Growth5 Blog

Thursday, September 24, 2009

Caution: Seed Investors Pushing Series A Term Sheets

I enjoyed this post from VentureBeat's blog - Entrepreneur Corner. Basic premise: capital is harder to come by these days, VCs are cautious but have to deploy some capital, software / Internet / IT companies can be started for a fraction of the cost it took ten years ago, thus VCs are doing more "seed" type deals but oftentimes are pushing their typical "Series A" terms.

The fact that VCs are getting involved earlier is great: it's better for our economy, it's nice to see money start moving again in the space, and many VCs have the experience to guide these start-ups and help them flourish where they otherwise may have not. However, the article does a good job of pointing out the potential problem areas that entrepreneurs should watch out for. They are:
1. Don't give away too much of the company too early.

2. Avoid giving investors more than a 1x liquidation preference.

3. Try to avoid giving investors Series A-type control rights.

4. Keep other "investor rights" to a minimum.

5. Try to keep "super pro rata" rights reasonable enough to not scare future investors.

6. There can be negative market perception when VCs don't participate in the next round. Be communicative with the VC about their long-term plans before you strike a deal.
The reason it IS a "seed" deal is because you are trying to take enough money to prove your business model and get your firm to the next set of milestones for the A Round. You and the VC might not be on exactly the same page when considering a "seed" deal, but you both need the same thing, follow-on investors, so try keep the deal as simple as possible.

Think hard about whether or not any of the terms will scare future A, B or C Round investors. If you're not sure, ask around. It's very difficult in today's climate to turn away money, but you need to consider that if the deal is "messy" you may be sealing your long-term fate by accepting a bad deal. Better to find a "cleaner" deal that has the possibility of follow-on investors than one that doesn't.

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At May 18, 2011 at 2:04 AM , Blogger Trade4Target said...

Hey, very nice site. I came across this on Google, and I am stoked that I did. I will definitely be coming back here more often. Wish I could add to the conversation and bring a bit more to the table, but am just taking in as much info as I can at the moment.
Thank You


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