Wow. Thank you for the insight, as someone who is working on getting funding for my business.
The Tricks Investors Use Against Founders
21–30 of 45 posts
Re: The Tricks Investors Use Against Founders
#22Am I the only one in 2011 who just isn't interested in an ebook? I have a Kindle - can't really bond with it. I have an iPad - can't bond with it either for books or long reading sessions.
I would buy the printed copy of this and read it but I won't buy the ebook. I just like printed books better.
Re: The Tricks Investors Use Against Founders
#23Earlier quoted context omitted.
PE investors buy mature companies and extract profits via cost cutting, mergers/acquisitions, re-organizations. A PE firm may buy a paper manufacturing company if they thought they could increase profits by cutting unnecessary costs. angels/VCs fund growing companies and extract profits as the company value grows and is to sold to a company or the public market. A VC would never fund a paper manufacturing company unl…
so how relevant is this article for startups? Seems to me this is more for owners of mature companies. Or am I missing something?
Hardly at all. It was probably posted by mistake.
Re: The Tricks Investors Use Against Founders
#24These tricks are depressing and bolsters my attitude more toward a profitable yet slower growth start-up, doing without the sleazy investors... By no means am I saying all are sleazy, but a slower growing startup will not attract the better of the lot.
This list is basically irrelevant to startups.
PE firms don't invest (generally) in early stage tech startups. By the time you get to dealing with PE (as an alternative to IPO, or as a path to turnaround if you're company is fucked like Yahoo), you can hire your own lawyers and such to buffer from the sleaze.
Re: The Tricks Investors Use Against Founders
#25It's important to note that these things are common in the private equity world, not the angel investment or venture capital world. The VC world has totally different tricks, like 3x participating preferred, "independent" board members, collusion, and option pools. Also, if the PE firm is using a 20% discount rate to evaluate the merits of vendor finance, they are likely fooling themselves more than they are fooling…
Here is a very good explanation of the option pool "shuffle": http://venturehacks.com/articles/option-pool-shuffle
Re: The Tricks Investors Use Against Founders
#26One of the cardinal rules of software development I've decided over the years is to seek to reduce complexity and reduce risk. With respect to entrepreneurship I go in with a similar philosophy. Therefore as a general rule I think it's wise to avoid outside investment. Because it exposes you to unnecessary additional complexity, risk and sleaze. If you can start and grow a business without it, strongly prefer to do so.
* Note that I speak in general terms. I love YC and trust PG so they would be an exceptional case where it can be a clear net win.
Re: The Tricks Investors Use Against Founders
#27Earlier quoted context omitted.
You need good advisors who are experienced entrepreneurs. I had an experienced and well-recommended startup lawyer completely overlook a bullshit clause in a term sheet which he said was 'complete standard'. it was a friend of mine who had experience with similar who pointed out everything the lawyer missed
We had pretty good lawyers, but we got the best advice from a couple of guys who had founded and sold their own companies years before and who still had the scars. In my experience, I thought the lawyers sometimes played the whole exercise like an intellectual tennis match - whereas the guys who had been the same process with their own skin in the game could give much more directly useful advice. For example, a coupl…
Just to clarify - I was talking about a pretty standard VC investment, not PE. Serves me right for not reading the article :-)
Re: The Tricks Investors Use Against Founders
#28How do you find the right lawyer to vet your agreements, as a founder, to make sure something like this doesn't happen to you? Is a lawyer even the right person to look for?
> Is a lawyer even the right person to look for? It's very tricky. If you find a lawyer that sees many deals, then he/she likely knows many VCs and knows who butters his bread. If you find a lawyer that doesn't know many VCs, then they likely don't know as well the in's and out's of term sheet tricks. More fundamentally, the problem is that founders are technical (by and large), and they are up against people who do…
I would expect a banker / financial advisor to pick up on value and risk points. A really good, experienced lawyer should, but it isn't entirely in their expertise.
(BTW, if the lawyer does see a lot of deals, I would wonder how much of their business is representing investors, and how that colors their thinking. Their duty is to their client, but it's just human nature to see things in the same terms as your client base.)
These negotiate for a living, but investors shouldn't be intimidated. Take your time, think the thing through. DO NOT BE AFRAID TO SAY NO. Always have a plan to walk away, and never get committed beyond your comfort with the terms of the deal. Always have some plan to bootstrap, if only to prevent psychological commitment to _this_ funding deal.
I'm sure the fundraising process is a pain, but a lot of the preparation and strategizing is stuff that management should be doing anyway.
Re: The Tricks Investors Use Against Founders
#29Earlier quoted context omitted.
so how relevant is this article for startups? Seems to me this is more for owners of mature companies. Or am I missing something?
Hardly at all. It was probably posted by mistake.
Are you sure the article didn't just flip the relevance bit for you when you read "investors are looking for good companies with low risk, not great companies with high risk"?
The stuff in there about how earnouts are structured seems germane. I have friends who have sold tech startups where earnout structure was a material issue.
Re: The Tricks Investors Use Against Founders
#30Earlier quoted context omitted.
so how relevant is this article for startups? Seems to me this is more for owners of mature companies. Or am I missing something?
Hardly at all. It was probably posted by mistake.
Even if this article isn't directly relevant to startups, I think it's useful to startup founders to see the type of games investors can play. Some people don't have the YC team making sure they don't get screwed.