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I wrote this in 2015 in response to Mark Suster suggesting that founders "Run" from liquidation preference and preference overhang in early deals: "Run where?

I wrote this in 2015 in response to Mark Suster suggesting that founders "Run" from liquidation preference and preference overhang in early deals: "Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple preferences because they have nowhere else to go. For founders, these deals can be make or break. For investors they can hold out and the only downside is slightly lower yield. So there is asymmetry in needs which means founders have little leverage." https://medium.com/@andrewkemendo/first-time-founders-and-the-trouble-with-founder-friendly-terms-e804a9783b5c https://medium.com/@andrewkemendo/first-time-founders-and-th...

frfl 3y ago
You wrote that back in 2015. What, in your experience, has changed since then? 2021 would've probably, I'm guessing, been a lot more favorable for founders, but 2022/23/24 is likely a lot less favorable.
- AndrewKemendo 3y ago
  I stepped out of investing about two years ago because i couldn’t stomach the persistent narcissistic greed dressed up as virtue once I saw it for what it was. The last I saw it was just as bad and frankly getting worse for founders, as investors pulled back when the Fed moved on interest rates. Basically everyone just stopped taking risk except for the giant institutional funds and even then, as of last year were most just doubling down on existing. I heard similar actually last month at an event I was at - funds are sitting on dry powder and not doing cap calls.
  - lumost 3y ago
    Out of curiousity - how does a VC fund hold onto "powder"? Do they have terms to invest in a liquid fund, or some other arrangement? Seems like they'd face tough returns if they held powder for long.
    - AndrewKemendo 3y ago
      I don’t have enough experience at the institutional level to tell you precisely. At the smaller scale, though it just means that returns that were above and beyond distribution expectations so, for example, what the fund returns separate from the LP distribution, and then separate from distributions to partners is you know basically that net margin for the fund overall so that they would use as seeds for another fund or something like that. So effectively they are just not opening other fund lines, because none of the investments or markets that are coming up, match a risk profile for the amount of interest you can get back in other methods now.
    - whiterknight 3y ago
      Hold treasuries?
    - pcl 3y ago
      Typically, VC funds don't have much cash on hand, and when they make an investment, they issue a capital call to the limited partners (LPs) in the fund. The LPs then are on the hook to send money for the investment, typically within a week or two. So, a $100M VC fund is really a commitment by the LPs to wire $100M over the course of ~5-8 years. LPs do all sorts of different things to manage the money they've committed but not yet invested.
      - MichaelZuo 3y ago
        It's much like a miniature version of the World Bank or other MDBs.
- lumost 3y ago
  Anecdotally, not much changed for East coast startups. What did change is that West coast firms came to the east coast. Whereas 10 years ago it would be noteworthy to work for an SV company - it is now typical. I think the local market was outcompeted and absorbed outside of a few niches.
  - AndrewKemendo 3y ago
    Interestingly, the East Coast is way more primed for large deals than the West Coast is just from a population volume and infrastructure perspective. However, because there is just no high risk in the area, it just doesn’t happen. It’s literally just a physical access to rich people location thing which is crazy to me that it’s still the case but it seems to actually just be as simple as that.
lmm 3y ago
> Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple preferences because they have nowhere else to go. Away from the east coast? If funding on good terms is important to your business, go somewhere you can get funding on good terms.

frfl 3y ago

You wrote that back in 2015. What, in your experience, has changed since then? 2021 would've probably, I'm guessing, been a lot more favorable for founders, but 2022/23/24 is likely a lot less favorable.

AndrewKemendo 3y ago
I stepped out of investing about two years ago because i couldn’t stomach the persistent narcissistic greed dressed up as virtue once I saw it for what it was. The last I saw it was just as bad and frankly getting worse for founders, as investors pulled back when the Fed moved on interest rates. Basically everyone just stopped taking risk except for the giant institutional funds and even then, as of last year were most just doubling down on existing. I heard similar actually last month at an event I was at - funds are sitting on dry powder and not doing cap calls.
- lumost 3y ago
  Out of curiousity - how does a VC fund hold onto "powder"? Do they have terms to invest in a liquid fund, or some other arrangement? Seems like they'd face tough returns if they held powder for long.
  - AndrewKemendo 3y ago
    I don’t have enough experience at the institutional level to tell you precisely. At the smaller scale, though it just means that returns that were above and beyond distribution expectations so, for example, what the fund returns separate from the LP distribution, and then separate from distributions to partners is you know basically that net margin for the fund overall so that they would use as seeds for another fund or something like that. So effectively they are just not opening other fund lines, because none of the investments or markets that are coming up, match a risk profile for the amount of interest you can get back in other methods now.
  - whiterknight 3y ago
    Hold treasuries?
  - pcl 3y ago
    Typically, VC funds don't have much cash on hand, and when they make an investment, they issue a capital call to the limited partners (LPs) in the fund. The LPs then are on the hook to send money for the investment, typically within a week or two. So, a $100M VC fund is really a commitment by the LPs to wire $100M over the course of ~5-8 years. LPs do all sorts of different things to manage the money they've committed but not yet invested.
    - MichaelZuo 3y ago
      It's much like a miniature version of the World Bank or other MDBs.
lumost 3y ago
Anecdotally, not much changed for East coast startups. What did change is that West coast firms came to the east coast. Whereas 10 years ago it would be noteworthy to work for an SV company - it is now typical. I think the local market was outcompeted and absorbed outside of a few niches.
- AndrewKemendo 3y ago
  Interestingly, the East Coast is way more primed for large deals than the West Coast is just from a population volume and infrastructure perspective. However, because there is just no high risk in the area, it just doesn’t happen. It’s literally just a physical access to rich people location thing which is crazy to me that it’s still the case but it seems to actually just be as simple as that.

lmm 3y ago

> Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple preferences because they have nowhere else to go. Away from the east coast? If funding on good terms is important to your business, go somewhere you can get funding on good terms.