The Handshake Deal Protocol
Introduction
In Silicon Valley—and in many other dynamic startup ecosystems—a great deal of progress is made on the basis of handshake deals. A handshake deal is a verbal commitment that parties will move forward with a certain transaction, typically formalized later through written contracts and the exchange of funds.
Why rely on handshake deals instead of waiting for finalized documentation? Speed matters. In the fast-paced world of startups, opportunities can appear and disappear quickly. Handshake deals give founders the ability to secure investor interest without slowing down their fundraising processes, and give investors a way to commit early enough to avoid missing out on promising ventures.
Though not unique to Silicon Valley—diamond traders, for instance, have long used handshake deals—this approach thrives where trust is high and speed is crucial.
The Problem
Unlike in close-knit communities of seasoned professionals, startup funding often involves newcomers and, unfortunately, some bad actors. Every year, we hear about handshake deals that supposedly fall through. Without clear evidence, it’s difficult to know whether an investor truly reneged on a promise, or if founders misunderstood or misread enthusiasm.
Some investors also exploit the ambiguity. By never clearly saying “yes” or “no,” they maintain a free option to invest later if the startup suddenly looks more attractive. This tactic shifts risk onto founders, who may be left thinking they have commitments that don’t actually exist.
The Solution: A Clear Protocol
To address these issues, we propose a standard protocol for forming and confirming handshake deals. YC will begin using this approach internally, and we hope it becomes an industry-wide standard.
Defining an Offer
An “offer” includes:
- The amount the investor will invest.
- A clear valuation or valuation cap (or no cap).
- An optional discount, if applicable.
Example Offers:
- $100k at a $5 million pre-money valuation.
- $100k at a $5 million cap.
- $100k uncapped.
- $100k uncapped with a 10% discount.
Establishing a Handshake Deal
A handshake deal exists only if all four steps happen:
- The investor explicitly says, “I’m in.”
- The startup emails or texts the investor: “Can you confirm you’re in for [offer details]?” This message must specify the exact amount and terms.
- The investor replies “yes.”
- This confirmation occurs promptly, ideally in person, so there are no misunderstandings.
Until the fourth step, no handshake deal exists. This means the startup is never obligated to reserve space or accept funds until the investor confirms in writing.
Audit Trail & Transparency
Performing the final exchange on the spot—both parties having their phones or devices at hand—helps ensure honesty and reduces misunderstandings. If someone is reluctant to confirm on the spot, that’s a red flag.
This protocol provides a clear record. In the event of a dispute, it’s easy to see where things broke down. As a result, fewer founders will fool themselves into believing half-promises, and fewer investors will attempt to mislead.
No Need to Specify Documents Upfront
This protocol doesn’t require specifying the type of legal documents. In practice, small investments use standard forms, and larger investments are negotiated in good faith. Generally, market standards are well understood. If one party later tries to complicate the terms, it’s obvious where the problem lies.
Removing Ambiguity
The protocol rules out vague offers and conditions:
- No Undefined Terms: An investor can’t just say “I’ll invest $x” without specifying valuation or cap. That leaves room for later backtracking and isn’t considered a proper offer.
- No Ranges Without Commitment: Offers like “$50k to $150k” force the startup to hold space for the higher amount while the investor is only truly committed to the lower one. To avoid this, lock in a handshake deal for the minimum amount and treat the rest as interest—not an obligation—until the investor fully commits.
- No Conditional Offers: Investors can’t make handshake deals contingent on other investments or conditions (e.g., “I’m in if you find a lead investor”). Such contingencies are too unreliable. If an investor wants to commit, they should do so without caveats.
Deadlines to Prevent Open-Ended Deals
While you can’t add conditions, you can set deadlines. For example, it’s reasonable to agree that if the investment isn’t funded within 10 days, the handshake deal expires. You can negotiate different deadlines as long as both parties explicitly agree. This prevents indefinite waiting and ensures both sides follow through in a timely manner.
Conclusion
The Handshake Deal Protocol is designed to ensure clarity, fairness, and speed. Both startups and investors can still make whatever arrangements they please, but according to this protocol, a true handshake deal must be precise, unconditional, and confirmed in writing. This clarity helps everyone move forward confidently—no guesswork required.