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Keep in mind that unless the existing investors actually sign something agreeing to this, it cant happen. Many likely do sign, because they think that getting big-namebrand-investor onboard is worth the haircut. If they don't want to do it, they don't have to. If the company does it anyways, they would have a slam dunk legal case to reclaim their ownership. Majority shareholders diluting minority shareholders for their own benefit is probably the most common business dispute there is.

This has traditionally been the role of unions and why YC has morphed itself into a de-facto founders union to better negotiate terms like this across a collective of founders.

I wouldn't be surprised if this sort of thing were a test. If you're not willing to screw over the earlier investors, you are clearly not ready to manage a large company. Large companies run on 'if I don't do it a competitor will and then we'll lose', not on being good people. Especially considering that white collar crime is very rarely punished, and then only with a slap on the wrist, such crime is expected in such circles.

I'm not sure this is such a terrible place for founders to be put in. It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word.

It's straightforward as an ethical dilemma, but maybe not as a practical/CEO dilemma. Are you willing to risk the future of your company, your employees and finally, your own future (by failing to raise another round) on keeping your word?

Now, of course, if it's such a hot startup that investors are cramming to get into a round, it probably less of a dilemma. But that might not always be the case.

Yes? I'm still not clear on why this is difficult.

The reality is that the decision is probably never between the future of the company and honoring your promises. It would be irrational for an early investor to allow the company to die in order to preserve their percentage stake in a zeroed-out investment.

The behavior contemplated in this blog post isn't that dilemma. It's "this conversation with early investors is going to be sticky, and will involve some form of concession to them --- therefore, we're going to exploit their lack of leverage and bulldoze through them." That's unethical. It's not a tragic dilemma. It's being presented with an opportunity to harm someone for your own convenience, and all that's asked of you as a human is to simply not do that.

That - obviously.

What I have in mind as the dilemma is exactly the fact that is is rational for the early investor to accept the terms of the latter round, which is why they are likely to get screwed. The dilemma of the founder, to me, seems to be whether (1) to go along with whatever terms the latter investors propose, even though you know it's not fair to the early investors, because you know that it's rational for the early investor to accept them, or (2) to stick out with the early investors and only accept further investment provided they honour your agreement (and not try to strong-arm the early investor in giving up their rights), even though it's not rational for you (the founder) or your company to do so (however, it's rational for you+early investor).

It's similar to the story that was on HN earlier - founders that had great exists had rewarded their employees with additional equity/cash, even though they were neither rationally nor legally bound to do it - but they did it anyways, because it was fair / the right thing to do.

That's the sort of dilemmas I'm talking about, and I believe the original article is talking about.

"(2) to stick out with the early investors and only accept further investment provided they honour your agreement (and not try to strong-arm the early investor in giving up their rights), even though it's not rational for you (the founder) or your company to do so (however, it's rational for you+early investor)."

The rationality of ethics depends on everyone believing they are part of a multi-round game.

Hint: even if you think you are playing a single round game, you probably aren't.

I wonder how straightforward an ethical dilema it is. When signing a contract, are you ethically obligated to follow the terms of the contract, or are you merely agreeing to something which can be enforced by the terms of the contract, including penalties and lawsuits. Most people do business in the latter way: a contract is only as good as the "teeth" that make it unprofitable to violate it.

You are ethically obligated to follow the terms of a contract that you carefully and deliberately sign.

How could it be otherwise? Virtually nobody is in a position to casually and efficiently use the courts to enforce contract terms.

A contract documents a promise. Promises must be kept.

> When signing a contract, are you ethically obligated to follow the terms of the contract, or are you merely agreeing to something which can be enforced by the terms of the contract, including penalties and lawsuits.

Ethics have nothing to do with the likelihood of getting caught or any potential penalties after being caught.

Some people do do business in that way, sure, but that doesn't change the ethics of those actions.

> It's pretty straightforward, as ethical dilemmas go. "Excitement" comes nowhere close to justifying breaking your word.

