00:31:14 · Guillaume Moubeche, Martino Cadoni
[00:31:14] S1: Yeah. The one with the preferreds. [00:31:16] S0: Exactly. So you had a lot of companies which they were raising at, they became unicorn, but they have a very high preference share thresholds. And then what happens is when the market turn upside down because of their preference thresholds, they became what we call zombie con. They are stuck. Right? Because they cannot raise at any valuation similar to the last round. They have these preference shared thresholds, which now put them in a corner. Right? While if you issued common share, yes, it was... You couldn't raise a so high valuation back then, but you are free now. You don't have this preference threshold, you know, behind you. Right? [00:32:04] S1: So your advice, like, for founder would be to to never raise preferred and always
00:32:09 · Martino Cadoni
[00:32:09] S0: No. Off common or No. I I think it depends. Right? So prefer... And you never know. But, obviously, prefer is cheaper cost of capital. If if you have a strong foundation as a company and you don't raise... You avoid raising too high valuation, you can be smart that you can better... Slightly better predict the trajectory, and and prefer is great if you minimize the risk of down round. Right? But if you go too far with the prefer, then you can be in a tricky situation as it happened for many companies in the last few years. Right? So I don't think there is a one size fits all type of rule. You need to optimize between dilution and other considerations. But I think that some people, yeah, went too far with the preference shares. And then they say, I would rather raise at 1,000,000,000 with high preference thresholds than not raise at 600,000,000 because of the... You wanna become a unicorn. There are other type of incentives there, but I think a lot of companies underestimate how bad can get if you raise a two high valuation with too high of a preference threshold. And I think, actually, that's another big learning from working with public companies is how do you manage downside scenario. Right? Because I think in tech, which is great. I love it. I'm a positive person by nature. There is always this extreme positive attitude, which is amazing. But I think a lot of people, they don't know. They haven't seen how to manage downside scenarios. So sometimes they take risk a bit blindsided without understanding what that means. Right? I think deciding between common and preference is one of the things that, in some case, preference makes makes sense. But I think people should think deep before making the decision rather than just go for it. Right?
00:34:24 · Guillaume Moubeche
[00:34:24] S1: And and when you have like a a down round and and it's only common shares, like, does that work from a board perspective? Like, does the board has to approve the down round or is it something that the the founder can decide? Like, I'm guessing it depends on the on the shareholder agreement, but how exactly is is that is that is something like this decided internally? Because as you said, like, it's super important to manage your downsides, and I assume that when you invested in a company at a super high valuation with common shares, and they decide to to do like a down run, it means that you're losing money. So like, how exactly do you do you balance that that negotiation with the the shareholders?
00:35:12 · Martino Cadoni
[00:35:12] S0: Well, I mean, I I will say every case is quite different. Definitely, the board is involved in this type of things. They usually is a is a deep discussions between the board and and and the founders. And you also need to be strategic even that. Right? Because every time you raise money at specific valuation, you need to think about the next round. Right? So if I'm a company which was value 1,000,000,000, let's say, back in the back in the days, and then they say, hey. I need to do a a down round at 500. I think you need also to think very deeply about what's the next round and what's your ability and your conviction to get to the next round and the valuation which makes sense for your investors. Right? Because if you were value 1,000,000,000 and then you got... You do a down run at 500, you have a new investor. Let's say you are... You wanna be my new investor at 500. I need to give you enough buffer so that that you can make money, you know, from from my specific situation. Just like, hey. If it's 500 today, do I have a clear path to 800 or back to 1,000,000,000 in in a couple of years because that's the math you as investor will do. It's like, hey. I'm gonna invest at 500 only if I see a path to go back to 800 or to 1,000,000,000. So there is... Is every time you do... And that's having another learning over the time. Every time you do these double transactions, it's not about that transaction per se, but what does it mean for the next transaction. Right? And the next transaction could be a new round, could be an IPO, because you always wanna give buffer to the investors. And also, you need to make sure you convince the investors. So the... If the valuation is too high and they don't see the upside, they simply will not invest on you. Right?
00:37:30 · Guillaume Moubeche
[00:37:30] S1: And how exactly do you like manage your relationship with the founder or management? Because obviously for people who are already shareholders, they want to maximize like their upsides at every round, like some people might do like secondary, etcetera. So you have like essentially different, I would say, yeah, everyone has different needs. So a super early investors would want maybe this round to be at the highest valuation because they want to exit half of their position, maybe the founder wants to do cash out, maybe the founder that doesn't want to get too diluted. So how as a CFO, because you're the one who's gonna prepare for the next round, so how exactly do you manage everyone's expectation and make sure that the valuation is not too high, so the investors are actually like in it for an upside, and are not just like the the bottom of of of the one paying the highest valuation basically.
00:38:29 · Martino Cadoni
[00:38:29] S0: Yeah. I think another very important thing is that's part of my job is to truly be close to those investors. Right? Is to listening to their needs and to their feedback. Because as you said, everyone has different needs. Right? Someone might be, you know, they have very patient capital, so it's all good. Some others, maybe they've invested in your company long time ago, and now they have their own LPs pushing for an exit. So how can you help those investors to make an exit? Sometimes you can do it, you know, facilitating a secondary or, like, either through employees or with with other investors. In some other case, you need to explain what the situation is, and you need to help them managing their own LPs. Right? I think the best way as a CFO is not understanding only your investors' needs, but their... Your investors' LPs' needs. Because at the end, my job as CFO is very similar as the job as a GP in a fund. Because I'm managing my investors, the GP is managing their own investors. And often those needs and those questions are quite similar. So the better you understand what's going on in the LP population of your investors, the easier it's gonna be for you to support your investor. Also, to build that empathy, understanding, because it's... A lot is also managing emotions, particularly in volatile markets. You you need to be able to, you know, to keep calm and to inject that calm across the investors so that they can, you know, keep and manage their own LPs. Right? But I would say, yeah, communicating and managing them actively is very important. And that's why I would say one advice to fund, they will say try to keep your cup table manageable and not too crowded. Because it's... You know? Now, for example, at DeepL, I'm very lucky because I have a fantastic cup table. It's very concentrated. So I don't have hundreds of investors. So I'm able to manage them almost one to one. I can have catch ups and one on ones. But then if you have 100 investors or 200 investors, it's impossible, and then things gets much more complicated. Right? So I think it's good to have a more concentrated cap table if you can.