5 ms·

I see this said here all the time, but why are obligated to do so? If VCs don’t own a majority stake what authority do they have to make you chase such huge re

I see this said here all the time, but why are obligated to do so? If VCs don’t own a majority stake what authority do they have to make you chase such huge returns at the cost of a stable and profitable business?

mantas 3y ago
VCs won’t invest if they know this is your plan? If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is).
- plonk 3y ago
  "I initially planned to scale but eventually realized the company wouldn't make enough to survive, as happens to most startups. I chose to scale down and make the company profitable instead of killing it." Could the VCs really argue against that in court? It's well-known that most startups fail without any scamming.
  - thfuran 3y ago
    Making fraud your retirement plan seems unwise, even if there's a chance you'd get away with it.
    - edgyquant 3y ago
      How is there any fraud here? You took seed money, built a profitable company and it just can’t scale to a unicorn. That isn’t fraud and no court would consider it as such
      - thfuran 3y ago
        How is it not fraud to initially represent to investors that you plan to scale to the moon while planning all along to later say that you decided it wasn't going to work out?
        plonk 3y ago
        What your mental plan is doesn't matter though, as long as you actually made a reasonable effort towards what the VCs expect. Or does anyone actually tell them "invest in me because I'll overtake Nvidia or die trying"? I guess the person taking the VC deal isn't actually against getting filthy rich if they have a chance. If you say "I think this can get big", burn cash and work hard for a while, then recognize the moment where it's not sustainable anymore and scale down, then you did what was expected.
        thfuran 3y ago
        >What your mental plan is doesn't matter though Of course it does. It makes the difference between being wrong and being a liar. >I guess the person taking the VC deal isn't actually against getting filthy rich if they have a chance. If you say "I think this can get big", burn cash and work hard for a while, then recognize the moment where it's not sustainable anymore and scale down, then you did what was expected. But if at the time you said that you actually neither believed it could get big nor intended to try to make it big, you've committed fraud even if the ultimate outcome is expected.
  - bootsmann 3y ago
    I don't think you even need to go to court over this. If you have a reasonably good relationship with your VCs you can just offer to buy them out with a small premium on their investment. They see how the business is going too and most are not looking to hold you on their portfolio forever for no reason.
    - saulpw 3y ago
      It seems like VCs will often sell shares for a near-total-loss on their investment, for simplicity and relationship with founders, and they can write it off[0]. [0] https://www.youtube.com/watch?v=XEL65gywwHQ https://www.youtube.com/watch?v=XEL65gywwHQ
- htrp 3y ago
  >If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is). They'll just boardroom coup you and replace you with someone who will hyperscale up.
  - edgyquant 3y ago
    Again, this requires them having a majority stake and we’re discussing YC which is a seed round. The current company I work at is YC backed and the founder still controls 85% of the company
- gnicholas 3y ago
  Former Silicon Valley lawyer here. It would be very difficult for a VC to win such a case, and it would almost certainly not be worth it for them given the amount of damages at issue. It would also hurt their reputation by making it seem like they got duped by some founder.
brigadier132 3y ago
edit: my comment on SAFEs was wrong
- deleted 3y ago
  [deleted]
- zamfi 3y ago
  This is true of most debt instruments but explicitly not SAFEs, which do not have an interest rate.
raincole 3y ago
It's definitely possible. Example: gumroad. I don't know the whole story, but basically at one point they couldn't raise more VC money, so they scaled down (read: fire people) and made it at least moderately profitable. But it's exception, not the norm.
- langsoul-com 3y ago
  Gumroad is a major exception. They fired almost everyone and took on part time contractors instead.
  - DVassallo 3y ago
    They’re an exception because VCs pressure funded not to do what Sahil did. All investors wanted him to shut it down and do something else.
deleted 3y ago
[deleted]
paulgb 3y ago
> what authority do they have Board seats, which are often a condition of investment at series A and later rounds.
- kjksf 3y ago
  That still requires majority vote of board members which implies you've sold at least 50% of your company. YC gets 7%, they have zero power to make you do anything. Selling enough company that you loose 50% control is such a rare thing that it's not relevant to what most founders will experience.
  - dahart 3y ago
    > That still requires majority vote This presumes open and direct confrontation, which means the relationship is going bad, and which I’d speculate most people would rather avoid. You’re forgetting a bunch of things, like what the investment terms might say about it, what your reputation is going to be down the road, all the ways people can apply lots and lots of pressure, how important networking can be, and the fact that in some cases the investor is providing other resources and/or might be the gateway to future investment. Getting to a place where you’re openly ignoring your investors and calling for a board vote to overturn them is a last resort, and is playing Russian roulette, not the first thing to try if there’s disagreement about their advice, right?
  - icedchai 3y ago
    It doesn't require selling 50%. You can sell less than 50% of your company and still have the board majority controlled by investors, because those were the terms of the preferred investment.
  - fakedang 3y ago
    If I'm not mistaken, YC takes a 7% at the seed stage, then the SAFE bumps it to around 15-20% on the next fundraise? From that, they're diluted down in subsequent rounds is what I presume.
  - MacsHeadroom 3y ago
    Board control and share control are two different and competing things, with the board generally trumping shareholders. The board is not controlled by shareholders. The board has a fiduciary responsibility to act in the best financial interest of the shareholders as a whole. But they (the board) essentially have full authority to decide what that means to them. Shareholders are effectively powerless outside of court, except for whatever power a board intentionally briefly concedes to them.
indymike 3y ago
> If VCs don’t own a majority stake what authority do they have to make you chase such huge returns at the cost of a stable and profitable business? Disputes with investors about the direction of the company are rare. Disputes about how exactly to aim that direction happen often. In my own experience, VCs and large investors have this leverage: * Future investment. A major investor pulling back or not participating in the next round usually will result in worse terms, lower valuations or, the round not happening. * Legal issues. Investments come with terms and conditions, and they are rarely, here's $5m, do what you want. * Restructuring. From time to time, you need to have investors be on board with restructuring debt or the company. If you are at odds with a major investor, they are a whole lot less likely to be helpful. * "We'll make it hard for you" Everything from investing in competitors, to introducing key people to job opportunities to guiding customers elsewhere. Yes they have a fiduciary duty, but when they think that duty requires management to change direction, things can get ugly. Finally, investors talk to each other, and you piss one off, and they will poison the well with many others.

