The Cost of Preemptive Deals
blog.ycombinator.com
The Cost of Preemptive Deals
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Re: The Cost of Preemptive Deals
#2This is helpful. Core takeaway at the end: "That suggests that to get the best of both worlds – to minimize the Work Premium as well as the work of running a full fundraise – founders should use pre-emptive offers to run an accelerated, abbreviated process with a handful of select investors. The way to do this is for founders to make sure they are cultivating relationships with a subset of investors they think would be good partners for their company far in advance of their actual raise."
Re: The Cost of Preemptive Deals
#3I don't find this surprising at all and I think it's likely often in founders' best interests to still take a preemptive deal. It removes risk (which creates value) and also allows them to remain focused on operating the core business. There are obvious downsides here but I'd guess on average the benefits of that slight extra dilution far outweigh the costs.
Re: The Cost of Preemptive Deals
#4Makes sense - one should always price shop when able to.
As an employee When you get a job offer the very next thing you should do is reach out to those companies you are most interested in / furthest along in the process and ask for acceleration. They won’t always be choose to accommodate but I’ve had it happen / improves the quality of my offers.
Re: The Cost of Preemptive Deals
#5I don't find this surprising at all and I think it's likely often in founders' best interests to still take a preemptive deal. It removes risk (which creates value) and also allows them to remain focused on operating the core business. There are obvious downsides here but I'd guess on average the benefits of that slight extra dilution far outweigh the costs.
Remember dilution compounds into future funding rounds. I agree with point of this article intuitively - just take a month or two to run an accelerated process.
It’s not just about the money, it’s also entering into a partnership. So you shouldn’t take the first offer, you should at least shop it to know your options (quant and qual).
Re: The Cost of Preemptive Deals
#6> ...we looked at 120 US Series A rounds...
> ...on average, founders taking preemptive offers are taking ~1.4% more dilution for less money.
Is this finding statistically significant? It's unclear what the standard deviation in the distribution of dilutions is, but if it's less than ~7.7% or so then this would be less than a 2 sigma result. Granted, given that their prior was that this should have gone the other way, that would increase the statistical significance of the result. I really have no idea what this distribution looks like, though.
Re: The Cost of Preemptive Deals
#7This post doesn't mention what is perhaps the greatest benefit for founders of accepting a preemptive offer from an existing investor: getting a known and trusted person on the board.
At the Series A and later, founders typically have to give up a board seat in financing rounds. This is no bueno, because it means they're giving up control of the company. Board members are hard to get rid of, can often veto big moves, and after a certain point can even fire the founder CEO.
Ensuring only extremely trusted, founder friendly, values aligned people make it on to the board should be a top priority of every startup founder.
By accepting a preemptive offer from an investor the founders have worked with directly for months/years, the founders are limiting the risk of having the wrong people on the board. Founders can, of course, run reference checks with other founders on new investors, to try to gauge how they would act as board members, but there's no stand in for direct experience working with an investor.
Given that the most important things to optimize for during later stage financings are ownership and control, it makes sense that founders might trade some ownership to have more certainty about the control situation.
Re: The Cost of Preemptive Deals
#8I don't find this surprising at all and I think it's likely often in founders' best interests to still take a preemptive deal. It removes risk (which creates value) and also allows them to remain focused on operating the core business. There are obvious downsides here but I'd guess on average the benefits of that slight extra dilution far outweigh the costs.
Remember dilution compounds into future funding rounds. I agree with point of this article intuitively - just take a month or two to run an accelerated process. It’s not just about the money, it’s also entering into a partnership. So you shouldn’t take the first offer, you should at least shop it to know your options (quant and qual).
There's a bias here in that as a founder if I'm disappointed in one of my investors I would decline the pre-emptive offer and actively seek alternatives. In some cases I may even be interested in more dilutive options if it re-structures the companies governance.
Re: The Cost of Preemptive Deals
#9> ...we looked at 120 US Series A rounds... > ...on average, founders taking preemptive offers are taking ~1.4% more dilution for less money. Is this finding statistically significant? It's unclear what the standard deviation in the distribution of dilutions is, but if it's less than ~7.7% or so then this would be less than a 2 sigma result. Granted, given that their prior was that this should have gone the other way…
you are reading this blog post like a research paper, which is wrong. This is not a research paper.
this is the writers trying to influence the market so that future start ups they work with accept terms that are more favorable to YC.
they are using data and statistics because their target market would dismiss the information outhand if they did not.
Re: The Cost of Preemptive Deals
#10Sorry for the dumb question, I'm not an expert on startup finance, but what is a " pre emptive offer"?
The article assumes the reader knows( which is fine, but I don't know, hence the question here, thanks in advance )