A diversity rider is a recently developed term that promotes diversity efforts to increase the representation of underrepresented minority groups in venture capital. If included in a term sheet, a diversity rider will typically require lead investors to seek diverse co-investors in their deals, including but not limited to African American, Latinx, women, or LGBTQ+ individuals, as well as diverse check writers. A minimum of 10% or $100K of the total round should be allocated for such a co-investor.
The Benefits of Including a Diversity Rider on a Startup Term Sheet
Including a diversity rider on a startup term sheet can have numerous benefits. First and foremost, it signals to potential investors and employees that the company values diversity and inclusivity. This can help attract top talent who are looking for companies that prioritize these values.
Moreover, research has shown that diverse teams perform better than homogeneous ones. By committing to diversity through a term sheet rider, startups are setting themselves up for success by bringing in different perspectives and ideas onto the cap table.
Overall, including a diversity rider on a startup term sheet is not only the right thing to do from an ethical standpoint, but it also makes good business sense.
Potential Challenges in Implementing a Diversity Rider and How to Overcome Them
While the idea of implementing a diversity rider on a startup term sheet is commendable, it can come with some challenges. One potential challenge is finding diverse co-investors who are interested and available to invest in the company at the time of fundraising. This is especially true for startups that are located outside major cities or have limited networks.
Another challenge is ensuring that lead investors are committed to seeking out diverse co-investors. Some investors may see this as an additional burden or feel that it goes against their investment strategy.
To overcome these challenges, startup founders can take several steps. One approach is to proactively build relationships with diverse investors and networks before beginning fundraising efforts. This can help increase the likelihood of finding suitable co-investors when the time comes.
Finally, startups should communicate clearly with lead investors about the importance of diversity and how it aligns with their business goals. By highlighting the benefits of diverse perspectives and experiences, startups can help investors understand why a diversity rider is necessary for long-term success.
When suitable for your deal, the diversity rider will create more access for underrepresented venture capitalists. This is a powerful step in the right direction for the industry, and I hope that this term becomes the industry standard.
If you’re interested in other key terms on startup funding term sheets, check out the Founder’s Guide to Seed Funding and the Founder’s Guide to Series A.