Key insights

• ⚖️ Founders should carefully review and understand the terms of fundraising deals
• 💰 Investors can take advantage of founders' desire for high valuations
• ⚠️ Risk of giving up unfamiliar terms and rights without full understanding
• 📊 Impact of board control on founders' decision-making and position
• 🎯 Experienced investors may offer more favorable terms for startups
• 📝 Use of standard paperwork and experienced lawyers to avoid unfavorable terms
• 💡 Careful consideration of seemingly favorable valuations with unfavorable investment terms
• 🔍 Understanding the true meaning of 'come back to us when you find a lead' in VC speak

Q&A

• How can professionalized seed funds create pressure for more money and what should founders do?

  Professionalized seed funds may exert pressure on founders for more money to meet company ownership targets, potentially leading to misalignments with the company's best interests. Founders should be vigilant, understand investor incentives, and not blindly believe sales pitches to ensure that the funding aligns with the company's long-term goals.

• What potential misalignments of incentives can occur between investors and founders?

  Investors may have different incentives based on the stage of the company, potentially leading to misalignments in goals. For instance, encouraging startups to capture mindshare in early stages and later encouraging growth for a huge outcome can create conflicts with the founders' vision.

• How do investors use ninja tactics in negotiations?

  Investors may leverage their experience and negotiation leverage to create the illusion of interest in an investment deal. They can also present conditional job offers similar to requiring offers from other companies, which founders should approach with caution.

• What does the phrase 'come back to us when you find a lead' typically mean from investors?

  In the context of venture capital (VC) speak, the phrase 'come back to us when you find a lead' often signifies a polite way of declining the investment opportunity. It indicates that the investor wants a free option to invest in the future if another impressive investor is found.

• How can founders prevent being taken advantage of by investors?

  Founders can prevent being taken advantage of by using standard paperwork and experienced lawyers. Additionally, they should be cautious of seemingly favorable valuations with unfavorable investment terms and seek investors with a track record of success in providing more favorable terms.

• Why is it important for founders to understand funding deal terms and rights?

  Understanding funding deal terms and rights is crucial because they can significantly impact the control and decision-making of founders. It helps in avoiding unforeseen risks and ensuring that the terms align with the long-term goals of the company.

• 00:00 Founders need to pay close attention to the terms of their fundraising deals as they can have significant impact, including losing control of their board and giving away unfamiliar rights and terms.
• 01:41 Investors with experience in public companies and a track record of success may provide more favorable terms for startups. It's important for founders to use standard paperwork and experienced lawyers to prevent being taken advantage of. Some investors may optimize for lower sale outcomes, which can impact the terms of the investment. Founders may receive better terms from investors with a track record of billion-dollar companies. Beware of seemingly favorable valuations with unfavorable investment terms.
• 03:11 Investors saying 'come back to us when you find a lead' actually means 'no' and may just be a polite way of passing on your company. They want a free option to invest in the future if you find another investor.
• 04:46 Investors may use ninja tactics in negotiations. They have the advantage of experience and leverage. Job offers from investors can be conditional like getting offers from other companies. Be cautious of provisional job offers in the investment process.
• 06:06 Investors may have different incentives based on the stage of the company; they may encourage startups to focus on capturing mindshare and later encourage growth for a huge outcome. There can be a misalignment of incentives between investors and founders. The investment community has evolved, with less professional investors in the past.
• 07:48 Seed fund professionalization can create a misalignment of incentives with founders, leading to pressure for more money. Investors may push for more money to meet company ownership targets. Founders should be aware of investors' incentives and not blindly believe sales pitches.