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