The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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?
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.