Venture Deals, 3rd Edition

CHAPTER 13 Issues at Different Financing Stages

Not all financings are created equal. This is especially true when you factor in the different stages that your company will evolve through over its lifetime. While this book is primarily focused on early-stage financings, and many of the issues apply to all stages, there are some key differences. This chapter touches on a few of the important ones.

Seed Deals

While seed deals have the lowest legal costs and usually involve the least contentious negotiations, they often allow for the most potential mistakes. Given how important precedent is in future financings, if you reach a bad outcome on a specific term, you might be stuck with it for the life of your company. Ironically, we’ve seen more cases where the entrepreneur got what at the time seemed to be too good of a deal but ultimately ended up being bad for them.

What’s wrong with getting great terms? If you can’t back them up with performance when you raise your next round, you may find yourself in a difficult position with your original investor. For example, assume you are successful getting a valuation that is significantly ahead of where your business currently is. If your next round isn’t at a higher valuation, you are going to be diluting your original shareholders—the investors who took a big risk to fund you during the seed stage. Either you’ll have to make them whole or, worse, they’ll vote to block the new financing. This is especially true in cases with unsophisticated ...