Agreed - this is inexcusable.

If you lose an investment because a later-stage investor is keen on you cheating existing investors out of what you already promised them, I'd say you dodged a bullet - you don't want them owning any piece of your company.

If your later-stage investors are so keen on working with investors who are willing to renege on their promises and legal obligations to earlier investors, that says something about:

(A) The types of entrepreneurs they want to work with

(B) How they themselves can expect to be treated in later rounds, when they are now the "earlier investors".

And if your Series A investor denies pro-rata rights to your seed round investors, then it should expect to have its pro-rata rights denied in Series B. Which gives this Series A investor a perverse incentive to set up the company to look better in the short term to get it to Series B, rather than it acting in the IPO-timescale long-term interest of your company!

Founders realistically have to pick and choose their battles. If a founder raises a seed round from 10 investors who each invest a five figure amount, and eight of those 10 investors do little to nothing after writing a check, it's difficult to expect the founder to go to bat for them if push comes to shove.

Are you sure you're not moving the goalposts here, like, a lot? If you make a promise, keeping it doesn't constitute "going to bat for someone".

In an ideal world, everyone would honor their agreements. In the real world, the behavior Aaron is describing is happening whether we like it or not.

Angel investors who are concerned about their pro rata rights can't pretend that they exist in an ideal world. They can do one of two things: passively accept whatever they get, or take action in an effort to get what they want.

If you recognize the motivations of founders (and the pressures they may be put under), it is clear that the behavior of the angels themselves can either incentivize or disincentivize founders when it comes to honoring the obligations they made under different circumstances.

It's possible to behave ethically in a fallen world. It's not even that hard. Your pose of hard-nosed realism is actually more repugnant than just straight up saying "I'm breaking my agreements because I want to".

> It's possible to behave ethically in a fallen world.

You're absolutely right. It is. But as an investor, you are bound to get hurt if you assume that everybody you're conducting business with will do so. Again, you can either deal with the world as it exists, or lament the fact that it isn't perfect.

In boxing, fighters are instructed to protect themselves at all times. That approach is a decent one outside of the boxing ring too.

What parts of your life are subject to ethics, then? Is it just investment, or are there are other circumstances where you feel like you have to choose between ethics and the law of the jungle?

> ...are there are other circumstances where you feel like you have to choose between ethics and the law of the jungle?

I can choose to conduct myself in an ethical manner. I can't assume you will do the same. Get it?

If you go through life under the mistaken assumption that nobody is willing to hit below the belt, and you never take action to prevent and defend against such blows, you will eventually be hurt. There's nothing wrong with accepting the fact that some folks will play dirty, and please don't fall into the trap of believing that taking action to protect your interests requires you to play dirty too. It doesn't.

Once again, if you acknowledge the motivations of other individuals and the pressures they might come under, you are less likely to be caught off guard by actions they might take in response to them. If you adjust your behavior accordingly, you can often incentivize them to do the right thing when they otherwise wouldn't had you acted passively and/or obliviously.

Am I misreading you? It sounded like earlier you were saying that it's justifiable to ruthlessly renege on agreements because if you don't, you're sure to take losses. If that wasn't what you were saying, I made a mistake, and apologize.

To be fair, I can see how my original comment could be misread. I wasn't endorsing the behavior being discussed, I was simply trying to convey the idea that investors should accept reality: most founders are going to pick and choose their battles. Realistic investors shouldn't expect founders to go to bat for them unless they have an incentive to.

Example: if you invested $25K in a $250,000 seed round and haven't talked to the founder in six months, don't be surprised if he doesn't fight tooth and nail for your pro rata rights.

If you want to write a contract to the effect that the investor retains pro rata rights provided he/she does X, Y, and Z, you can certainly do that. If the contract doesn't say that, then that wasn't your agreement.

-- Ah, I understand. Your comment is addressed to the seed investors, not to the founders. As such, it's a fair point. The question of how the investors should behave is not what we're discussing, though.