- Startup founder Elizabeth Giorgi is hoping to trigger a chain reaction in startup due diligence by requiring potential investors to disclose all allegations of gender discrimination or sexual harassment in the company's fundraising documents.
- The CEO of the Denver-based Soona asked her lawyers draw up the requirement, dubbed the 'candor clause,' after a potential investor sent Giorgi unsolicited nudes. But she hopes other founders will use the open-source legal disclosure to also protect themselves.
- In an industry that has drawn scrutiny for longstanding gender discrimination and sexual harassment, Giorgi says that the clause has rapidly accelerated the pace of trust building with investors.
- Investors in Giorgi's company also supported the clause, with one investor telling Business Insider that including such a provision was a "no brainer."
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Like many tech startups, Elizabeth Giorgi's media production firm recently raised venture capital funding. But before the funding deal closed, investors in Giorgi's startup had to fill out a special document disclosing any allegations of gender discrimination or sexual harassment.
The so-called "candor clause" is something that Giorgi's startup, Soona, requires of all potential investors. It's similar to the criminal background disclosure that some employers put on job applications. But in the male-dominated world of venture capital, where the investor typically has the bargaining power, the candor clause is a bold step for a startup seeking money.
The effort was born out of need to better vet company investors, Giorgi told Business Insider. Several bad experiences in front of male investors - including one sending her unsolicited naked photos after expressing interest in her company - left the Denver-based CEO feeling the need to come up with a more comprehensive due diligence process.
"What if we made this effort to do due diligence on investors? That was really how this was born," Giorgi said. After "multiple conversations and iterations" with Soona's lawyers, the candor clause came into being.
Silicon Valley and the venture capital industry in particular, have drawn a great deal of scrutiny for an entrenched culture of gender discrimination and sexual harassment. And while tech investors are increasingly including #MeToo clauses in deals with startups, as the Financial Times reported back in March 2019, Giorgi says it is more uncommon for founders to ask the same types of diligence questions from its investors.
"It's not uncommon for investors to be able to ask us a lot of questions, but it's really unusual for a founder to ask about the background of an investor," Giorgi said. "We want to work with these people but we want to ask them to do the same kinds of diligence questions."
To help founders address the power imbalance between founders and investors, Giorgi's candor clause is available online. And she says that both male and female founders have adopted the clause. At least 45 founders have reached out to say they included similar language in their fundraising documents, Giorgi said.
Investor response
So far, Soona has secured about $1.5 million in funding from her investors, who have all included the candor clause in their contracts with the company. That was a relief to Giorgi, who said that she was initially very nervous telling investors about the new requirement.
"I just felt like that this is going to be a scary conversation," Giorgi said. "I really hoped that this isn't gonna be a dealbreaker."
2048 Ventures, which led a $1.2 million seed round for Soona, said that was very much not the case. Managing Partner Alex Iskold said that when Giorgi first told him about the clause, it immediately seemed like a "no brainer," and compared disclosing allegations of sexual harassment to disclosing a criminal record.
"I thought it was a great idea, a no-brainer on my part," he said. "It's very clear to me that it makes a lot of sense to have in the document if both parties want that ... Just like you represent you're not a thief or criminal, that kind of disclosure can be really helpful."
In fact, in an industry that has drawn scrutiny for gender discrimination and sexual harassment, Giorgi says that the clause has reaped advantages beyond just protecting founders.
"I think the candor clause has rapidly accelerated the pace of trust building and collaboration that I've been able to have with my investors," Giorgi said, citing an "ability to have really honest dialogue together," as a key reason.