Last week, for just the second time ever, I passed on an investment opportunity because of the terms of the deal--both the price and the legal structure of the agreement. It was a company whose product I believed in and whose founder I liked, but a firm lobbed in a term sheet at a price 33% higher than what I had offered using a very light agreement meant for a much earlier stage company. This was a company that had successfully bootstrapped itself to real revenues, employees and cashflow and I thought it deserved the structure of a going concern, not a flier.
At first, I thought I was making a mistake. After all, I understood that when these types of deals pop, the initial price you pay tends to matter very little--and it matters much more that you're in the deal versus not. I remember back in the Union Square Ventures days when we had an internal debate over the price of the first round of Indeed. A billion dollars later, it didn't much matter.
Then, I read about the idiotic comments made by a co-founder of Rap Genius...
which is not long after the recent debacle at Github...
and then there's the nightmare at RadiumOne...
Founders. Run. Amok.
And even when they're not disrespecting murder victims, creating hostile work environments for women or literally beating women, they're running amok in other, less violent ways...
...like raising over $300 million, flaunting the epic winning, only to watch the whole thing go up in flames, like at Fab...
...or sticking your head in the sand while fraud occurs on your platform, like the way Indiegogo watched Healbe Gobe get torched in the media. They even tried to change their Terms of Service in the middle of the alleged scam.
No wonder people are questioning where the boards of these companies were.
Founders. Run. Amok.
Three of the aforementioned companies have taken investments from Andreessen Horowitz--probably the hottest firm on the planet right now. They got that way due in large part to a very public founder friendly stance.
Perhaps they need to rethink that "back the founder at all costs" mentality. Perhaps we all should.
I certainly have.
When I saw this term sheet where another firm clearly fell over themselves to get enough money into this deal, going against anyone's better judgement with a thin set of terms and a high price, it vaulted the founder into a tremendous power position in the company's dynamic. No one from the firm leading the deal will join the board. The whole deal was optimized to avoid distracting the founder too much from the world of building the company.
I hate to break it to anyone, but the creation of a board, the building of a strong legal base, and, to take it a step further, tedious little things like values statements and human resource policies, are all the work of building a real company. Terms that hold founders accountable make them better founders and company builders.
It ain't all coding, selling, and raising money, people.
Ok, does getting one over on investors term-wise mean this founder is going to go out and start beating people up, harrassing people, etc... No, probably not.
But it's all part of the environment we're creating.
Is it really surprising to anyone when we talk about "party rounds" as financing strategies we've created companies with unprofessional environments and founders behaving irresponsibly?
Fundraising isn't just a "distraction". Finding and negotiating with investors is a serious part of the process of creating a company. It's an opportunity to outline a vision for the kind of environment you want to create and the impact on the world you want to make--and a chance to seek out and properly align incentives with the best potential partners you can get.
Treat financings like an auction and you're going to get a bubble and a lot of bad behavior. Treat it like the creation of a partnership and you'll build a lasting entity built on values.
And as investors, we need to keep doing our job. We shouldn't be telling founders how to run their companies--but we should hold them and ourselves accountable to really high standards. We shouldn't bend just because someone appears to be a high flyer. We need to make sure that there are sound and thorough management practices in place at the companies we work with--and that all starts with the very first piece of paper you pass across the table...
The Term Sheet.
If we've seen anything so far, the more term sheets are built simply to win deals--the more we'll see inflated founder egos believing that what they've built up to that point is amazing, needs no help, and that their creation changes all the rules.
Rules have a funny way of snapping back again, if you hadn't noticed. Rules like respect. Rules like checks and balances.
Sign a term sheet that you feel doesn't respect the contribution you can make as an investor and one that doesn't respect the company building process, and you'll likely, unintentionally, create a founder that believes they are above a lot of rules.
I treat all my founders equally. I ask them for terms that acknowledge how much more work they have to do in order to fulfill their potential and ones that involve me directly in company building process. That might be a board seat, or at least an observer right. It will certainly involve market pricing. If I lose a deal, I'll lose a deal--but I have a feeling, in the long run, some of those high fliers are going to get undone by the same lopsided dynamics that created the first term sheet.