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> He agreed to start a company with Elbring and invest an initial $500,000 through his trust — in installments, to ensure certain benchmarks were reached. This
by joshu 15y ago
> He agreed to start a company with Elbring and invest an initial $500,000 through his trust — in installments, to ensure certain benchmarks were reached.
This kind of offer is generally a warning sign, btw.
- imjk 15y agoCould you elaborate?
- deleted 15y ago[deleted]
- themechanic 15y agojosh, can you elaborate please?
- shareme 15y agoI think Josh meant that there was an initial expectation not met to be satisfied through an installment investment once the benchmark was reached.. Generally you do not confuse investments as co-founder with loans..its a bad sign..
- joshu 15y agoJoshua, not Josh :)
- themechanic 15y agoSorry, Joshua :)
- geekfactor 15y agoJosh may have something entirely different in mind but it is a bit of a red flag when an investor wants to tranche a small investment. Part of the art of sizing your round is to do so in a such a way as to give you a nice bit of running room, but it's much harder to run if you always have to wonder whether there's a brick wall around the corner. The investor is taking a certain amount of risk in making the investment. The way to minimize that investment is to support the team, make intros, execute, etc. Not dole out the cash a bit at a time like a crack dealer. Also, the milestones are already built into the process. The seed round provides enough cash to get you past the first set of milestones. The series A enough to get you past the second. Etc.
- joshu 15y agoNo, you were correct. (BTW: Joshua)
- brokentone 15y agoPerhaps you could elaborate?
- joshu 15y agoIt's generally a sign of a skittish, controlling, amateur investor. You see it pretty rarely. The investment already is tranched: Seed, Series A, Series B, etc.
- tptacek 15y agoWarning sign maybe, but I've had enough conversations about tranched offers to think it's not uncommon, even among real VCs.
- joshu 15y agoI'm in 50ish startups and I haven't heard of a single tranched investment. One startup I talked to several years ago had a tranched offer but it was from a Known Crazy Person. I do think there's some pretty big regional differences in investors, so maybe that is it?
- Vivtek 15y agoNo, I think we can safely assume that the investor in this case is also a crazy person.
- gallerytungsten 15y agore: warning signs I agree. For those asking how it could go wrong, a brief hypothetical example. Let's say you have a 500k seed round, with 100k initially, then 100k after each of 4 milestones. If the investor is out to pull a fast one, they might make their equity acquisition immediate (all of it) while you get the money in tranches. Then, let's say they decide you haven't met the first milestone. You're running out of cash. They suggest re-negotiating the terms. Since you "didn't meet" the milestone, it's a down round this time. Maybe they wind up with a controlling interest. Or let's say you find that scenario coming and find another investor. They might have a liquidation preference so they get paid more; and perhaps first too. Plenty of snares can be constructed by investors who want to take advantage.