mantas 3y ago

VCs won’t invest if they know this is your plan? If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is).

plonk 3y ago
"I initially planned to scale but eventually realized the company wouldn't make enough to survive, as happens to most startups. I chose to scale down and make the company profitable instead of killing it." Could the VCs really argue against that in court? It's well-known that most startups fail without any scamming.
- thfuran 3y ago
  Making fraud your retirement plan seems unwise, even if there's a chance you'd get away with it.
  - edgyquant 3y ago
    How is there any fraud here? You took seed money, built a profitable company and it just can’t scale to a unicorn. That isn’t fraud and no court would consider it as such
    - thfuran 3y ago
      How is it not fraud to initially represent to investors that you plan to scale to the moon while planning all along to later say that you decided it wasn't going to work out?
      - plonk 3y ago
        What your mental plan is doesn't matter though, as long as you actually made a reasonable effort towards what the VCs expect. Or does anyone actually tell them "invest in me because I'll overtake Nvidia or die trying"? I guess the person taking the VC deal isn't actually against getting filthy rich if they have a chance. If you say "I think this can get big", burn cash and work hard for a while, then recognize the moment where it's not sustainable anymore and scale down, then you did what was expected.
        thfuran 3y ago
        >What your mental plan is doesn't matter though Of course it does. It makes the difference between being wrong and being a liar. >I guess the person taking the VC deal isn't actually against getting filthy rich if they have a chance. If you say "I think this can get big", burn cash and work hard for a while, then recognize the moment where it's not sustainable anymore and scale down, then you did what was expected. But if at the time you said that you actually neither believed it could get big nor intended to try to make it big, you've committed fraud even if the ultimate outcome is expected.
- bootsmann 3y ago
  I don't think you even need to go to court over this. If you have a reasonably good relationship with your VCs you can just offer to buy them out with a small premium on their investment. They see how the business is going too and most are not looking to hold you on their portfolio forever for no reason.
  - saulpw 3y ago
    It seems like VCs will often sell shares for a near-total-loss on their investment, for simplicity and relationship with founders, and they can write it off[0]. [0] https://www.youtube.com/watch?v=XEL65gywwHQ https://www.youtube.com/watch?v=XEL65gywwHQ
htrp 3y ago
>If you lie to them and keep going for 500k, they can sue you for scamming (or whatever legal term is). They'll just boardroom coup you and replace you with someone who will hyperscale up.
- edgyquant 3y ago
  Again, this requires them having a majority stake and we’re discussing YC which is a seed round. The current company I work at is YC backed and the founder still controls 85% of the company
gnicholas 3y ago
Former Silicon Valley lawyer here. It would be very difficult for a VC to win such a case, and it would almost certainly not be worth it for them given the amount of damages at issue. It would also hurt their reputation by making it seem like they got duped by some founder.

