Startup’s ‘Candor Clause’ Puts Bad Behavior Out In The Open

By LEE SCHAFER Star Tribune

WWR Article Summary (tl;dr) When Liz Giorgi got creeped out by how she was treated by potential investors for her startup, she turned to her lawyer for help. Instead of politely asking investors if they treat women well, she wanted to contractually obligate investors to describe how they plan to treat partners. The result is what they call the "candor clause."

Star Tribune

Unlike the Silicon Valley types who claim with little evidence to be making the world a better place, Minneapolis entrepreneur Liz Giorgi seems to have a good shot at actually doing that.

Giorgi is CEO and co-founder, with Hayley Anderson, of a Minneapolis startup called Soona. Maybe best described as a Kinko's for high-quality, same-day video and photos, Soona is just getting going. It has 17 employees, studios in Minneapolis and Denver and it just launched an online service.

But as promising as the business sounds, what makes Giorgi particularly noteworthy is the contract language she put into the company's financing documents. It aims to curb the sexual harassment, discrimination and just plain different treatment female founders get from potential investors.

As you probably suspected, Giorgi learned about this problem the hard way.

She and Anderson were in a position earlier this year to be part of a natural experiment into how women get treated by investors, enrolling in a Techstars accelerator program with nine other companies in Boulder, Colo.

These were all startup companies at about the same stage of development, all trying to get their businesses growing while talking to investors about putting in early stage capital.

Giorgi and Anderson were two of just three women in the group.

Giorgi soon found herself being asked by investors about her plans for children, what her husband or boyfriend did for work and so on. She is a 33-year-old woman, and when she asked the similarly young men in the Techstars group, their response was as she expected.

None of them got any questions about family plans or relationships.

What happened next was creepy, as text messages from potential investors arrived on her mobile phone well after normal business hours, maybe after 10 p.m. Anybody else getting those?

"I think there was one other woman CEO in the group, and she said 'yes,'?" said Colin McIntosh, founder and CEO of Denver-based Sheets & Giggles, another firm in Soona's Techstars cohort. "And the eight guys in the room are all kind of like, 'Ah … no.'?"

Giorgi finally lost her patience when an investor, somebody she called a "very respected person in the Boulder community," blatantly crossed the line into flirting.

"I went to my co-founder, Hayley, and said, I'm about to terrify you," she continued. "But I'm sick of this nonsense. I don't want to sign another petition or join another hashtag campaign on the internet. If we are going to raise venture money, because it's the only way we're building a billion-dollar company, I need protection.

"I need protection when I walk into these rooms, and I need protection for the long term when I have to deal with these people and have them be a part of our lives for God knows how long."

Her choice of word "terrify" was about right, because they both knew just how much power venture investors had over them.

The guys in the venture firms can get away with behavior that ranges from creepy to threatening because they have the money.

The entrepreneurs are expected to put up with dreadful behavior because they need the money.

Giorgi went to their lawyer for help, because she wasn't planning to politely ask investors if they had treated women well. She wanted to contractually obligate them to describe it. The result was what they call the candor clause.

The candor clause goes into the part of a contract usually called "reps and warranties." People in business don't have the time to track down every bit of information that might be relevant before signing a contract, so here in the contract is where both sides commit to having provided what the other side really needs to know.

Soona's candor clause asks for full disclosure from investors about any past sexual harassment and discrimination claims, for everyone in the firm. If being presented with this demand means some investors shy away, great -- Giorgi just weeded out somebody they wouldn't have enjoyed working with anyway.

The power of the candor clause is when investors hear it will be coming. They have to sit down with the Soona founders, hear why this is necessary and how they expect a fair, open and trusting business partnership from day one.

Soona investors Matchstick Ventures of the Twin Cities and New York-based 2048 Ventures both had no harassment history to disclose, and both were happy to sign Soona's candor clause. Both also agreed to include it in deals with other companies.

"It's something we encourage our founders to add into any negotiation," said Matchstick founder Ryan Broshar. "It's about having an open conversation, so the founders know who was investing in the company."

McIntosh was impressed enough with the candor clause that he brought it into financing documents for Sheets & Giggles, which sells eucalyptus bedding. He figured that if only women demand this, it won't be nearly common enough to rid this part of the capital market of bad behavior.

Giorgi certainly knows that changing the venture market is a big task. More than seven out of 10 venture-capital firms have no female partners, and the percentage of capital going into companies founded by women has been slipping. For businesses not focused specifically on female customers, less than 2% of venture capital goes into companies founded by women.

It is irrational to conclude from this that men must come up with 98% of the good ideas for high-growth businesses. It is far more likely that women understand what it is like to try to raise money from venture partners and decide they want nothing to do with it.

"This is an issue that affects the entire entrepreneurial ecosystem," Giorgi said. "This is not a woman's issue. If you want great businesses to be started, grown, create incredible jobs and economic vitality, you need to support all kinds of entrepreneurs.

Women are fundamentally and inherently at a disadvantage, and this was cutting off at the knees 50 percent of the great ideas." Giorgi called from Chicago last week as she was on the road talking with potential investors, with every intention of keeping the candor clause in for Soona's next financing round.

"I'm choosing to be cautiously optimistic," she said. "There's decent people everywhere." ___ Distributed by Tribune Content Agency, LLC.

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