Interview
Understanding Investor Terms & Incentives || Rookie Mistakes with Dalton Caldwell and Michael Seibel
- Investors with high valuation expectations or those targeting companies likely to sell for $10–$20 million may structure deals with provisions like participating preferred or super pro rata rights to ensure fund survival, potentially misaligning with founder interests in billion-dollar outcomes.
- Founders lacking experience or raising small amounts (e.g., $1 million) while yielding excessive control risk removal via board control provisions, particularly when investors optimize for low-valuation exits rather than massive scale.
- International investors without a history of backing billion-dollar companies, and professional seed funds with LP obligations, are expected to prioritize fund survival and internal goals over maximizing company value, creating misalignment with founders.
- Investors seeking specific ownership targets (e.g., 10%) or operating in capital-abundant environments may encourage founders to raise excessive capital they do not need, utilizing tactics to make founders feel capital-constrained or using offers that appear official but lack immediate commitment.
- Requests for a lead investor first often serve as a mechanism for non-committal investors to secure a free future option, while phrases like "let's talk about it" or "come back when you find a lead" typically indicate a refusal to invest rather than genuine interest.
- Investors may provide partial funding (e.g., $1 million of a requested $3 million) to pressure founders into finding additional capital elsewhere, or advise funded companies to prioritize aggressive growth spending on sales and marketing even if the company is profitable but growing slowly.
- Due to the professionalization of the investment community over the last decade, experienced investors are expected to be superior negotiators who can "tie founders into knots," contrasting with the less professional alignment of angels and small funds from ten years ago.
- Founders are advised to analyze the specific incentives of investors rather than assuming offers are binding, as the current environment involves significant competition among investors to convince founders they need more money than they do.