Dear SaaStr: As a startup founder, what’s the shadiest thing a VC asked you to do (to get their funding)?
I don’t think anything is truly shady in venture. Deals are generally made at arm’s length, and founders don’t have to sell any shares if they don’t want to.
But .. but like most founders, I’ve had better and worse experiences with VCs. (And yes, when I invest, I don’t do this stuff).
Still, here are my worst / shadiest experiences:
- Issuing a secret, second version of the term sheet where I would be replaced as CEO. Oh, this was great. In my first start-up, the second term sheet came from a new venture firm that was … nervous. They issued a pretty crummy term sheet, but it was OK on its face. What they didn’t tell me is they gave a second version to the other investors where I would be replaced as CEO. Without telling me. And started recruiting the new CEO on their own. We didn’t take this term sheet.
- The $750,000 full-recourse promissory note. The third term sheet we got in my first start-up had an interesting condition. Even though I probably had $50k in life savings at the time, I was required to sign a $750,000 full-resource note (i.e., paper loan) as part of the financing. That meant if the start-up failed, I was personally on the hook for $750,000. While the VCs weren’t. This was nutso. In all fairness, it expired after a certain period of time, and the VCs had their goals here to force a certain type of transaction. But it was a bit crazy. Still, I signed it. I had to make payroll.
- The “you have to now split the round with a VC that is our friend and take a lot more dilution than we agreed after we’ve signed a term sheet”. This wasn’t so fun. I had 3 term sheets for our seed round at Adobe Sign / EchoSign, from 3 firms. I picked the 1st firm to give us a term sheet, but then the 2nd begged me to take their money. I had a personal relationship there, so we went with choice 2 (even though we would have preferred firm 1 ideally). However, Firm 2 was close business friends with Firm 1 and then would not honor the original term sheet unless we also took more money from Firm 1. That just was a big headache and created endless drama. You need to bring up these key conditions before the term sheet is signed, not after. We didn’t agree to it. It created a lot of drama. Way too much. Eventually, we got the deal done we wanted with Firm 2. But way not cool to bring this up and try to force us to take money from both firms after we had a signed term sheet.
- Excluding me from an M&A offer meeting. This was just plain dumb. While I understand the objective was to maximize a preferred outcome over a common outcome, excluding me entirely just led to confusion. And a rejection of the M&A offer, where perhaps it wouldn’t have been rejected.
Even these experiences, well there were reasons. They weren’t 100% illogical.
They just were not exactly done in a win-win way.
Now stories like these are less common these days, or at least became less common in the boom times. In the boom times, everyone was doing so well on paper, fewer bothered. Perhaps we will hear more of these tougher stories in slightly tougher times, though.
(Note: an updated SaaStr Classic post)
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- Source: https://www.saastr.com/as-a-startup-founder-whats-the-shadiest-thing-a-vc-asked-you-to-do-to-get-their-funding/