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May 10, 2006


Great post! It's all about balance - high valuations mean complex "unfair" terms... dilution is the solution because the terms are more reasonable and there is alignment of the two parties.

Your solution creates value - the other, well who knows, the entreprenuer smiles in the beginning, and then when he fails to execute the VC smiles.

The win - win is both parties smiling at the same time.

It's not the #1 reason experienced entrepreneurs say "VC" in the same tone of voice as those initials would be spoken by your average Vietnam vet...but it's in the Top 10. (Actually, I think you could abstract the whole Top 10 under "contracts that are deceptively attractive and yet disproportionately harm the interests of the entrepreneur in the name of enhancing security for the VC".)

When negotiating term sheets and valuation, entrepreneur and VC will necessarily always be on opposite sides of the table. This is normal and indeed correct. But term sheets that _keep_ them on opposite sides even after the negotiations are over are per se evil.

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