founder of Tome. We talk to her about her founding journey and also her advice for founders evaluating term sheets / SAFEs (from her perspective as a venture lawyer who’s helped 100’s of founders evaluate theirs).

Tome is a platform that uses AI to decode contracts (especially term sheets!) so people can easily understand them. They’ve raised $5M+ from SignalFire, Quiet Capital, Better Tomorrow Ventures, and more.

In this interview we discuss:

• How making friends with no agenda allowed her to break into Silicon Valley (and ultimately lead to meeting her co-founder, raising VC, and building Tome)

• How she iterated on solutions to solve problems she experienced first hand as a lawyer until she found something scalable and VC-backable

• How being a founder who’s a transgender woman of color has been an advantage (especially in recruiting an effortlessly diverse team)

Read more re advice on how to evaluate term sheets and about Nadia/Tome’s story below!

Nadia’s advice for founders when evaluating term sheets

In general: if you have an investor proposing a really complicated deal structure, that just means it's going to take a long time and a lot of money to close that deal. If they opt for something really complicated, it usually means they don't know what they're doing or, worse, are predatory. Ditch them and move on.

The biggest mistake she sees founders make
Not understanding dilution. SAFEs are easy to raise money with, but founders commonly underestimate the amount of dilution they’re taking on by the time they convert. Understanding the nuances behind pre-money valuation, post-money valuation, $ raised, option pool, and conversion are all extremely important levers that impact dilution that founders don’t know how to take into account when negotiating.

Many people think the financing contracts are the most important and intimidating aspect of deals, but I actually think the cap table is even more important. It's the easiest to mess up because lawyers can't really do math or Excel models, and founders don't know how to translate term sheet concepts into cap table equations. It's a recipe for disaster that I see play out in most deals.

(Note: Tome can help you understand how these mechanics work and what’s considered standard)

Resources she recommends for learning about term sheets
Venture Deals is one of the best books out there. Carta has some great materials. I’d also recommend NVCA resources and (of course!) Tome Venturepedia.

Terms that are becoming more common that founders should be careful of
YC standard SAFEs are great, and in general, they’re a democratized instrument that allows more people to participate in venture investing. That being said, a lot of investors who use SAFEs are not the most experienced, and founders should be careful of edited ones. On Tome, we’re seeing that ~70% of SAFEs have been edited in some way. It’s never a dumb question to ask an investor if and/or why a SAFE was edited.

I’m seeing liquidation preferences and MFNs (Most Favored Nation) clauses more often.

I have mixed feelings about liquidation preferences (which give investors first priority for payment in the event of a company liquidation event). 1x liquidation preferences (meaning investors will get first priority for just the amount of $ they initially invested) are for downside protection. However, I’m also seeing more 2-3x liquidation preferences lately that founders should push back on.

I’m also seeing MFNs more often these days. Historically, they were common only for no cap / no discount SAFEs. However, I’m also seeing them now for many that do have set valuation caps. If a founder has leverage, I’d also recommend they push back.

The founding story behind Nadia and Tome

How she knew she wanted to be a founder
I've always had the bug my entire life to start a company. When I was in high school, I really admired people like Bill Gates and thought, "Why can't I be a Bill Gates?" That was a child's fantasy, quickly quelled by practicality. I became a lawyer instead.

When I was in law school, I saw The Social Network and decided I wanted to go to the law firm that represented Facebook, and I did! Literally the second day I joined, I saw Mark Zuckerberg walk down the hall for work on the WhatsApp deal.

How she broke into Silicon Valley (from lawyer to founder)
When I was working in venture capital law, I represented a lot of VC funds and a lot of top startups, but it's kind of weird being in Silicon Valley as a service provider. Nobody takes you seriously.

What changed though is that I made friends. I ran into someone at a party who was obsessed with board games and we became really close.

He was an investor. I had no intention of be-friending him because he was an investor. But that ultimately lead me to going in-house as the Head of Legal at 500 Startups, and that's when things really got kickstarted because people no longer treated me as a lawyer at a law firm. They treated me as someone at a VC fund, even though I was still back office.

