Understanding Investor Terms & Incentives || Rookie Mistakes

Michael Seibel says founders should weigh deal terms alongside valuation and the amount raised. Investors may offer a high valuation while asking for unfamiliar provisions such as participating preferred, super pro rata, or board control. He advises using standard paperwork and a lawyer experienced in startup deals.

Seibel says some investors structure deals around smaller exits, such as a company selling for $10 million or $20 million, which can affect founder terms. He also describes offers where an investor commits only part of a proposed round, leaving the founder to find the rest. An investor who says to return after finding a lead may be passing while keeping the option to invest later.

Dalton Caldwell says investor advice depends on the company’s stage: an investor may encourage faster growth and more spending because they want a large outcome. That can conflict with a founder’s preference for profitability, which Caldwell says may be a good outcome for the founder even if growth is slower.

Seibel says professional seed funds may have ownership targets and obligations to their limited partners, which can lead them to encourage a founder to raise more than the business needs. He gives the example of a fund seeking to own 10 percent. With abundant capital, investors may also emphasize the need for more money as a way to compete.

Caldwell says investors have their own incentives, which are neither inherently good nor bad. Seibel advises founders to consider those goals when evaluating fundraising advice instead of accepting a sales pitch at face value.