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But that's the point isn't it? If you only raise one round, like the $3m, a round is only like ~15% of the company so they don't have the power to dictate wheth
by reducesuffering 3y ago
But that's the point isn't it? If you only raise one round, like the $3m, a round is only like ~15% of the company so they don't have the power to dictate whether you attempt a bigger exit or not. I also don't understand why this "third way" isn't more common because you get the initial big boost of being able to hire a team, but you still retain 70-85% of the company instead of repeated dilutions where founders end up with 5-10%. I know I know, 5% of $1b is more than 85% of $50m but it usually seems like you become worse off and just another job you don't have control of where someone else is putting their thumbs on the scale and you can get ejected from.
- sv123 3y agoI think the point is it may be hard to get investors to ever give you $3m if you don't have the 100x exit in mind.
- avisser 3y agoThe counterpoint is that it's impossible for the seed investor to read minds or force a majority-owning founder to take more funding.
- BadCookie 3y agoLiquidation preferences make a difference to the math here. For example, a 3x liquidation preference would guarantee the investors the first $9 million of proceeds from any exit in the $3 million investment example.
- morgante 3y agoLiquidation preferences rarely kick in until later rounds. Most seed rounds are just 1x.
- xyzzy_plugh 3y agoI know some late stage startups with multiple rounds where _all_ are 1x. Most likely ZIRP but still.
- siegel 3y ago1x IS a liquidation preference. I very, very rarely see in excess of a 1x liquidation preference, regardless of the round.
- tptacek 3y agoRight, but you more or less have to lie to raise money for that strategy.
- xyzzy_plugh 3y agoI think that distinction firmly lies in what founders decide to tell themselves. Imagine, founders _lying_ in their pitch decks.
- tptacek 3y agoFounders are wishful in their pitch decks, but that's not the same thing as misrepresenting their intentions.
- reducesuffering 3y agoReally? You might've been in these investor meetings. AFAIK, founders are telling investors about the big vision, we'll raise money right now and wishfully become very big. In what way are investors stipulating, "ok we'll fund your seed/A but only so that you can hit certain benchmarks that you will definitely be raising a series B in a year or two." Is it that direct?