Pat Moore, of Amplafi, put up a good response to my post regarding do you really want Venture Capital. I’ve 'promoted it’ here because it raises some interesting points which I’d like to expand/share.
I’ve put my comments inline with his.
Respect you a lot but I think you are flat out wrong here.
[Yeah, I used to get the you’re a nice guy, but… a lot in school, always knew the next sentences weren’t exactly coming up roses.]
1) so would you object to a 5x, 10x, 100x ?
In theory? No, I really don’t care provided that there is a provision where at a certain price, everybody converts and nobody can stop a sale unilaterally. So, if somebody has a 5x and the deal says at a sale of over $50 million, everybody converts, no double (or 5x) dip, you just line up at the pay window and get your share. If a VC says downside only, okay, cool. The $50 million number, in this example is arbitrary but it makes my macro point. I don’t care about downside, what I care about is the upside fairness.
2) maybe you wouldn't because as a founder perhaps your starting percentage is high enough that you still see bucks on the horizon - but what about employee #40. He does the math. Math tells him that unless the company sells for $1B he isn't getting much. Instead of stock motivating -- becomes demotivator. Now as CEO you have 9-5 employee and a real gulf between the haves ( founders) and the have-nots ( everyone else ).
I’m looking at my ending percentage not my starting percentage. I believe what I am working on is a zillion dollar company. I truly do. I’ve written a personal check, bet the house so to speak, and I believe that if I own 5% – 10% of this puppy when we win, I’m a seriously happy bunny. So, armed with that attitude, I’ve got lots of stock (mine) and an option pool to reward the key people in my company. Let me also say that if the tech gods above shine onto me a billion dollar exit, I’m locked and loaded to reward the people who got me/us there.
3) I gather you are pretty well off. If this company fails, or you get screwed by investors -- you are not financially devastated. The rest of us are not so lucky.
To this I can only say that if this fails (it won’t) I’d be on the street looking for another gig or maybe another kick at the startup can. At this stage, yes, for a certain period of time, I can pour every dollar back into the company, take no salary, eat capital expenses, and generally make Ebenezer Scrooge look like a drunken sailor when it comes to spending. I’m not on food stamps but I’m bringing my own lunch to work and gladly letting other people buy.
4) you have enough connections that an investor thinking about screwing you will know that it will get around hard and fast -- the rest of us not so connected.
I don’t think my connections are any better than yours when it comes to ‘thinking about’ anything. The fact is that you can post, tweet, comment, and share a VC screwed me story and it will get picked up since the VC community is a magnet for bad stories. I appreciate the thought, but I’m just not that connected nor able to scream louder than you. I wish I was actually.
5) If the investor demands so much downside protection then is the investor really convinced about the idea?
VCs, for the most part are driven by spreadsheets and returns once they get past that first instinct of wanting to do something. This is important. A VC jumping up and down on a deal after a meeting or two do, will eventually have to settle into whatever the firm’s style/rules/plans/IRR/state of the fund/etc is. Reality bites but in my experience, Pat, they bet on you and the firm layers on top of it those things they need for the committees, the LPs, and everything else. As I said before, I’m interested in closing the deal with the lowest legal costs possible and only worrying about things that are going to materially impact my ability to be successful. The rest is noise to the extent that if there a shit pile or things don’t work out, it blows already. If this doesn’t work out (it will) and I’ve taken, say $2 million of other people’s money, aren’t I supposed to get it back to them before I get coin? They placed the financial bet and if the downside says, we’re covered, I’m fine. It’s just me, you clearly disagree.
If I got such a proposal, I would demand upfront money going into my pocket, all previous investors, and all current shareholders. Additionally, the investors would lose the ability to force the sale of the company, and the provision would only kick in after a certain percentage of their money was spent. If it ends up just sitting in the bank because current revenue is adequate then the company gets to return it as a loan.
Do I think any VC would take such a harsh "deal" -- no... but then again why should I take such a harsh deal from them?
This would be a broader definition/debate on what’s harsh. For me, harsh would be a double/triple dip on a major, out of the park, home run. A VC who say, I’m protecting against a flip and if it is a dude, I get my money back, etc, is not (in my opinion) being harsh. A VC who says, 5x participating pref REGARDLESS of exit, yeah, that’s harsh and no, I wouldn’t do it. Your sitting in bank comment points to a disconnect with what a VC would want and what they would do regardless of terms. I hope that I take in the coin under legal review now, and that’s it. I hope it never gets spent and I exit with a billion dollar company. I’m not thinking about loans, returning money etc, rather I’m thinking about the win and joining the ‘blank check’ club.
In reading Pat’s comments over a couple of times, I think he has done an excellent job of making my point about do you really want to sign up to the life of a VC funded company. Thinking in terms of being screwed, giving money to people as it comes in, etc, all point to, well, not being actually ready for a VC investment.
Again, the debate shouldn’t be about the terms, etc, rather about the basics of taking the money in the first place.
Thanks Pat, I appreciate your comments.