VCs aren't assholes, generally, but their standard terms are a bad deal for founders, generally. I've thought about this a lot over the past 25 years. In the past I've seen VCs do really bad things (like force decisions that set the company back 18 months bad.) The problem is, when you get a "good" VC that doesn't force bad decisions on you ,the cost of the money, mostly in deal terms, is too damn high.
And when you push back on them about this the response is you get are generally:
"This is a standard term" eg: everybody else is doing it. Well, tough. I'm actually reading before signing.
"If we don't have this method of double dipping [one of the four different ways they are doing so], then you could take the company and sell it for the money we put into it and that would be a bad deal for us." You mean your share of the company in such a situation isn't equal to the amount of money you put in? First off, I don't believe you because this valuation is kind of a joke and you've spent weeks telling us scary stories to try and keep it down, and secondly, your inability to get the equity you want for your money is your problem, not mine. That is like saying you think you're getting a bad deal so you want to cheat me to get a better deal? So let me get this straight, I took real risk and built up sweat equity, but you want my shares to be discounted effectively because you don't trust me? Ok, how about we discount your shares because I don't trust you? (I don't trust anyone who doesn't trust me. Usually they're projecting their own intentions.) Also, all you're doing-- at best-- is putting money in. Money can be acquired from any number of places and methods. The expertise we gained while building the company is irreplaceable and the knowledge of our own product and the risk we took getting it to here is far more valuable than your money. So, we have a split of the shares that accounts for that. The shares you get account for all of that.
"trust us". Nope, if you don't trust me, don't do a deal with me.
Don't even get me started on founders vesting their shares. You build a company, you have sweat equity, but the VC wants to reset the vesting? Why ? You can't vote unvested shares. They will give you a song and dance about "what if a founder leaves?" Well, we covered that in our articles of incorporation because we're not idiots, but they will ignore that and insist that "all founders must vest all their shares". (this is more common on early VC deals.) That's straight up taking paid for (with equity) and earn shares and turning them into a class of potential shares. Nope Nope Nope. Give founders part of the option pool as an incentive, fine. But reseting is just setting you up to be sucker punched when they want to replace a founder (because they don't like how things are going and need a scapegoat, no matter that it's the worst thing for the business at that point. But Tada! All your shares you already earned are now vesting again! Look at that! Even thought the other founders don't want you out, you don't have enough votes!
I think that the culture of "startups" over the past decade has become a bit cargo cult where there's a specific plane you build to get the money to rain from the sky.
This is: Go to accelerator, do VC deal, take the VC money and buy growth, use that to do another VC deal, rinse and repeat until you either stumble onto a working business (Uber, AirBnB) or you go bust (get Satisfaction)
The problem with this is that the cost of those VC deals are not in the founders interests. Far too often they hit base hits and build viable fast growing companies and then get taken out and don't get adequately compensated (and all the non-founder employees really get screwed.)
The other problems with this is once you take money from a VC you're locked into trying, and repeatedly betting the company, on being the next Uber. Being 37 Signals is not sufficient. Being Github (before the A18Z investment) is not sufficient.... even though both of those are obviously great fast growing companies that would make their founders and employees a lot of money at a liquidation event. And such event is far less likely under VCs because they want a $1B valuation (in fact their fund NEEDS a $1B valuation to cover all the losers)... whereas a $50M, $100M, $250M or $500M valuation (with no dilution from taking VC money) even though it's drastically smaller would result in the founders and early employees getting rich, and even the later employees getting a nice bonus.
Take angel money on good, clean, simple terms. If you need that to get going, go for it.
I think the age of the VCs is past. They just haven't realized it yet.
Ok, whenever I say things that are critical of VCs I get a lot of responses that are sorta knee jerk defenses of VCs. I've been working for startups and founding startups for over 25 years. I've seen it back when it was much worse and it cost a lot more to do a company. I've ridden this industry from BEFORE the dotcom bubble started to inflate. I'm speaking form experience here. Even when the VCs are "good" - in the top %10 of the VCs I've had direct experience with-- the deal isn't good for the founders in the end. They paid too much for their money.
You want VC money. Ok, why? Because that's your dream? Your dream should be to build a company.
Your plan should be to build a compelling product or service that really makes people go crazy with desire to throw money at you for it. I'm talking about CUSTOMERS.
All the time you spend dealign with VCs takes away from that and the deals aren't good.
You need money? Ok, go on Angel.co, get backed by a syndicate. Find Angels in your community. Charge for your product from day one. If github can do it, you can do it. Plow your profits into growth and product development. Take as little money as you can to get top product market fit. VC money is wasted before that point anyway. Even angel money should just be used to keep the lights on until you get to product market fit. Once you haver that, you have revenue, maybe take some more angel money to jumpstart marketing, but plow your operational profits int growing the business.
Don't delude yourself into thinking your pokemon website is a billion dollar business. It isn't.
Don't even waste time chasing VCs. By definition that are bad at picking and they will try to force you to bet it all only our pokemon wiki being a billion dollar business.
GS may have made a bunch of mistakes, but I'm using decades of experience here to reach my conclusions.
If you go thru YC or TechStars (but not any other accelerator) then maybe you might have a real business that could be a billion dollar business, but even then why not raise angel money instead of VC money? And I mean angel money on terms like the YC deferred-valuation deal that replaces convertible notes. (can't remember the name at the moment.)
Don't do any deal with liquidation preferences or any other kind of shenanigans. (And don't wave your hands about why VCs need LP in front of me. Your math doesn't add up, it can't add up.)
The model will never change until VCs realize they are dinosaurs. Or let VCs fund late stage deals, I'm sure their terms are not so terrible (unless the company is dying.)
But VCs for startups are obsolete.
drops mike