brigadier132 3y ago

edit: my comment on SAFEs was wrong

deleted 3y ago
[deleted]
zamfi 3y ago
This is true of most debt instruments but explicitly not SAFEs, which do not have an interest rate.

raincole 3y ago

It's definitely possible. Example: gumroad. I don't know the whole story, but basically at one point they couldn't raise more VC money, so they scaled down (read: fire people) and made it at least moderately profitable. But it's exception, not the norm.

langsoul-com 3y ago
Gumroad is a major exception. They fired almost everyone and took on part time contractors instead.
- DVassallo 3y ago
  They’re an exception because VCs pressure funded not to do what Sahil did. All investors wanted him to shut it down and do something else.

deleted 3y ago

[deleted]

paulgb 3y ago

> what authority do they have Board seats, which are often a condition of investment at series A and later rounds.

kjksf 3y ago
That still requires majority vote of board members which implies you've sold at least 50% of your company. YC gets 7%, they have zero power to make you do anything. Selling enough company that you loose 50% control is such a rare thing that it's not relevant to what most founders will experience.
- dahart 3y ago
  > That still requires majority vote This presumes open and direct confrontation, which means the relationship is going bad, and which I’d speculate most people would rather avoid. You’re forgetting a bunch of things, like what the investment terms might say about it, what your reputation is going to be down the road, all the ways people can apply lots and lots of pressure, how important networking can be, and the fact that in some cases the investor is providing other resources and/or might be the gateway to future investment. Getting to a place where you’re openly ignoring your investors and calling for a board vote to overturn them is a last resort, and is playing Russian roulette, not the first thing to try if there’s disagreement about their advice, right?
- icedchai 3y ago
  It doesn't require selling 50%. You can sell less than 50% of your company and still have the board majority controlled by investors, because those were the terms of the preferred investment.
- fakedang 3y ago
  If I'm not mistaken, YC takes a 7% at the seed stage, then the SAFE bumps it to around 15-20% on the next fundraise? From that, they're diluted down in subsequent rounds is what I presume.
- MacsHeadroom 3y ago
  Board control and share control are two different and competing things, with the board generally trumping shareholders. The board is not controlled by shareholders. The board has a fiduciary responsibility to act in the best financial interest of the shareholders as a whole. But they (the board) essentially have full authority to decide what that means to them. Shareholders are effectively powerless outside of court, except for whatever power a board intentionally briefly concedes to them.

indymike 3y ago

> If VCs don’t own a majority stake what authority do they have to make you chase such huge returns at the cost of a stable and profitable business? Disputes with investors about the direction of the company are rare. Disputes about how exactly to aim that direction happen often. In my own experience, VCs and large investors have this leverage: * Future investment. A major investor pulling back or not participating in the next round usually will result in worse terms, lower valuations or, the round not happening. * Legal issues. Investments come with terms and conditions, and they are rarely, here's $5m, do what you want. * Restructuring. From time to time, you need to have investors be on board with restructuring debt or the company. If you are at odds with a major investor, they are a whole lot less likely to be helpful. * "We'll make it hard for you" Everything from investing in competitors, to introducing key people to job opportunities to guiding customers elsewhere. Yes they have a fiduciary duty, but when they think that duty requires management to change direction, things can get ugly. Finally, investors talk to each other, and you piss one off, and they will poison the well with many others.