There is a written component to the protocol: The follow up email/text. "This is to confirm you're in for X." "Yes."

I do wonder what happens without step 4 occurring.

I wondered this too. How long could an investor wait before sending the "Yes" and have it still considered valid? Could the investor not reply for a few weeks or months and only send the "Yes" once the startup is growing and worth more than the initial deal's valuation?

I think there needs to be an explicit timer between step 3 and 4. Something on the scale of a few hours or at most a few days.

> Where no time is specified in the offer, the offeree has a reasonable period of time to accept the offer. After a reasonable period of time expires, the offeree's power to make a contract by accepting the offer "lapses". ... When a seller purports to accept an offer after it has lapsed by the expiration of time, the seller's acceptance is merely a counteroffer and does not create a contract unless that counteroffer is accepted by the buyer.

-- Anderson's Business Law, Formation of Contracts: Offer and Acceptance: Lapse of Time

Legally, that's murky. There's still the oral agreement. Others have suggested that the oral agreement would be unenforceable due to the statute of frauds. But I don't think it actually applies here. So I think the oral agreement might, in principle, be enforceable. Being practically enforceable is another matter.

That being said, it appears the intention of the protocol is not to recommend a set of best practices for forming legal agreements, but rather to establish some community norms. I think the assumption is that anyone who violates the community norms will suffer a loss of reputation.

In that light, the analysis becomes easier. If step 3 happens and the investor subsequently goes quiet--failing to deliver a "yes" or "no"--then the investor has violated the community norms. (Even a "no" might be considered poor form following the oral deal, but it's certainly better than ambiguous silence.) Presumably, some community self-policing happens at this point, and if the investor remains obstinate, then word spreads and the investor is shut out of future deals.

that's what steps 3 and 4 are for, aren't they? Wouldn't that make it a written contract instead of just an oral one?

As someone who hasn't been past first year of law school, I can't say whether an SMS creates a valid written contract.

Emails definitely do (though IANAL).