Y Combinator Founder Paul Graham Issues New Warning to Start-ups
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That sort of offer puts founders in a bind, because if you take it (a) it can anger the earlier investors, and (b) perhaps worse, it can, like a "down round" give investors the impression that your prospects are getting worse.
My overall advice about fundraising is to do breadth-first search weighted by expected value. I.e. talk to every investor who's interested but focus on the most promising ones. This is one of many situations whose solution follows from that rule. An investor offering you money on worse terms is at least offering you money, which is better than nothing. But all other things being equal, the expected value of such an investor is lower than that of one willing to invest on the same terms as your existing investors, so you have any of the latter you should focus on them.
Traditionally you'd give later investors higher valuations/caps/etc, particularly if you were at or approaching the magical amount of money you need point.
seems that GV resources are worth something more than other investors checks by themselves. while i agree there are many investors who are "just a check", there are at least some who bring a lot more to the table than just capital.
anyway, i understand the timing issue of subsequent / lower cap deals, but i wonder if this isn't just a result of a sequencing problem for diff "hi-res" financing negotiations within a period of 30-90 days around the same raise.
"I don't know what Paul's thinking," Maris said.
"It's just not true. Our portfolio speaks for itself."
"We've already closed investments on companies from this class,
so they don't seem to feel that way," Maris said.
In other words it would be unethical for the VC to not work to get the best valuation.
A) Care deeply about producing the highest return for you and in doing so use their expertise as negotiators including their competative advantage as a well branded firm (google). And in doing so dilute founders and less experienced investors in the process...
B) Ask them to negotiate in a way which maximizes other investors' returns and founder returns at the expense of your own returns.
Both cases you are paying them a fee to do this.
If you answer B, I encourage you to leave a response explaining your position.
Then consider you are a pension advisor who needs high returns to make sure that you will be able to pay the pensions of fire fighters. Would you make the same decision?
Fiduciary responsibility is independent of ethics. You can't use ends to justify means.
Exactly! Enron would be the equivalent if Google Ventures decided to falsify their valuation documents they were sending to investors saying they were getting much better valuations than they actually were. Then one day in 6 years they said all of those financial reports they submitted to the SEC were falsified so there is a total loss in the Google Venture line. In doing so they violated their fiduciary responsibility.
I'm sure there's a line in your head that companies are not meant to cross in serving their investors, but it didn't make it into the argument.
Of course there is, but an arm's length negotiation with CEOs of angel invested startups seeking to be the CEOs of the worlds largest, most innovative companies is well within that line.
Fiduciary responsibility is independent of ethics.
Fiduciary responsibility is the core of business ethics that should never be violated. Within fiduciary responsibility you still can't do anything illegal. Of course ethics are always a grey area which is why there is a discussion about this topic here, but I disagree where the line is clearly with you.
You can't use ends to justify means.
That is not what I am doing.
Seriously, ask yourself what you would want the VC you entrust with your money to do.
Is that all you need to ask in considering how ethical an action is?
The whole point of ethics is to reason in the context of tensions. Tensions between what you want and what others want. Companies have responsibilities to more than their investors. Their employees, their communities, their customers, their environment. Focusing exclusively on one side of the tension has nothing to do with ethics.
Focusing disproportionately on investors is also ethically convenient, because their interests are often aligned with yours.
"an arm's length negotiation with CEOs of angel invested startups seeking to be the CEOs of the worlds largest, most innovative companies is well within that line."
It may seem obvious to you, but it's clearly not obvious to grandparent since that is what the argument is about.
"Fiduciary responsibility is the core of business ethics that should never be violated. Within fiduciary responsibility you still can't do anything illegal."
I think this position doesn't require the word 'ethics'. You can get by with just 'laws'.
This isn't a rhetorical device. I think lots of people think this, and honestly am ok with it. At the least it's internally consistent. It just fails for me because it doesn't permit asking, "what should the laws be?"
If the CEO is unable to negotiate what they are worth, they should hire a dreaded MBA to help them.
GV or other capital firms do this all the time, they can probably put a valuation exact to the cents in your startup (I'm exaggerating, still)
Everyone that is on a long lasting business (or better, those who last in business) knows that what comes around goes around
1) You're going to be in business with your investors for the next decade (if things go well).
2) The pool of investable startups and investors is pretty small, and reputation matters. If you screw a company once, you might juice your expected return from 50% to 55% (likely still an actual return of $0 on any given deal), but if you get a reputation for behaving badly, your dealflow will no longer include good deals, which hurts you far more.
No, that's called business.
I do see what you mean, but I'm not sure the metaphor really helps because it reverses who's the big and famous player.
From the article: Google Ventures managing partner Bill Maris blasted back, telling BI that Graham's accusations were "patently absurd."
First example from http://en.wikipedia.org/wiki/Non-denial_denial#Types: Characterizing a statement as "ridiculous" or "absurd" without saying specifically that it is not true
Summary: PG warns that he sees a pattern at Google Ventures. Google Ventures isn't denying or confirming anything in regards to PG's statement.
Seems simple enough.
If everyone is investing at $12mm, and an investor says "fine, but I'm special, give me $6mm or I won't invest", there's no difference if it's capped convertible note or equity (except that it's technically more difficult to do the investment as equity with different valuations; you can hack it by giving warrants or other benefits I think.)
>'why he's writing about this subject at all.'
Makes one wonder what PG today, would say in response to PG (2005) :p
Pretty interesting stuff, possibly even inspiring some ideas.
"According to the website, the incubator's prominent founder said: "If you're talking to Google Ventures you may be part of a pattern. The pattern is: you've already raised some money at a cap of $x. Then GV says they're interested and wants to invest at a cap of $x/2.""
The quote in question: "Practically all start-ups internally are disasters"
Not just "often", but "practically all" start-ups. It's true in my experience, and not necessarily a bad thing. Of course, it would be great if everyone acted thoughtfully, didn't let ego get in the way, planned things just enough (but not too much), etc., but that's not just not the way it happens.
Acknowledging this fact, getting okay with it and still forging a highly functional team in the midst of such chaos and tragedy is the key. That's a tall order.
It's text content. Why not just a nice simple HTML page: instead of all the 'HTML app' cruft on top?