Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The importance of honoring pro-rata agreements

aaronkharris.com

Post reply on HN
Print view View original

21–30 of 59 posts

Re: The importance of honoring pro-rata agreements

#21

Post by paul »

jpeg_hero wrote: post #5

laughing at the default variables in the spreadsheet. ludicrous the idea that you can get a 50x return by owning a 1% of a company that was seeded at a $10m valuation. ....and lets just assume a $1B exit for arguments sake! haha, this guy must be raising money for a seed fund or something. -- oh yeah, and the fact that prorata shares actually cost you something, you don't get them for free as Aaron seems to think.

Why is that ludicrous? I've gotten > 50x return multiple times. If you invest in winners, it's not unreasonable -- that's where most of the money is made in this business, and why it matters to not get squeezed out of the big hits.

Re: The importance of honoring pro-rata agreements

#22

Post by 7Figures2Commas »

idlewords wrote: post #18
7Figures2Commas wrote: post #16

Earlier quoted context omitted.

In an ideal world, everyone would honor their agreements. In the real world, the behavior Aaron is describing is happening whether we like it or not. Angel investors who are concerned about their pro rata rights can't pretend that they exist in an ideal world. They can do one of two things: passively accept whatever they get, or take action in an effort to get what they want. If you recognize the motivations of found…

It's possible to behave ethically in a fallen world. It's not even that hard. Your pose of hard-nosed realism is actually more repugnant than just straight up saying "I'm breaking my agreements because I want to".

> It's possible to behave ethically in a fallen world.

You're absolutely right. It is. But as an investor, you are bound to get hurt if you assume that everybody you're conducting business with will do so. Again, you can either deal with the world as it exists, or lament the fact that it isn't perfect.

In boxing, fighters are instructed to protect themselves at all times. That approach is a decent one outside of the boxing ring too.

Re: The importance of honoring pro-rata agreements

#23

Post by tomp »

tptacek wrote: post #10
austenallred wrote: post #2

I've seen this a couple times where the onus is mostly on the later-stage investors. They know the terms, and they know exactly what they need to say to lock out the earlier stage investors and take over a bigger portion of the round, so they start pushing levers to see what they can get to move, playing on the FUD of the founders that they might not be able to raise from somewhere else. What a terrible place to be p…

I'm not sure this is such a terrible place for founders to be put in. It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word.

It's straightforward as an ethical dilemma, but maybe not as a practical/CEO dilemma. Are you willing to risk the future of your company, your employees and finally, your own future (by failing to raise another round) on keeping your word?

Now, of course, if it's such a hot startup that investors are cramming to get into a round, it probably less of a dilemma. But that might not always be the case.

Re: The importance of honoring pro-rata agreements

#24

Post by tptacek »

tomp wrote: post #23
tptacek wrote: post #10

Earlier quoted context omitted.

I'm not sure this is such a terrible place for founders to be put in. It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word.

It's straightforward as an ethical dilemma, but maybe not as a practical/CEO dilemma. Are you willing to risk the future of your company, your employees and finally, your own future (by failing to raise another round) on keeping your word? Now, of course, if it's such a hot startup that investors are cramming to get into a round, it probably less of a dilemma. But that might not always be the case.

Yes? I'm still not clear on why this is difficult.

The reality is that the decision is probably never between the future of the company and honoring your promises. It would be irrational for an early investor to allow the company to die in order to preserve their percentage stake in a zeroed-out investment.

The behavior contemplated in this blog post isn't that dilemma. It's "this conversation with early investors is going to be sticky, and will involve some form of concession to them --- therefore, we're going to exploit their lack of leverage and bulldoze through them." That's unethical. It's not a tragic dilemma. It's being presented with an opportunity to harm someone for your own convenience, and all that's asked of you as a human is to simply not do that.

Re: The importance of honoring pro-rata agreements

#26

Post by tptacek »

7Figures2Commas wrote: post #22
idlewords wrote: post #18

Earlier quoted context omitted.

It's possible to behave ethically in a fallen world. It's not even that hard. Your pose of hard-nosed realism is actually more repugnant than just straight up saying "I'm breaking my agreements because I want to".

> It's possible to behave ethically in a fallen world. You're absolutely right. It is. But as an investor, you are bound to get hurt if you assume that everybody you're conducting business with will do so. Again, you can either deal with the world as it exists, or lament the fact that it isn't perfect. In boxing, fighters are instructed to protect themselves at all times. That approach is a decent one outside of the…

What parts of your life are subject to ethics, then? Is it just investment, or are there are other circumstances where you feel like you have to choose between ethics and the law of the jungle?

Re: The importance of honoring pro-rata agreements

#27

Post by phreanix »

founder6564 wrote: post #3

I am currently on the other side of the table. I have a startup that is doing well in traffic, but running out of money quickly. I want to sell the company, and I have several buyers, but my investors who have common stock are threatening to kill any deal I bring unless they get above and beyond their pro-rata shares. At least the investors in this article have the option of not signing whatever paperwork the new inv…

Just wondering, why sell and not raise additional funding? Or is that something you already explored?

Re: The importance of honoring pro-rata agreements

#28

Post by founder6564 »

phreanix wrote: post #27
founder6564 wrote: post #3

I am currently on the other side of the table. I have a startup that is doing well in traffic, but running out of money quickly. I want to sell the company, and I have several buyers, but my investors who have common stock are threatening to kill any deal I bring unless they get above and beyond their pro-rata shares. At least the investors in this article have the option of not signing whatever paperwork the new inv…

Just wondering, why sell and not raise additional funding? Or is that something you already explored?

Not a option for a bunch of reasons.

Re: The importance of honoring pro-rata agreements

#29

Post by tomp »

tptacek wrote: post #24
tomp wrote: post #23

Earlier quoted context omitted.

It's straightforward as an ethical dilemma, but maybe not as a practical/CEO dilemma. Are you willing to risk the future of your company, your employees and finally, your own future (by failing to raise another round) on keeping your word? Now, of course, if it's such a hot startup that investors are cramming to get into a round, it probably less of a dilemma. But that might not always be the case.

Yes? I'm still not clear on why this is difficult. The reality is that the decision is probably never between the future of the company and honoring your promises. It would be irrational for an early investor to allow the company to die in order to preserve their percentage stake in a zeroed-out investment. The behavior contemplated in this blog post isn't that dilemma. It's "this conversation with early investors is…

That - obviously.

What I have in mind as the dilemma is exactly the fact that is is rational for the early investor to accept the terms of the latter round, which is why they are likely to get screwed. The dilemma of the founder, to me, seems to be whether (1) to go along with whatever terms the latter investors propose, even though you know it's not fair to the early investors, because you know that it's rational for the early investor to accept them, or (2) to stick out with the early investors and only accept further investment provided they honour your agreement (and not try to strong-arm the early investor in giving up their rights), even though it's not rational for you (the founder) or your company to do so (however, it's rational for you+early investor).

It's similar to the story that was on HN earlier - founders that had great exists had rewarded their employees with additional equity/cash, even though they were neither rationally nor legally bound to do it - but they did it anyways, because it was fair / the right thing to do.

That's the sort of dilemmas I'm talking about, and I believe the original article is talking about.

Re: The importance of honoring pro-rata agreements

#30

Post by avemuri »

Forgive me if this is a naive question, but why are pro-rata rights considered standard? It seems like it's essentially the right to dilute founders in the future to maintain your ownership. Yes you're investing early, but that's priced into the valuation. I suppose the right has value, so perhaps a lower valuation would be justified. But why do pro-rata rights always elicit this moral outrage when called into question?
Post reply on HN