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October 20, 2009

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Problem with that is the macro trends and other things that are beyond the entrepreneur's control. Say there's an, oh don't know, a housing bubble or some other financial disaster which totally changes the market situation - which is totally out of the control of the entrepreneur. Why should the entrepreneur shoulder all the risk and the investors getting all the downside protection?

Farhan,
Thanks for the comment. In my view, the downside risk is for the opportunity and the entrepreneur really is the one managing the issues and the business. I hear you but I still believe it.

I believe in caring about the down side as an entrepreneur if I have also invested hard $$$. These $$ should have similar downside protection to the investor. I think that is only fair. On the other hand if I invested 'only' sweat equity, then your comments are 'on the money' no pun intended. As an entrepreneur I would negotiate hard on the 'valuation' which you have not mentioned, which of course talks to the fairness of sharing in the upside.

Leo,
You make a good (great, actually) point. My personal cash goes in with the investors for that exact reason. Great point, thanks for stopping by.

Rick,

Respect you a lot but I think you are flat out wrong here.

1) so would you object to a 5x, 10x, 100x ?

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 ).

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.

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.

5) If the investor demands so much downside protection then is the investor really convinced about the idea?

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?

Follow-up to previous comment.

My response to such a "deal" would be:

"So based on this offer. Joe (employee #40) with 40000 shares would get $0 dollars unless the company sold for at least $60m. Joe would get $100,000 if the company sold for $80m. Could you (mr. sharky investor) craft the message to Joe explaining why he should stay working for XYZ-next-Youtube?

Be sure to explain to Joe in a way that he can explain the long hours at the office to his wife and kids."

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