Be careful about investor rights
This important variation on “money talks” is an important consideration for entrepreneurs when seeking an investment from professionals such as VCs. Something like a marriage (and often lasting just as long statistically), your investment partner can be a great cheerleader, coach and resource. But the moment things turn sour, including missed plans, some investors on company boards go into a predictable mode of dictating terms for emergency loans or additional investment.
Some of the rights to watch
These include forcing early investors to “pay to play,” or invest their pre-rata amounts to keep their original percentages or suffer the consequences of being diluted to the extreme and losing preferences in a liquidation.
…and if you miss projections…
[Email readers, continue here…] The reaction to bad news by V’s controlling the board by virtue of their power to supply additional money, often includes the threat – or reality – of starting the process to find a replacement CEO. So, the combination of bad news and VC or professional investors on the Board can be volatile for the founders or management. Angel investors tend to be much more understanding, and usually resort to coaching rather than replacing the CEO during bad times.
Are angels and friends a better bet?
These are only a few of the considerations that have caused an increasing number of early-stage entrepreneurs to draw up business plans for companies that can be grown with angel and friends-family capital. It avoids the increased risks and pressure that come with subsequent VC investments.
But if your needs are genuinely larger…
On the other hand, if a business needs large amounts of capital to succeed, the entrepreneur and board should contemplate the advantages gained against the increased risks, making a conscious decision to go for the growth with such funds or to grow organically – or to grow with a smaller round from internal investors.
Image created with DALL-E3 using prompt: “US hundred -dollar bills floating from the sky to a snowy ground in silver, blue, and white colors on a ice blue background, papercraft.”
