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By that logic, even if VC1 is dead and buried, VC2 still will never make an offer, since VC3 might swoop in and steal the deal, so it's always a waste of time t
by drfuchs 10y ago
By that logic, even if VC1 is dead and buried, VC2 still will never make an offer, since VC3 might swoop in and steal the deal, so it's always a waste of time to make an offer. Additionally, it's implausible that two VCs will calculate the exact same "fair" valuation, since it's all so nebulous.
From the point of view of the original angel investors and early employees, why shouldn't the founder push for the best, least dilutive, offer? Are you suggesting that if VC2 comes in with a low-ball offer, the founder should just say "gee, they made such an effort, I owe them the right to excessively dilute us all, even though VC1 is putting his money where his mouth is, and is willing to step up to avoid it."
Let's say I helped you by putting up a down payment for you to buy your house, for which I get 10% ownership. Later, you want to sell the house (or a further interest in it). If you get an offer, and I think it's too low, is it unreasonable for me to want to "steal the deal" at that artificially low price? Otherwise, it's simply a transfer of wealth from me (and you) to the new buyer, which I'd certainly like to defend myself against. People buy houses all the time in competition with other buyers; no serious buyer says "I'm not going to make an offer on that house, because someone else might beat my offer, or maybe exactly match it and the seller could choose that other offer."
- argonaut 10y agoNo, because once the contracts with VC2 are signed etc. they can't change the terms, so VC3 can't swoop in anymore in the same round. And even if VC3 swoops in during negotiations with VC2, it requires the founders to be pursuing that (and VC1 would be aware). Whereas with the ROFR the founders have no choice. Finally, VCs suffer from herd behavior. So it is very plausible that many VCs arrive at the same valuation - the valuation of the VC leading the round / the valuation of the best-reputation VCs. If foo VC values a company at $10M, but Sequoia comes in at $20M, 99% of the time foo VC will second-guess their valuation and match Sequoia.
- drfuchs 10y agoThe founders have a fiduciary duty to all existing shareholders (angels, early employees, etc.) to exactly be pursuing VC3 at the same time as VC2, before anything is signed, and to take the best deal. They already have no choice. Your point about herd behavior is well taken, though. And the result is that the VCs moan and groan, but ultimately the price goes up, and the entrepreneur wins, because they get the best valuation possible. (I've been in the room as an angel investor, and I was sure happy when the valuation went up 25% when a second VC got interested in the B round.) The only counter-argument I can see is, in your example, if Sequoia's money really is greener than fooVC's (which there are long-standing arguments for and against).
- argonaut 10y agoNo they don't have a fiduciary duty to negotiate with everyone. Founders routinely arbitrarily decide certain VCs are not the right fit (basically, they don't like them).
- abalone 10y agoYou're confusing ROFR with simple bidding when you use the phrase "steal the deal". VC2 and VC3 are open bidding, and between them whoever bids highest wins (you call it "steals"). ROFR changes this landscape considerably. VC1 doesn't have to put their bid in until the others are locked. I cited an article explaining how this can steer away competition. Another scenario you might not have considered is that if VC1 would've bid $15M, but the highest other offer is only $10M, then VC1 gets it at $10M.