Interest Alignment - Entrepreneur & Investor

What the greatest technology investors say about Interest Alignment between Entrepreneur & Investor

INTEREST ALIGNMENT POSTS (8 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order except for the “Interest Alignment: What It Means” post which appears towards the beginning of the page.  For the others for example, following this list, Fred Wilson’s post appears towards the beginning of the blog page, and Chris Dixon’s posts appear towards the end of the blog page.  

 INTEREST ALIGNMENT: WHAT IT MEANS (1 post)

 CHRIS DIXON (2 posts)

Chris Dixon:  Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon:  Tranching Can Create Misalignment of Interests

 JOSH KOPELMAN  (1 post)

Josh Kopelman:  High Valuations Can Limit Exit Opportunities

BASIL PETERS (3 posts)   

Basil Peters:  Why VC's Block an Exit

Basil Peters:   How to Ensure There's Alignment on Exit Strategy

Basil Peters:   A Fair Vesting Formula Optimizes Interest Alignment

FRED WILSON  (1 post)

Fred Wilson:  Why I Believe Twitter Picked Us as their Investor

 

 

Interest Alignment: What It Means

Interest alignment refers to whether or not investors and entrepreneurs whose businesses they finance have the same [aligned] or differing [misaligned] interests, incentives and objectives with respect to the investment.

Why I Believe Twitter Picked Us as their Investor

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[] we were probably alone at the time in advocating that approach [to various strategies for scaling the product, etc.] and I think that’s why they [Twitter] picked us [Union Square Ventures VC firm]. [] I think, I don’t know for sure, I think they probably wanted an investor who was aligned with the way that they wanted to run their company.”  This Week in Startups, Fred Wilson, episode # 523, Mar 10, 2015 @ approx. 6 min. http://thisweekinstartups.com/fred-wilson-launch-festival/

 

A Fair Vesting Formula Optimizes Interest Alignment

Basil Peters angel investor and Principal Strategic Exits Corporation

“Investors get 100% of their money back on the sale [of the company], so 50% vesting on the sale is fair and optimizes alignment [between entrepreneurs and investors].

[The] most fair vesting formula-  Assuming that was the fundamental agreement, and that 50% of the value is often created at the exit, then reverse vest: 50% of the shares [vesting] daily over  a three year period, and the other 50% when there is a ‘sale’ of the company.  

All vesting for senior employees accelerates on a sale of the company.”  Basil Peters, Maximizing Exit Value Angel Capital Association,  Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf,  pg 30-31

How to Ensure There's Alignment on Exit Strategy

Basil Peters angel investor and Principal Strategic Exits Corporation

 “It’s surprising how often there is a misalignment between key stakeholders on the exit strategy. The only way to check is to get a ‘signoff’ on a written exit strategy. [] [Check] alignment annually. [] [The] right way to build a company is [to] determine the type of business, build alignment on the exit strategy, THEN develop the financing plan and then start to contact investors.”   Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009, pg 28 & 32; 

http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf

Why VC's Block an Exit

Basil Peters angel investor and Principal Strategic Exits Corporation

“Most entrepreneurs don’t even know that a VC is likely to block an exit when they accept the VC’s money. [] VCs design their investment agreements to give them the power to block exits.”

“[] VCs will almost always block a sale where they only make a 3-4X return on their investment.  This could have easily been a 10X return for the angels and a 100X return for the entrepreneurs.

[] The winners [must] produce at least 10-30X return for the [VC] fund to perform respectably.

[] This propensity to block exits is one of the reasons that every company needs a clear exit strategy before [it approaches its] first investor.”  Basil Peters, How VCs Block Exits, August 28, 2010, http://www.exits.com/blog/how-vcs-block-exits/; Why VCs Will Block Good Exits;  http://www.angelblog.net/Why_VCs_Block_Good_Exits.html

High Valuations Can Limit Exit Opportunities

Josh Kopelman Partner First Round Capital and former entrepreneur

Kopelman advises that entrepreneurs who “[] try to maximize valuation [] in many cases [] might be shortsighted” because high valuations can limit exit opportunities.  “[] too many founders are not aware that they are shutting off the majority of exits -- and therefore increasing risks -- when they accept a high valuation.”  “[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Thus, a VC could block an exit that could have been a fabulous payout for entrepreneurs and angels.  Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html;  When the music stops... March 10, 2006;  http://redeye.firstround.com/2006/03/as_a_little_kid.html

Tranching Can Create Misalignment of Interests

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

Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

“I prefer to think of dilution over the life of the company. Sometimes you give up more now to give up less later. []    I gave up 50%+ of SiteAdvisor to investors in the first round but in the long run was happy for it.”  That said, Dixon recommends raising “as much as possible while keeping [] dilution under 20%, preferably under 15%, and even better, under 10% [especially] for founders who aren’t experienced “developing and executing operating plans”.” 

“[] I know it sounds self serving as a seed investor but the path to least dilution is investors aligned with you on seed round where you don't raise too much money, and then raise the bulk of your money later.” Chris Dixon, What’s the right amount of seed money to raise?  Comments, December 28, 2009;  http://cdixon.org/2009/12/28/whats-the-right-amount-of-seed-money-to-raise/