Don’t Have A Lazy Relationship With Your VC

Today’s great post is from Bilal Zuberi @ Lux Capital. In it he asserts that Friends Don’t Let Friends Have a Lazy VC/CEO Relationship. I see this play out so many times in so many ways that – while it seems obvious – it’s an important reminder to all entrepreneurs who hear their friends complaining about their relationship with a VC.

Oh – and make sure your VC has a sense of humor. For example:

  • What are the best ways to keep it entertaining ? What kinds of activities would keep things going ?

    • Normal, human interactions with a sense of levity.

      • DC

        Lol. Normal for who? 😉 You guys have to teach that to investors
        outside of USA. Really. I believe if you guys follow Steve Blank
        proselytism way in creating a some sort of a compelling manifesto and VC
        guidelines, lots of non-americans VC would jump in the startup
        bandwagon and nurture great startup founders (or searchers in Steve
        Blank’s way).

  • DC

    It would be nice if Brad could reply Campusgris questions.

  • Hi Brad – I’m trying to find the right place to ask a question about your book but couldn’t find an obvious entry point so I’ll ask my question here. I’m reading “Venture Deals” and I’m at the Liquidation Preference section near the beginning. You very clearly spell out the common scenarios with X preference and participating vs. non-participating. At one point in that chapter you say “In early stage financings, it’s actually in the best interest of both the investor and the entrepreneur to have a simple liquidation preference and no participation.” I like this conceptually and it’s clear how this is in the best interest of the entrepreneur but I’m not sure how it’s in the best interest of the VC. On p 44 and 45 where you walk us through the different liquidation cases, I’m seeing that in the Case 2 scenarios the VC always makes out better with 1X preference + participation. How do I argue that non-participating is better for the VC? BTW really enjoying the book and learning lots, thanks for writing it.

    • jasonmendelson

      Jason here….. Glad that you like the book. We are working on edition 3 right now which will be a major upgrade. That being said, think of how VCs will be affected by VCs later investing in the company. If I ask for a large liquidation preference or for participation, later VCs will get the same thing as VCs love precedent. If I put in smaller dollars (as early stage VCs do), the later stage folks will get the same preferences on larger dollar amounts effectively cramming me down to look more and more like common stock. So it’s a function of money coming in later that has this effect.

      • Hi Jason and thanks so much for the reply. I figured it had something to do with later investment but as this is my first experience in working with VCs I wasn’t sure. Makes perfect sense that later-round investors will look at the liquidation precedent set in the first round. I now feel equipped to discuss liquidation with these guys. I look forward to edition 3.

      • Hi again Jason – we’re now trying to find an attorney or firm to represent us in a negotiation with this VC. Can you recommend any that might – per your book – be willing to cap their total fees, delay payment until closing, etc? Those we’ve spoken with are not willing to do so. Thanks in advance!

        • jasonmendelson

          In order to get this deal, you’ll need to convince your counsel that you are going to receive funding so that they believe they will get paid. So the framework is: 1. Find counsel who will do this and 2. Make them believe in you and your company. Where are you located? If not in a normal VC market, you’ll have a hard time. Lawyers generally will not give this out to non-local clients, either.

          • Our HQ is not in a normal VC market (Wyoming) but our Sales offices are in Boston and we’ve spoken with attorneys there as it’s difficult to find qualified firms here in Wyoming as there is so little software startup activity. I hear you on the convincing part. The firm we spoke with in Boston that we really liked might be convinced once they see that we already have a term sheet and that the VC wants to move. They are also familiar with this VC. Thanks!

          • jasonmendelson

            I don’t know how to help you. You will be considered a Wyoming company by the lawyers (and most VCs) and I just don’t have good contacts there.

          • No worries – I’ve got that part figured out. Firms in Boston & Denver are fine representing us in the VC negotiations as long as we involve our Wyoming attorney for the state-specific analysis. Not ideal, but we have good reasons for incorporating here. Wyoming is business-friendlier than even Delaware.

  • Mark Smith

    Just a heads up, that the video no longer exists