Understanding Investor Terms & Incentives || Rookie Mistakes with Dalton Caldwell and Michael Seibel

Investors' terms and incentives in a funding deal are crucial and can impact a startup. Founders should prioritize understanding the terms of their fundraise. Investors exploit founders' desire for high valuations by imposing additional requirements when offering the requested amount. Understanding investor terms and incentives is crucial for founders to avoid common mistakes. Standard paperwork and hiring an experienced startup lawyer can protect first-time founders from investor exploitation. Investors have different goals and incentives when investing in startups, leading to different terms and structures in investment documents. Founders must understand these differences and negotiate terms aligned with their own goals. Investors often say "find a lead" to avoid committing to a round and get a free option to invest in the future. It's important to understand that investors have more experience and knowledge in this game, and their job is to find the best deals. Investor incentives may misalign with founders' goals, as investors prioritize rapid growth while founders may prioritize profitability. The landscape of investors has shifted towards more professional investors. Alignment between founders and investors is crucial in seed funding to ensure their goals and incentives are in sync.

Rookie mistakes

The video discusses rookie mistakes made by founders when raising money.
Insights from Y Combinator founders are shared to help others avoid these mistakes.

Note from YC founder

Investors' terms and incentives in a funding deal are crucial and can impact a startup.
Entrepreneurs should prioritize understanding the terms of their fundraise.
Terms are as important as economics, valuation, and amount of money raised.

Valuations

Investors exploit founders' desire for high valuations by imposing additional requirements when offering the requested amount.

Founders often seek high valuations for their startups.
Investors may use this desire to their advantage.
They offer the requested amount but with additional conditions attached.

Jargon

Understanding investor terms and incentives is crucial for founders to avoid common mistakes. Some jargon founders should be familiar with includes "participating preferred" and "super pro rata." Giving up board control without understanding the consequences is another common mistake.

Standard docs

Standard paperwork and hiring an experienced startup lawyer can protect first-time founders from investor exploitation.

Goals

Investors have different goals and incentives when investing in startups. Some prioritize building a big company, while others focus on smaller exits. This leads to different terms and structures in investment documents. Founders must understand these differences and negotiate terms aligned with their own goals.

Investors have varying goals and incentives in startup investments.
Some prioritize building a big company, while others focus on smaller exits.
Different goals lead to different terms and structures in investment documents.
Some investors offer high valuations but commit to small investments, requiring founders to seek additional funding.
Founders should understand these differences and negotiate terms aligned with their own goals.

Find a lead

Investors often say "find a lead" to avoid committing to a round and get a free option to invest in the future. This tactic allows them to pass on your company while appearing interested. It's important to understand that investors have more experience and knowledge in this game, and their job is to find the best deals. So, don't interpret their words as genuine interest or job offers.

"Find a lead" means investors want to put in the entire amount of money and not share the round with someone else.
Investors may ask you to come back to them when you find a lead, but it's just a way for them to keep their options open without committing.
Understanding investor incentives is crucial, as they have more experience and knowledge in finding the best deals.

Investor incentives

Investor incentives in the context of company stage:

For tiny startups, it may be beneficial to say what investors want to hear to capture their attention for future success.
Investors interested in funding or already funding companies typically want them to achieve huge outcomes.
This often means encouraging the company to grow faster and invest more in sales and marketing.
Misalignment of incentives can occur between investors and founders, as investors prioritize rapid growth while founders may prioritize profitability.

Community

The landscape of investors has changed in the past decade, with a shift towards more professional investors.

Small funds and angels have been replaced by professional investors.

Alignment

Alignment in the seed funding world is crucial as it ensures that the goals and incentives of founders and investors are in sync. However, there is a risk of misalignment, where investors may prioritize their ownership targets over the company's best interests. Founders should be aware of this and carefully evaluate investment offers, taking into account the investors' goals and incentives.