YC
Understanding Investor Terms & Incentives || Rookie Mistakes with Dalton Caldwell and Michael Seibel
@ Y Combinator
12/17/21
Takeaways
MS
Michael Seibel
12/17/21
@ Y Combinator
You should care just as much about the terms of your fundraise as you do about the valuation and the amount of money you raise.
MS
Michael Seibel
12/17/21
@ Y Combinator
There are many terms in a funding deal that can negatively impact you, regardless of how high the valuation is.
MS
Michael Seibel
12/17/21
@ Y Combinator
Investors know that founders want high valuations and often leverage this by offering a desired valuation while asking for unfavorable terms.
MS
Michael Seibel
12/17/21
@ Y Combinator
Founders sometimes agree to terms like 'participating preferred' or 'super pro rata' without fully understanding their implications, which can be detrimental.
MS
Michael Seibel
12/17/21
@ Y Combinator
I've seen founders give up control of their board, which can lead to them being fired, just to raise a million dollars.
MS
Michael Seibel
12/17/21
@ Y Combinator
As a first-time founder, you're unlikely to negotiate as effectively as an experienced investor who deals with multiple companies.
MS
Michael Seibel
12/17/21
@ Y Combinator
Using standard paperwork and hiring a lawyer experienced in startups can help you avoid unfavorable terms during fundraising.
MS
Michael Seibel
12/17/21
@ Y Combinator
It's beneficial to raise money from investors with a track record of building large companies, as they are more likely to support your growth.
MS
Michael Seibel
12/17/21
@ Y Combinator
Some investors structure their deals around the expectation that your company will sell for a modest amount, which can limit your potential.
MS
Michael Seibel
12/17/21
@ Y Combinator
When an investor says, 'Come back when you find a lead,' it often means they are not interested in investing at that moment.
MS
Michael Seibel
12/17/21
@ Y Combinator
If you find a lead investor, the lead often wants to invest the entire amount to meet their ownership target, which can limit your options.
MS
Michael Seibel
12/17/21
@ Y Combinator
When an investor expresses interest in your company contingent on finding a lead, they are essentially getting a free option to invest later without commitment.
YC
Y Combinator Cast
12/17/21
@ Y Combinator
Investors often say they want to see a job offer from Google or Apple before making a commitment, but this is usually just a way to say no without being direct.
YC
Y Combinator Cast
12/17/21
@ Y Combinator
For tiny startups, investors may not fund them anyway, so it's important to say what they want to hear to capture their interest for future opportunities.
YC
Y Combinator Cast
12/17/21
@ Y Combinator
Investors are generally incentivized to encourage companies to grow quickly, which can lead to misalignment of incentives if a company is profitable but not growing fast enough.
YC
Y Combinator Cast
12/17/21
@ Y Combinator
The investment community has evolved, with more professional seed funds emerging that have obligations to their investors, which can create misalignment with founders' goals.
YC
Y Combinator Cast
12/17/21
@ Y Combinator
Nowadays, with an abundance of capital, investors have a greater incentive to convince founders they need more money, often using fear of not having enough as a tactic.
YC
Y Combinator Cast
12/17/21
@ Y Combinator
Smart founders recognize that investors have their own goals and incentives, and they should consider these when evaluating investment pitches instead of accepting them blindly.