Raising Capital: Closing The Deal

Hi Gruseom, I probably won't follow after this post, but you are welcome for the share. You can always email me directly via the address on the first page of the presentation. Board composition really matters, because your board is going to make decisions about the future of the company, and their most important role (some would say only role) is to hire/fire the CEO. Many founders give up 2 board seats for a bag of peanuts, and live to regret it.

The bottom line is board composition should be proportional to ownership. If a VC buys 25% of your company, they should have 1 of 4 board seats. The day investors (or their close friends who are identified as outsiders) have more than 50% of the board seats is the day you as a founder have lost control of your future.

I think most investors are fair about board composition up front. However some bigger VCs rely up on the fact that over time, you'll need to do multiple rounds, and they know that follow-on investors are frequently afraid to go against their decisions, so in effect, they end up with multiple board seats because the other investors don't want to piss them off. I have seen this dynamic firsthand, and it is not good. I hope this helps you!

Thanks, Enrique. Not sure what you mean by distribution of meetings/term sheets. If what you are saying is which VCs or angels are most likely to fund, that is a really hard question to answer. It really depends upon your plan and what you are doing, so I don't think I could say "firm X gives the most term sheets."

In terms of your other question about recommendations, I would guess that if Reid Hoffman or Marc Andreessen recommended an investment to a VC firm saying they were investing, the VCs would take notice. However, getting time from either of them is difficult. I'd recommend getting a strong, well-connected advisor, and a similarly connected lawyer, and work closely with them. I hope this helps.

Generally, a negotiation around a number will go more in your favor if you don't say a number first. Another view is that you should raise a level appropriate for your growth plans, and set the valuation based upon the control demands of the VC. Control is more important than valuation.

Hi Jack,

Great question. It's pretty complicated, but I think naming a valuation can only lead to problems. Bottom line: it's not your job as an entrepreneur to value your company. It's up to the investor to "make the offer" in most cases. Angels and VCs are professional negotiators. Most entrepreneurs are not. They see thousands of companies every year and can very quickly assess the value of your company. I have seen situations where an entrepreneur shoots himself in the foot by stating a valuation that is lower than the VC had in mind, as you suggest above. But the reality is that the "market" will value your startup. If 3 VCs want to fund it, it's probably worth more than you thought. If 0 VCs want to fund it, it's probably worth less than you thought :( I think it's best to let the investors compete and the interest level drive the valuation of the company. If asked for a valuation by a potential investor, my suggestion to entrepreneurs is to say "We'd like to raise $X. We're realistic about valuations these days, so you don't need to worry that we want $20 pre. But we're going to let the market decide the valuation." Most investors respect that response from what I have experienced over the years.

He who speaks first, loses.

Hi Sachinag, thanks for your comment. The reason most (but not all) of the firms I listed are in the Valley is because this group of startups are all in Palo Alto and meeting with investors here over the next few weeks. Of course there are many great investors outside of the Valley (some like Union Square, Foundry and First Round are all based outside) but I live and work in the Valley, so most of the investors I've worked with are here.