The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:05:36 · Jason Lemkin
[00:05:36] S0: I think as usual in these disputes, no one's a 100% right here. It's rare in life. There are disputes where someone's a 100% in the wrong. And even when you look back, you might say, you know what? Maybe I contributed just a little bit to that. Here's here's my read of the situation for what it's worth. Here's here's the more interesting thing. What what happened? Listen, we only can read the tweets. Right? And I love the fact that immediately everyone was all over it saying that day one was suing their portfolio company, which was completely wrong. Right? It was quite, it's quite the opposite, right? They may have hired, Quinn Emmanuel now a notorious firm, but it's, it's, it's Valor that wants declaratory judgment to move on. They just want an answer. So all of a sudden X decided that Day One had sued their portfolio company, which wasn't true. The other thing that I think if I read what Masha, who's my co investor and owner, I don't know her that well, but I have observed her behavior and she's a good investor. It sounds like to Rory's point, what really happened was Sequoia came in very aggressively and said, we're going to make, we're going make you a great offer. We're going make you a fast offer. It's clean. It's simple. And just like Sequoia and index and others do, everyone has to waive their pro rata so that we can get our ownership target. And I can say as a seed investor, this happens all the time. It happens all the time. The big funds, in fact, they put in their term sheet without even checking it. Their lawyers immediately put in that my pro rata is waived in every single round. Okay. So it happened here, probably annoyed day one because they clearly had, even though they're a $450,000,000 total fund, they have more funds, whether it's SBV or whatever. So this annoyed them. They want to do the pro rata. So be it. And then Valor said, Oh, we're actually letting one of our investors because they're strategic. They're strategic. This might piss me off too. First of all if they're strategic they're already on the cap table. You got the strategy. You already got the strategy you need. If they're a new investor, if someone wants to invest and help this nuclear startup go further, that's truly strategic. Let them the hell in, right? But this is someone already on the cap table that wants to own more, which I get.
00:07:32 · Jason Lemkin, Rory O'Driscoll
That probably means they're adding more nominal value than your early investor, which I get. But this is the whole point, right? This is you're not supposed to play favorites. And so I get all of it. Having said all of this, I've observed versions of this many times. I've observed VCs suing their portfolio companies for doing the wrong thing. When founders have decided to do this, you just got to get with the program. At the end of the day, when the founders are in the wrong here and the big funds often convince founders to do some things that are a little bit wrong, you just got to get with the program. It's not your company. [00:08:04] S1: It was to be clear, say, hey, that feels unfair, but I accept. I'm not going to waste time with mister Quinn and mister Emmanuel. I'm just gonna go with it. Is that what you're saying?
00:08:04 · Rory O'Driscoll, Jason Lemkin
[00:08:04] S1: It was to be clear, say, hey, that feels unfair, but I accept. I'm not going to waste time with mister Quinn and mister Emmanuel. I'm just gonna go with it. Is that what you're saying? [00:08:12] S0: You might even... Listen. If it's... If you feel so wrong, then I'll tell you why I think that that day one feels wronged if you want. If you feel so wrong, maybe you do send a letter. Okay. And maybe you don't hire Quinn Emanuele. Maybe you hire a Stebbings and Driscoll because they're not quite as intimidating. Maybe once in a while you send a letter, which you shouldn't, but you do, but then you gotta let it go. You just gotta, you just gotta get in line and move on. It's not your company. It is not your cap table. And this isn't just assets. These aren't just, I mean, founders have to work at this company for twenty years, right? That's the uncomfortable part. But the fact that they bridge the company when no one else would, led the rounds when no one else would, and then were discarded later, you know that can hurt. It's happened to me several times and it hurts as a human being. It does hurt as a human. I don't have... I didn't have a 100,000,000 lined up to do the Valor round, don't get me wrong, but multiple times... I've had three or four portfolio companies where with a small fund, had to bridge or do an A, or C, which I don't even have the resources to do. And then sometimes the founders just forget it even happened, and it... That would bother me.
00:08:12 · Jason Lemkin, Harry Stebbings
[00:08:12] S0: You might even... Listen. If it's... If you feel so wrong, then I'll tell you why I think that that day one feels wronged if you want. If you feel so wrong, maybe you do send a letter. Okay. And maybe you don't hire Quinn Emanuele. Maybe you hire a Stebbings and Driscoll because they're not quite as intimidating. Maybe once in a while you send a letter, which you shouldn't, but you do, but then you gotta let it go. You just gotta, you just gotta get in line and move on. It's not your company. It is not your cap table. And this isn't just assets. These aren't just, I mean, founders have to work at this company for twenty years, right? That's the uncomfortable part. But the fact that they bridge the company when no one else would, led the rounds when no one else would, and then were discarded later, you know that can hurt. It's happened to me several times and it hurts as a human being. It does hurt as a human. I don't have... I didn't have a 100,000,000 lined up to do the Valor round, don't get me wrong, but multiple times... I've had three or four portfolio companies where with a small fund, had to bridge or do an A, or C, which I don't even have the resources to do. And then sometimes the founders just forget it even happened, and it... That would bother me. [00:09:13] S2: I I actually agree with everything you said there, Jason. The challenge is you are seeing people like Ali Partovi, who's a fantastic investor, who's made a lot of money for his investors, and he's brilliant. [00:09:22] S0: Yeah. I nominated him last year for investor of the year. Right?
00:09:22 · Jason Lemkin, Harry Stebbings
[00:09:22] S0: Yeah. I nominated him last year for investor of the year. Right? [00:09:24] S2: Yeah. Come out and say, we waive our rights, and we don't think it's right. And many great investors support him. There is a moving tide towards pro rata rights not being [00:09:35] S0: Yeah. But you know why he said that? It's because his fund doesn't need them. His fund doesn't need them.
00:09:35 · Jason Lemkin, Rory O'Driscoll, Harry Stebbings
[00:09:35] S0: Yeah. But you know why he said that? It's because his fund doesn't need them. His fund doesn't need them. [00:09:39] S1: Yes. I mean, because you then have the, you know, the Gary Tan comment on how pro rata rights is what made his IRR and I think initialized one of his funds on one of his on Coinbase, right? I think, look, if your model is all seed and no follow, then you can waive your pro rata rights no matter what. I mean, the interesting question is, will the mega fund be waving its pro rata rights? In other words, is Segoya coming into this round saying, I'm not going to take anything on the follow on round? So to me, I always think anything that a majority can control in a cap table, which is heterogeneous, where there's lots of people, should be roughly fair. If a majority can waive pro rata rights, if it's good for the company, you know, typically two or three of the VC investors can get you there, and it should all be fine, would be my assumption most of the time. I do think for the seed guys, I can see why it sticks in the troth of a seed investor who takes all these risks. And, know, most of the deals don't work out and only a few of them work out well, and they're going to want to grab some of that when the guys coming in later say, oh, thanks for everything. And now you should wave. So I totally see that. [00:10:37] S2: So is it complete bullshit that we have to just let the big platforms come in with that time sheets that automatically waive our rights?