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Founders who are in the midst of their roadshow will pitch VCs who say they are “founder-friendly”. Here are 3 tips to connect the dots between the self-proclaimed founder-friendly VC’s mindset and the tough but fair conversations they will have with you when your business hits some road bumps.
Tip 1: “Friendly” might not mean what you think it means
If your start-up has multiple founders, it is typically the CEO co-founder who is the point person to negotiate the term sheet. As the CEO co-founder, you need to have the self-awareness to accept that the VC acts as the corporate stewards in the best interest of the company, their LPs, founders, and employees. The rubber meets the road when your startup has a critical business issue. It could be the business is not performing at the hockey stick growth level, or that the company’s brand was hurt by a devastating HR related issue due to company culture problems.
Great CEOs have self-awareness. They understand everyone is friendly when you are hitting your sales targets. But when you miss two consecutive quarters of revenue, or when your start-up is on the front page of the WSJ or TechCrunch for a Human Resources (HR) issue, there are consequences. The way the CEO leads and the speed it takes to navigate the startup out of the storm will dictate how long the relationship remains friendly.
Tip 2: Deal Terms exist to de-risk, not to offend
VCs and founders work with law firms like WSGR and Cooley to deploy billions of dollars a year in venture funding. There are few bad actors and no two term sheets are exactly the same. There are also many deals that fall apart. That is why founders are encouraged to get multiple term sheets. But a term sheet with a lower valuation than you expected or aggressive downside protection doesn’t mean the VC is not founder-friendly. It means that your traction, net revenue, growth and maybe the A team is not in a place to give you leverage in the negotiation. That is what is reflected in the term sheet deal terms.
The more uncertainty the Venture Fund has in your business, the more they will want to protect their downside and their LPs’ investment. Traction and revenue growth will drive better terms. So have a short memory. Be willing to re-engage with investors who have passed on you in earlier rounds. Plenty of VCs miss deals that they wish they could redo.
Tip 3 The intersection between founder-friendly and board governance
The CEO co-founder is the only founder who reports directly to the board. It is the board’s role to hire and fire the CEO. This is an interesting dynamic when you have multiple founders. No matter how you package it, the lead Series A Venture Partner will sit on your board and will have the power to be not-so-friendly when the business is not performing. Again, this doesn’t mean they are can’t empathize with the sacrifices founders have made. At the end of the day, the board needs to ensure the company is growing and that CEO is the right person to make that happen.
Darren Kaplan is the Managing Director of The Last 90 www.thelastninety.com an early-stage venture fund that invests and operates companies that are redefining the future of work. Prior to that Mr. Kaplan was the co-founder of hiQ Labs (www.hiqlabs.com), a data science company, informed by public data sources, applied to human capital to make work better.
Mr. Kaplan is an Alchemist Accelerator Selection Committee Member and Mentor.
About the Alchemist Accelerator
Alchemist is a venture-backed initiative focused on accelerating the development of seed-stage ventures that monetize from enterprises (not consumers). The Accelerator’s primary screening criteria is on teams, with primacy placed on having distinctive technical co-founders. We give companies around $36K, and run them through a structured 6-month program heavily focused on sales, customer development, and fundraising. Our backers include many of the top corporate and VC funds in the Valley — including Khosla Ventures, DFJ, Cisco, and Salesforce, among others. CB Insights has rated Alchemist the top program based on median funding rates of its grads (YC was #2), and Alchemist is perennially in the top of various Accelerator rankings. The Accelerator seeds around 75 enterprise-monetizing ventures / year. Learn more about applying today.