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Comment by eximius | Hacker News Reader

It seems to me that some of these points essentially suggest, 'hey, don't worry about the details of your funding, they aren't that important to whether you succeed. Just don't totally screw up on funding, focus on what you do with it'.

And, hey, that might be true.

But it also seems to me that there is a conflict of interest here in several of the main points.

> Founders who quibble over selling 18% or 20% of their company in a round have lost sight of what actually matters.

If each VC is getting that extra 2% of the company for free each round, that adds up.

So maybe we should take these points with a grain of salt. They don't seem obviously wrong to me (but I'm not an expert), but there does seem to be a conflict of interest in what they say and where it comes from.

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This is a tangent to the original article, but a reply specifically to your comment on being "greedy" (by which I mean founders being sensitive to giving up equity).

Whenever an investor says "are you really going to quibble over 1%?" my instinctive reaction is "are you?" It goes both ways. Yes, 90% of a watermelon is better than 100% of a grape. And obviously the investor's perspective for an ROI and risk tolerance are different from the startup founder and it has to be worth it for them. But it's so insanely selfish to paint the founder as greedy when the investor is literally in the process of being a hypocrite.

I actually understand the investor's perspective and realize they have a completely different context with their own goals, risks, assessments, etcetera and it's completely valid for them to have their own terms! I just despise when they frame the argument in such a tone-deaf manner. Yes, 1% fucking matters, otherwise you wouldn't be asking for it.

Usually the answer to that is to get a competing term sheet. That way, the answer to "Are you really going to quibble over 1%?" is "No, I'm not, I'm going to go with the firm that gives me that 1% without quibbling."

This also underscores the importance of doing fundraising in parallel and lining up as many offers as you can in a short period of time. If you're negotiating 1:1 you've already lost; you can't actually get market price unless you can make a market.

This might work to maximize price but it won't necessarily land you with the best partners. The smartest, best money knows it and they make you pay for their investment. Moreover, approaching fundraising as a transactional auction in a quick sprint carries with it a bunch of "relationship debt." You're signing on to someone (your investor) you can't fire for the duration of your company's existence. Rushing into that might end up costing your company far more than the marginal gain from a bidding war. Just my two cents.

This goes against point #2 that the investor for the most part doesn't matter.

Point #2 is so patently absurd its hard to take seriously. One, YC are themselves investors, and as far as I know they don't position themselves as causally inert in relation to a company's success / one of many indistinguishable and arbitrary alternatives.

Two, I don't think you will find many entrepreneurs who'd claim indifference around their investor choice. At the very least, this claim asks us to believe there aren't terrible investors who cause damage, which runs contrary to both common sense and history.

[edited]

Well, mea culpa. The piece does address the issue of bad investors. My main beef is with the line, "in the end, while some investors are better than others, none of them translate directly to success," which I don't think is a credible claim, or at least warrants more evidence.

> This also underscores the importance of doing fundraising in parallel and lining up as many offers as you can in a short period of time

Most early-stage raises lack the luxury of a competitive process. Bring able to trade concessions in terms for the win of a deal is a strong predictor for greater commercial sense. If someone can’t give away another point to fund their business, they may be in the wrong seat.

Globally or in Silicon Valley (and other tech hotspots)? It's common knowledge among experienced founders (or even just people who read a bunch of startup blogs) in Silicon Valley - that's why people raise "a round" of fundraising instead of just going to a single VC.

In areas that aren't startup hotspots I can certainly see that dynamic, but this is why people move to the Bay Area for fundraising.

It certainly does work both ways, but each player in a negotiation has a break point at which they walk away. You need to figure out what that is for you and for the other party.

The issue with founders who over-optimize in fundraising is that they are rarely working with a clear, frame worked goal in mind. It's often "I just want better!"

I understand this impulse. I've been there myself. I'm hoping to help people take a step back and consider the wider picture.

I agree with the other commenter that you need to avoid distributive negotiation on one scale (% ownership or price) because its outcome is inherently zero-sum. One way to resolve this, in addition to getting competing offers, is to add other elements into the negotiation so you’re no longer are negotiating on this one vector anymore. Try increasing liquidation preferences (or anything else that the invesor values more than you do) for example in exchange for the 1% percent. This way you end up with an integrative outcome: win-win situation.

> Whenever an investor says "are you really going to quibble over 1%?" my instinctive reaction is "are you?"

My reaction is even stronger: "Yes, I am. 1% to you is .02% of your fund--it's a rounding error. 1% to me is real money."

That's absurd. 1 point of the company at a given stage might be 5-10% of the total investment that the VC makes (given that VCs typically shoot for 10-20% of the company).

The VC is doing, give or take, the same deal 10-20x in a portfolio. If you talk about that 1% becoming a norm, then it really moves the dial 5-10% on the total return for the VC.

A founding team should be owning 60-80% of the company after that transaction. Meaning, the 1% ownership difference is something like 1.3% of the founders' total return.

If you're going to try to do math on it, be fair and real.

Full disclosure: VC here.

You are optimizing for the fact that you need all your companies to give you this since you can't predict the single "hit" that will generate the vast majority of the value of your portfolio.

Founders are (or at least should be) optimizing for the fact that they are most likely to be a mediocre business that isn't going to cash out with a lottery ticket.

I actually agree (broadly) with your statement about founders.

As far as what the VC is optimizing for -- fair enough, I am only pointing out that saying the 1 point difference in, say, a 10 or 11 point equity stake is somehow actually only 0.2% to the VC isn't fair. It's a 10% difference in the VC's stake.

> Founders who quibble over selling 18% or 20% of their company in a round have lost sight of what actually matters.

I think the more salient point being made here is that too many founders try to over-optimize the quantitative aspects of the round. If you find yourself trying to negotiate for a 2% difference in dilution, you should probably see if there are other qualitative terms you can get instead. Use whatever negotiating leverage you have to adjust board structure/voting, founder re-vesting, and a million other less-flashy terms.

And in the scenarios, such as SAFEs, where the only real terms are $$$-related, just decide on a starting number you're comfortable with and don't stress about optimization.

VC's will often ask early on, "what are you raising at?" and just because they agree to that number, doesn't mean "oh darn, I should have asked for higher and let them negotiate me down."

As Michael Seibel said at one of our YC dinners, "during fundraising, don't try to make ninja moves because most of you are not fundraising ninjas." While yes I understand that 2% dilution every round over the lifetime of the company adds up, the advice for 98% of founders is that you will hurt your company (and therefore financial outcome) more than you will help if you try to make minor negotiations on price/dilution/valuation.

Totally agree. There's so much nuance to fundraising that isn't expressed here. Dilution is a critical aspect to raising capital: too much will ruin your ability to raise money in the future. Too little can result in a cancerous drag on growth by leeching away founder enthusiasm and time. It's really important to try and raise the right amount at the right time. I actually found this section more objectionable than the dilution comment since it encourages founders to raise money in drips and drabs. That's a great way to derail an early startup and give up far more equity than if you'd just raised a larger amount in one big, early round.

Optimizing a deal is absolutely, 100% what a startup should be doing, but you should be going for a globally optimal deal, not optimizing for just one attribute. Would you counsel a startup not to optimize for sales or user growth? Sales are literally the only other form of revenue for most startups and without users you have nothing. Just as with sales and user growth, however, juggling long-term and short-term needs is critical.

100% agreed.

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