Many have questioned whether the public uproar and cries for action that erupted over the past weeks following George Floyd’s death would actually result in any concrete change. A collective of venture capital firms led by Act One Ventures just announced their own initiative to promote diversity in the funding of underrepresented groups. They have introduced The Diversity Term Sheet Rider that will encourage vc firms to bring Black and other underrepresented groups into the deal-making process.
“This rider will sustain our collaborative efforts as an entire industry to improve access for underrepresented minorities, every single time a deal gets done. Through this, we will expand co-investing access, evolve diversity discussions at the cap table and create more diverse deal flow across the industry. As evidenced by research, diverse teams outperform and deliver better returns. Not only is this the right thing to do, but it will have a positive impact on the bottom line,” said Alejandro Guerrero, Principal at Act One.
In addition to Act One the other venture capital firms committing to the Diversity Rider are: Greycroft Partners, First Round Capital, Maveron, SVB Capital, Harlem Capital Partners, Fifth Wall, Plexo Capital, Precursor Ventures and Equal Ventures. Each pledges to embed the new boilerplate rider language into their standard term sheets, establishing a connection between their firms and all founding teams that fosters the identification of diverse investors to bring them to the cap table.
Others such as Silicon Valley Bank, Stradling, Gaingels, Aumni and Crunchbase support this new approach to funding diversity by raising awareness within their networks that will help make the initiative an industry standard. The announced initiative specifically calls for LatinX, women and LGBTQ+ to be co-investors on deals that would bring an immediate impact on diversity. Crunchbase via its Diversity Spotlight Initiative is compiling a list of underrepresented investors who are actively writing checks who would value access to co-investment opportunities.
By focusing on increasing minority participation as co-investors in all deals, participants who are in those groups over time will gain a track record among prospective limited partners (LPs). This will benefit founders by exposing them to more diverse networks through those joining their cap table.
The boilerplate language for the Diversity Rider for inclusion in term sheets establishes that at least one Diverse Check Rider (DCW) as a co-investor for new or follow-on deals, It reads as follows:
“Diversity Rider: In order to advance diversity efforts in the venture capital industry, the Company and the lead investor, [Fund Name], will make commercial best efforts to offer and make every attempt to include as a co-investor in the financing at least one Black [or other underrepresented group including, but not limited to LatinX, women, LGBTQ+] check writer (DCWs), and to allocate a minimum of [X]% or [X] $’s of the total round for such co-investor.”
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