4 ms·

How to raise money with no lead

29 points by jeremyw 16y ago

thomaswmeyer 16y ago
well, if you have no lead, you certainly can't turn it into gold, so that option's right out.
dotBen 16y ago
The big concern with what I read is that you need to set your own proposed term-sheet slightly below market. I'm not sure why a startup would want to do that. There was also no real explanation as to why you wouldn't want a lead investor, or what is wrong with having one. It feels like this is doing something different for the sake of it, and fund-raising seems to be a prime time when you don't want to do anything unusual or different to the norm as it could spook investors and close doors.
- aditya 16y ago
  One reason to not want a lead investor is because you can't find one. Sometimes you'll get a lot of verbal confirmations, but no one deal champion... so why wait for a lead, just take the money and move on.
- gojomo 16y ago
  The message from both PG and the VH guys seems to be this style is on the rise, especially among the best startups -- so there shouldn't be a "this is different and spooky" effect. In the article Nivi rephrases "below market" as "priced to move" -- to create excitement and eliminate the need for lengthy due diligence. Leaving a little on the table could make sense for a faster, more-likely-to-finish-without-a-hitch round.
  - dotBen 16y ago
    The message from both PG and the VH guys seems to be this style is on the rise Is it though? I'm a fan of PG and VH.com but I wonder if the tail is actually wagging the dog here.
deleted 16y ago
[deleted]
mattmaroon 16y ago
I did it a couple years back.I definitely got the knee-jerk reaction from a couple investors due to its uncommonness back then. I still suspect that you'd generally get more money at a better valuation by having a lead for various reasons that are completely illogical from an investor's standpoint. I could see it becoming normalized though. It's one of those things that investors just have to get accustomed to.
lecha 16y ago
Question about slide 16: Why is selling preferred shares is more beneficial to founders than convertible debt?
- gojomo 16y ago
  From the transcript: Naval: Generally, even in the startup side, it’s probably better to do a preferred round because these are the times to set your terms very favorably for yourself, and they form a precedent for what happens when you do later rounds, whereas if you’re negotiating, if your first negotiation is with a VC you’re not going to set yourself the friendliest terms. So there’s nothing wrong with doing a preferred round, it’s just that the expense is slightly higher, but it’s not tremendously higher.
  - lecha 16y ago
    Presumably the "terms" in "set your terms very favorably for yourself" refers to valuation. Seems like the premise here is that VCs will actually take that valuation into account during the round A. How common is that? (versus VCs trying to set the valuation regardless of valuation of the round done without them)
    - gojomo 16y ago
      Actually, no; the valuation is the one thing definitely renegotiated every round. (Prior numbers are only psychologically important to the insiders; there's no expectation later investors need to respect them.) Instead, the terms referred to are all the other things that make stock 'preferred', and having an existing set of preferred stockholders makes it a little harder for later VCs to introduce new and different preferences. (And if they do, they may need to cut in the prior preferreds.) The transcript has more details.
- cperciva 16y ago
  Convertible debt, being debt, has an expiry date where it must be repaid (if it isn't converted). This could result in founders forfeiting their entire company if they can't repay the debt. Preferred stock, in contrast, acts like convertible debt with an infinite expiry date -- presuming, of course, that there aren't terms allowing the investor to force an exit at some point.

29 points by jeremyw 16y ago

well, if you have no lead, you certainly can't turn it into gold, so that option's right out.

The big concern with what I read is that you need to set your own proposed term-sheet slightly below market. I'm not sure why a startup would want to do that. There was also no real explanation as to why you wouldn't want a lead investor, or what is wrong with having one. It feels like this is doing something different for the sake of it, and fund-raising seems to be a prime time when you don't want to do anything unusual or different to the norm as it could spook investors and close doors.

aditya 16y ago
One reason to not want a lead investor is because you can't find one. Sometimes you'll get a lot of verbal confirmations, but no one deal champion... so why wait for a lead, just take the money and move on.
gojomo 16y ago
The message from both PG and the VH guys seems to be this style is on the rise, especially among the best startups -- so there shouldn't be a "this is different and spooky" effect. In the article Nivi rephrases "below market" as "priced to move" -- to create excitement and eliminate the need for lengthy due diligence. Leaving a little on the table could make sense for a faster, more-likely-to-finish-without-a-hitch round.
- dotBen 16y ago
  The message from both PG and the VH guys seems to be this style is on the rise Is it though? I'm a fan of PG and VH.com but I wonder if the tail is actually wagging the dog here.

deleted 16y ago

[deleted]

mattmaroon 16y ago

I did it a couple years back.I definitely got the knee-jerk reaction from a couple investors due to its uncommonness back then. I still suspect that you'd generally get more money at a better valuation by having a lead for various reasons that are completely illogical from an investor's standpoint. I could see it becoming normalized though. It's one of those things that investors just have to get accustomed to.

lecha 16y ago

Question about slide 16: Why is selling preferred shares is more beneficial to founders than convertible debt?

gojomo 16y ago
From the transcript: Naval: Generally, even in the startup side, it’s probably better to do a preferred round because these are the times to set your terms very favorably for yourself, and they form a precedent for what happens when you do later rounds, whereas if you’re negotiating, if your first negotiation is with a VC you’re not going to set yourself the friendliest terms. So there’s nothing wrong with doing a preferred round, it’s just that the expense is slightly higher, but it’s not tremendously higher.
- lecha 16y ago
  Presumably the "terms" in "set your terms very favorably for yourself" refers to valuation. Seems like the premise here is that VCs will actually take that valuation into account during the round A. How common is that? (versus VCs trying to set the valuation regardless of valuation of the round done without them)
  - gojomo 16y ago
    Actually, no; the valuation is the one thing definitely renegotiated every round. (Prior numbers are only psychologically important to the insiders; there's no expectation later investors need to respect them.) Instead, the terms referred to are all the other things that make stock 'preferred', and having an existing set of preferred stockholders makes it a little harder for later VCs to introduce new and different preferences. (And if they do, they may need to cut in the prior preferreds.) The transcript has more details.
cperciva 16y ago
Convertible debt, being debt, has an expiry date where it must be repaid (if it isn't converted). This could result in founders forfeiting their entire company if they can't repay the debt. Preferred stock, in contrast, acts like convertible debt with an infinite expiry date -- presuming, of course, that there aren't terms allowing the investor to force an exit at some point.