The exposure to founders and venture capitalists and being on their level 10x’d my career.

How she knew found the idea behind Tome and knew it was ✨the one✨
I worked for Pierre Omidyar, the founder of eBay, at the Omidiyar Network, where he deployed close to $2 billion. I was handling a lot of the legal aspects of these deals, and also mentoring founders and emerging investors on understanding how venture works.

I kept getting the same questions over and over again. I realized, "Wait a minute. Why do contracts happen this way?” It makes no sense. Why don't better writers, not lawyers, draft contracts? Why don't we visually explain how founder dilution works or explain dynamic concepts in a more conceptually intuitive way? I asked my VC friends — do you think this is an idea?

The most common feedback was, "I'm not sure there's a market for prettier term sheets, but I see the potential here as a no-code contract platform.” Even better, they were like, "If you build a product, we'll fund this."

I immediately started working on it on nights and weekends.

How she found (and failed to find) her technical co-founder
I realized early that I wasn’t technical enough to build this on my own, so looking for a co-founder was the first part of my journey.

I got rejected from a number of organizations. I joined the YC dating founder matching pool and didn’t have success. I explored working together with 2 co-founders, but the expertise and passion wasn’t a good fit. This prevented me, at the time, from raising a round.

I finally found my co-founder in August 2021 thanks to the serendipity of the Bay Area. A friend of mine met my now co-founder, heard what he was doing, and told him I was working on something similar. Next thing I know, I get a DM in my inbox from this guy, and he said, "Hey, I'm working on something very similar. We should talk."

That lead to us having ten meetings, because it turned out we were exactly aligned on the end vision of what this should be.

I had the domain expertise and the ability to build a great front-end, because I basically was building the product for me. My co-founder came with expertise in engineering and funding — he got two degrees in artificial intelligence at Stanford and was one of the founding employees at SignalFire, a multi-billion dollar VC fund.

How she thought about raising VC
I always knew I needed venture capital money because I was building a venture-backed business. My bias was honestly towards not raising money, but we have a deeply technical, advanced product that needed VC to be built.

My co-founder and I both contributed to the success of our $5M raise. My co-founder was an early employee at SignalFire, the firm that anchored our seed round. We also had a number of other investors, including Better Tomorrow Ventures, which is run by the close friend I mentioned earlier (who I had serendipitously met in SF over board games).

Other (fun) highlights from my interview with Nadia

On how being a founder who’s a transgender woman of color is an advantage, especially in recruiting talent
There’s no intentionality behind our diversity. I have found that simply by being an example and living the life that I lead and doing my job, diverse people naturally come to us.

This disproves the notion that you cannot hire talented individuals who are also diverse. Many people believe this, insisting that they already have the most diverse talent they can. However, I believe that we have the best diverse talent in the industry, and I stand by this claim.

(Side note: I really enjoyed this article where Nads talks about her transition from male to female in 2021 and her perspective on the differences between being a woman vs a man in business)

Being risk averse being risk seeking, and why more people need to jump through open doors
I think a lot of people, at various points in their lives, have doors open for them. What stops them from succeeding is that the doors are everywhere - the opportunities are everywhere - but I find that people, more often than not, close the doors on themselves.

As a lawyer who went to law school and practiced corporate law, you might assume that I'm risk-averse, but I jump through open doors — I keep an open mind and rarely turn down meetings or introductions. I mean, why not say yes to everything that isn't patently stupid?

People tend to overestimate downside risk and underestimate upside risk. But let's face it, humans are resilient. If they take a risk and fail, they'll be fine.

On being open about being a challenging team to work with when hiring
My co-founder and I are challenging people. We have exceptionally high standards for ourselves and the people we hire, and we know it can be intimidating and can be hard to work with. I'm just really upfront about it.

We want to build a best-in-class team, and challenge people in an intellectually honest way and help them grow.

PS. I’m always looking for more founders outside of my immediate network to feature, so if you know of any founders with interesting early stories to tell, please nominate them (or yourself) here! If you have suggestions, feedback, etc., email me at [email protected]! And subscribe above if you want to be alerted about future stories