(no title)
jdh | 12 years ago
I see the point that this is just a price negotiation. However, I don't understand why the form of presentation is so important to people. If you get a standard term sheet that says $2M investment at a $6M pre-money valuation and a 15% pool, it takes about 2 minutes to do the math to see this would be the same as a term sheet that said $2M on a $4.8M pre-money valuation, with the 15% pool coming in and diluting all parties after. The discussion on this thread seems to lean toward the idea that the latter term sheet is more founder friendly. I wouldn't see the latter term sheet as more founder-friendly, I would see them as equal.
Why do VCs continue to write term sheets the standard way? After all, if they thought entrepreneurs would really prefer the latter term sheet, it would obviously be in their interest to write it that way, and VCs are not dumb. I think they think that entrepreneurs prefer it the standard way, they like a cosmetically higher pre-money number, and I suspect they are generally right. I don't think on this matter they expect they are fooling the naive entrepreneur: this is pretty basic, and I doubt many would want to go into business with someone who couldn't grok this.
Now, diluting after but keeping the $6M pre-money... now that's founder friendly! Who doesn't like higher valuations! I suspect this is what a lot of people mean by founder friendly.
> Lawyers
As a founder I disliked this clause, I didn't understand why I had to pay the VCs legal bills. The major bummer on this is that VCs have less incentive to really grind down the amount if the company is paying, I agree with that.
But I have seen a lot of entrepreneurs grind on this particular term, and I think it's nuts to make this a point of principle.
VC's annual W-2 compensation is the management fee minus expenses. In the traditional customary structure of company pays, the deal expense comes out of the invested capital and doesn't impact annual compensation.
When you grind your VC on this point, you are saying this: listen you jerk, I am going to make you pay this out of your personal paycheck this year. And I'm going to make you go back to your partners and explain why, rather than customary deal terms, his partners have to eat their share of this bill personally.
Now, maybe it ought to be that way, I don't know -- I'm more with the other commenters that say what's the difference, just ask them to add $25K to the round size and scale up the pre-money accordingly and call it a day.
But running a business deciding what battles to fight or not.
As a founder, you can work valiantly to ensure that $25K of your $5M round comes directly out of the pocket of the guy who is going to be your partner in building the business for the next 5 years, instead of the family offices and endowments that are his investors, where it is customarily paid, but I think there are other points of negotiation you'd get more leverage out of pushing. Ask the VC to gross up the round size by the attorney's fees and use whatever leverage you have on more important points.
Incidentally, "company pays" can be a reasonable structure for angel investors as well as VCs: Say you have a $1M round with all angels, and for some reason your deal can't use one of the free open source docs out there. If there is a need for a lawyer (let's say you are raising from US investors but it's not an American company and they might reasonably want to understand any risks associated with this): if your lead investor is putting in $200K and then 16 other individuals are each putting in $50K, it's not reasonable for the lead to be out of pocket on the cost personally, and splitting the bill 17 ways makes no sense either, it would be much more sensible for the company to pay, and if need be the round be made slightly bigger. The same principle could apply to institutional rounds with multiple investors involved.
Robin_Message|12 years ago
aaronbrethorst|12 years ago