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Comment by feverishaaron | Hacker News Reader

I know of a company that thought they would be in this category. They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it. That way the expectation was set from the beginning that this company might take some time to build out their product and see traction.

It's smart, because the discount for the follow-on was pre-negotiated, so investors get perhaps a more favorable discount if the company is a run-away success, and the entrepreneurs were able to buy peace of mind, and could count on the money regardless of macro-economic forces.

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They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it.

So my guess is that these founders were either already successful previously, were well connected or had already bootstrapped quite a bit of the technology that would underlie the product (ie patents, team, etc...). Any or all of that the case?

It was an experienced salesperson who saw an open market, paired with a repeat startup CTO.

They did their research and validated the market by finding prospective customers before raising. Which is a good model to remove risk from any venture – especially one that would take many years to build.

Yes it would be nice to know what the background of the founder were here. I have a feeling they were not three 22 year olds on their first startup.

I would argue that three 22 year olds on their first startup shouldn't be building a product that can't be validated by the market in one or two years.

Define validate. That is kind of the crux of my question. If it means "profitability" then that is a different threshold than "users." I am trying to figure out what PG is trying to describe.

It's pretty obvious when it happens but it's most definitely not profitability. Rapidly growing usage (ie, traction) with an envisionable business model is usually sufficient. While the revenues themselves are not strictly necessary, it does help to demonstrate the ability to collect them.

I an not too sure about this. The debatable issue is should any investor give them any money or not? Since I doubt it almost never happens we probably don't have the data to know if it would work or not.

>They ended up raising a very large seed round (1MM+) from a VC and pre-negotiating a follow-on of equal size, should they need it.

Just out of curiosity why not just raise 2MM+? What value is there in this to the investor unless they have the ability to back out of the prenogociated follow-on? It seems like an expensive way to get no peace of mind?

Maybe because the founders are not required to take the follow-up 1MM if they don't need it, and thus don't need to hand over equity worth that 1MM.

They could always agree to return the cash if they didn't need it. I guess it would depend on the agreement signed.

That would be an exceedingly weird financial term. In effect, it would commit the investors to fronting cash, but give the managers an option as to whether and when to accept the cash at the agreed price (and deliver shares) or to reject some or all of it (and return cash).

Just from practice, you'll never see this from normal (professional or practiced) startup investors. Nor will you see its identical twin, the required second tranche.

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