Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur
Dixon says that tranching can create a misalignment of investors’ and entrepreneurs’ interests. “ tranching refers to investments where portions of the money are released over time when certain pre-negotiated milestones are hit.  In theory, tranching gives the VCs a way to mitigate risk and the entrepreneur the comfort of not having to do a roadshow for the next round of financing. In practice, [Dixon has] found tranching to be a really bad idea.
[Tranching] encourages the entrepreneur to “manage” the investors [hurting VC-entrepreneur relations, among other things]. One of the great things about properly financed early stage startups is that everyone involved has the same incentives – to help the company succeed.  When the deal is tranched, the entrepreneurs ha[ve] a strong incentive to control the information that goes to the investors and make things appear rosy. The VC in turn usually recognizes this and feels manipulated.  There are better ways for investors to mitigate risk – e.g. lower the valuation, smaller round size. But don’t tranche.” Chris Dixon, The problem with tranched VC investments, August 15, 2009; http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments