The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:10:45 · Jason Lemkin, Harry Stebbings
[00:10:45] S0: Look, there's obviously many types of rounds, but I would say roughly there's two later stage rounds. Okay? There is the Sequoia Index or whomever that wants to take all of it. They have the resources to capability, the fund size, and they've been very aggressive since for twenty years. Right. These terms are not new. We take the whole round. Everyone wages. This is not a new thing. Some funds do that. And that, or sometimes you'll find other investors that are growth stage that their targets 5% or 7%. And all of a sudden everyone gets can play in the round. It really seems like there's two types and founders get really pressured to go along with the program. Look, the Sequoia brand is super powerful, right? It has been since the 1870s. You're treated with love and you're paraded in the office and you're given these days you're given a very generous evaluation set of terms, right? And you're given help and you're, and you feel great. And I just ask one ask, we have a target, Harry, and we just need to own 15% of the company, 10% of company. So I just ask that you let us do the whole thing and nine times out of 10 founders agree to it without thinking, and maybe that's the right thing to do. Maybe it's not, but there's another category investors that that's not their target. Right. There's plenty of growth funds that isn't. It's the way the sharp elbows are in the industry. This is not an industry full of soft, cushy elbows. And this is a messy, messy way for it to spill out, right? [00:12:03] S2: So Jason, you're on the side of day one.
00:12:03 · Harry Stebbings, Jason Lemkin
[00:12:03] S2: So Jason, you're on the side of day one. [00:12:05] S0: I think everyone's wrong here. [00:12:06] S2: Yeah. [00:12:07] S0: I think it went too far. I think the CEO handled it poorly and said he wished they'd never been an investor when they clearly bailed them out multiple times. That's not cool. And hiring Quinn Emanuele for a very aggressive investor is a step too far. They both did the wrong thing.
00:12:22 · Rory O'Driscoll
[00:12:22] S1: Yeah. I agree. Because I think... No. Play it out here. I mean, because I mean, now down in the weeds of what are you actually going to win here? It's whenever you start an argument, and I do this a lot too, you forget to ask yourself, what are you going to win? First of all, you've waived your pro rata rights. So if you want 5%, you're not going to get 5% of the round because someone's waived the rights. Once that's happened, it's all up for grabs. The springback is only proportional to how much the other person who got to come in on springback rights puts in. In other words, if the strategic got to put in 5,000,000, then your ratio is relative to that. So it might be a whole ton of money anyway, right? So you're suing for the right to get 10 or $15,000,000 in at 6,000,000,000 pre when you already own 5% of the company, we're $300,000,000 What are you doing here? Even if it's $100,000,000 right, you have your win, picking this fight's a mistake. Whenever you pick a fight with a founder, and occasionally you do it when you're not thinking, it's just not worth it. I'm kind of what Jason is. Both people can be intellectually wrong, but pragmatically right. Pragmatically, this is a, you know, why and say I'm hurt, and then move on. And we've left out the whole Russia Epstein dimension. There's a whole bunch of noise around that. That's very Twitter centric about day one, and I know nothing about it. I'm going to acknowledge it, and I'm sure at some point it'll be used in the defense. I think forget that leaving that aside, even I think the pragmatic thing is what are you fighting for relative to what you already have? Why are you doing this?
00:13:44 · Jason Lemkin, Harry Stebbings
[00:13:44] S0: That's just my life lesson is listen, if you are quote, air quote, wronged by a founder as a VC. In fact, it happened to be once with Harry years ago, raise it once and let it go raise it once. And I made this mistake once years ago, around years ago, Harry doesn't even know he wrote a small check-in to a company he didn't know and a very large fund. This is one of the rare cases where I wanted my pro rata. It was important to me. I don't really care after the second check, but I needed to get my second check-in. And I love this guy, Harry Steppings, but I get an email that Harry's investing in the round and I'm cut back to zero. And I'm like, I was the only investor in this company for years. I bridged you. I helped you. I've been the only one. And I love Harry, but I know he has this fabulous podcast, but why is Harry getting an allocation and I get nothing? This is a true story. When I said it that way, and I shouldn't have quite said it the way I did, it was so obviously wrong that Harry got his allocation that really bent the relationship with the founder. Didn't break it, but it bent it. Right? Because there was no good answer to why Harry Harry gets his allocation and I don't. And I learned from that, don't even say it because the decision's been made. It doesn't it doesn't matter if it's right or wrong. Let it go. It doesn't matter. [00:14:49] S2: But Jason, I felt a real bond with you as a result of that. You said
00:14:49 · Harry Stebbings, Jason Lemkin, Rory O'Driscoll
[00:14:49] S2: But Jason, I felt a real bond with you as a result of that. You said [00:14:53] S0: even know what that happened a until today. Say that, how he said This was five or six years ago. You never even knew until today. [00:15:01] S2: Dude, I have no idea what company you're even talking about right now. I hope it's a good one. [00:15:05] S1: It's a [00:15:06] S0: good one. Yeah. Oh, good. They've been fantastic. You gotta let it go. Jason, I thought that was [00:15:12] S2: incredibly nuanced commentary, by the way, from you
00:15:12 · Harry Stebbings, Jason Lemkin, Rory O'Driscoll
[00:15:12] S2: incredibly nuanced commentary, by the way, from you [00:15:14] S0: on that. I was very impressed. The interesting thing for this, everyone's so biased on this issue. I've never seen more crap, more selfish takes on Twitter that are seen as generous. Like, I'm only a pure seed investor. I don't need pro rata. And then you see other folks who are like, this is the most important rights under the constitution of venture capital investing. You peel the layer back, everyone's biased in the answer they give. It's just, you can't get a straight answer on this. The only thoughtful answer I ever heard, the last time this issue came up a couple of years ago, I remember what Keith Rabois wrote, which was, I thought a simple answer. He's like, you could get rid of pro rata, but it's core to our business model as larger funds. Maybe it at Founders Fund at the time. Right. And he's like, I just have to pay a much lower price than worst case. Right. If I'm investing early with an expectation I can deploy a lot later, I'm comfortable overpaying in the early round for my pro rata. I'd have to pay like a half the price I'm paying otherwise. Are you comfortable with that founders and the crickets? No one set up, I'm willing to raise at half the price for no pro rata. [00:16:12] S1: Can value an... You're exactly right. Keith's right. You can value an option and deduct it from the price. You're exactly right. [00:16:17] S0: It has a value, right?