Ask HN: How to avoid losing control in series B
5 comments
That’s very simple to do. Don’t raise external funding.
If you are raising external funding, you, more often than not, should be okay with becoming an employee. If you are not you should not raise money and work to grow the company like everybody else in the planet does: work hard, put a lot of work everyday and make something that SELLS.
This is what a lot of tech people don’t get it. They are asking for investors to put their money in the founders business and they don’t want to give anything up?
Why the heck would anyone sane do that? I wouldn’t put money anywhere unless there is a way to get it back. The way to do that is either investing on a company that has a proven model and already makes a ton of money, in which case I’m ok with no control because I KNOW I will make my money back or by taking the risk and being rewarded by it with a bigger chunk of the company.
I guess that for the founder it always comes down to a simple question: can I get to where I want to without external money? If the answer is no then you should not whine about how much that money cost because you would not get there anyway without it.
If you are raising external funding, you, more often than not, should be okay with becoming an employee. If you are not you should not raise money and work to grow the company like everybody else in the planet does: work hard, put a lot of work everyday and make something that SELLS.
This is what a lot of tech people don’t get it. They are asking for investors to put their money in the founders business and they don’t want to give anything up?
Why the heck would anyone sane do that? I wouldn’t put money anywhere unless there is a way to get it back. The way to do that is either investing on a company that has a proven model and already makes a ton of money, in which case I’m ok with no control because I KNOW I will make my money back or by taking the risk and being rewarded by it with a bigger chunk of the company.
I guess that for the founder it always comes down to a simple question: can I get to where I want to without external money? If the answer is no then you should not whine about how much that money cost because you would not get there anyway without it.
When you take funding you lose control. Period. I am a technical consultant for VCs and my entire job is to evaluate whether a company and product will be a good investment and allow the investors to become more profitable. This always means losing control to said investors. I am sure there are a few minor examples of this not being the case. But my VC's have portfolios with 700 companies in them between them, they control all of them.
So my answer is simple, don't get to the point where you need outside funding. Work now to get profitable. If you can't, pivot and get profitable. If you still can't, then give up control because they can and should make you successful and profitable. The reason VCs often take control is so they can fix your lacking business knowledge and expertise.
So my answer is simple, don't get to the point where you need outside funding. Work now to get profitable. If you can't, pivot and get profitable. If you still can't, then give up control because they can and should make you successful and profitable. The reason VCs often take control is so they can fix your lacking business knowledge and expertise.
I think the comments you've received here are spot on. But wanted to make one additional comment for your friend.
If I had to guess, the Series A terms provide that in order to issue new shares on parity with or senior to Series A shares, the company needs to get Series A shareholder approval. In other words, to raise a Series B, he'd need to get Series A shareholder approval.
How does that fit in here? Well, the prior comments you received essentially point to two strategies:
1) Get the company into a position where VCs want to compete to invest in it; and/or 2) Simply make the company profitable so that a Series B isn't essential.
The problem with the requirement of getting Series A approval for the Series B is that, to an extent, the fact that other VCs might want to compete to provide better terms is somewhat irrelevant. The Series A VC can turn down any Series B term sheet it wants.
In other words, the real leverage is in strategy #2. Make the company profitable without the need for funding if at all possible.
Will that net your friend enough money to scale in the way millions in VC funding would? Quite possibly not. But at least it changes the negotiating dynamic with the Series A VC. If the Series A VC knows the company NEEDS Series B funding, then the VC knows it has veto power and can control the terms of the Series B. If the VC knows that the company is profitable and can live without any Series B funding, then suddenly the VC is in a weaker position - the company can "walk away" from the Series B negotiations altogether.
[Note for anyone reading: if you have the negotiating leverage in your Series A, rather than agreeing to the protective provision I mentioned above requiring Series A shareholders to agree to any Series B funding, see if the VC will agree to merely require the Series A BOARD MEMBER to approve a Series B round. This, of course, assumes that there is a Series A board member, of course, and will be a tough sell. But it, again, changes the dynamic. The Series A board member has fiduciary duties to the company and can't simply say no to competing Series B term sheets for self-interested reasons. But if the Series A shareholders have to approve the round in their role as shareholders, the same fiduciary obligations don't apply the same way.]
If I had to guess, the Series A terms provide that in order to issue new shares on parity with or senior to Series A shares, the company needs to get Series A shareholder approval. In other words, to raise a Series B, he'd need to get Series A shareholder approval.
How does that fit in here? Well, the prior comments you received essentially point to two strategies:
1) Get the company into a position where VCs want to compete to invest in it; and/or 2) Simply make the company profitable so that a Series B isn't essential.
The problem with the requirement of getting Series A approval for the Series B is that, to an extent, the fact that other VCs might want to compete to provide better terms is somewhat irrelevant. The Series A VC can turn down any Series B term sheet it wants.
In other words, the real leverage is in strategy #2. Make the company profitable without the need for funding if at all possible.
Will that net your friend enough money to scale in the way millions in VC funding would? Quite possibly not. But at least it changes the negotiating dynamic with the Series A VC. If the Series A VC knows the company NEEDS Series B funding, then the VC knows it has veto power and can control the terms of the Series B. If the VC knows that the company is profitable and can live without any Series B funding, then suddenly the VC is in a weaker position - the company can "walk away" from the Series B negotiations altogether.
[Note for anyone reading: if you have the negotiating leverage in your Series A, rather than agreeing to the protective provision I mentioned above requiring Series A shareholders to agree to any Series B funding, see if the VC will agree to merely require the Series A BOARD MEMBER to approve a Series B round. This, of course, assumes that there is a Series A board member, of course, and will be a tough sell. But it, again, changes the dynamic. The Series A board member has fiduciary duties to the company and can't simply say no to competing Series B term sheets for self-interested reasons. But if the Series A shareholders have to approve the round in their role as shareholders, the same fiduciary obligations don't apply the same way.]
Quite honestly it sounds like your friend is not qualified to maintain control post series B. (Or he could figure out the answer to this question himself.) Given his “weird techy” background he should rather try to protect himself in any deals (get a good lawyer) and then go along for the ride.
Thoughts:
1. Competitive fundraising dynamics = easier to keep control
2. Optimizing for control in negotiations at the expense of other things like valuation = easier to keep control
3. Post Series A, meeting with VCs regularly to build up a cache that are ready to lead the B = more competition = easier to keep control
1. Competitive fundraising dynamics = easier to keep control
2. Optimizing for control in negotiations at the expense of other things like valuation = easier to keep control
3. Post Series A, meeting with VCs regularly to build up a cache that are ready to lead the B = more competition = easier to keep control
Weird founder, very techy area, got an MVP, lots of progress with just FFF funding (F^4 ?!).
Anyway, somehow he is close a series A-ish offer with equal control rights. Mostly by dragging it out, showing progress and keeping it default-live.
However, the (friendly, honest) VC has made it very clear that he will put the screws-on in series B. Its a software-only area, but will still much more capital.
Any ideas on how to strategize for this?
BTW, no one is opposed to an outside CEO if and when the time is right. The uul