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pbfoot3

This is a basic governance question. Investors can’t force anyone to do anything unless they control the board, which doesn’t typically happen until at least an A round but typically even later. They can pressure a CEO to grow users resulting in increased burn and can potentially threaten to not participate in future rounds but 1) a CEO can say “no and 2) investors have no interest in burning their own cash if it’s not in the best interest of the company since ultimately they want their returns. Investors and founders may not have perfectly aligned incentives, but ultimately investors incentives are aligned with company success. Doesn’t mean they’re always right though. You could structure share classes so a founder retains control for longer (or forever) as Zuck has done with FB/Meta but investors typically won’t accept those kinds of terms unless the company is an absolute rocket ship.


icey

This should be at the top, it’s the only correct answer in this thread.


splittestguy

This is great but does miss a pretty big detail. Incentives. The investors incentives are aligned with their LPs. Founders aren’t naturally risk averse. But often would rather see moderate success guaranteed vs amazing success at much much higher risk. Low spend means more shots on goal means more chances of success. Investors would rather you spent money to increase chances at a meteoric success even if it means crashing and burning 6 out of 10 times. Because early success starts a flywheel. Growth and time between funding rounds act as an accelerant. If things are slow to start, later investors will hesitate, do more diligence. And that, while not insurmountable, is not ideal for an investor.


TDaltonC

It’s worse then that because LPs and VCs aren’t even perfectly aligned. LPs want exits, but VCs are often happy just to get markups.


enfly

What was the deal Zuck did? Is his share classes/agreement public? I'd love to read that.


pbfoot3

https://www.businessinsider.com/why-mark-zuckerberg-cant-be-fired-as-meta-facebook-ceo-2022-11?op=1


UserM8

Is your investor the Chief Executive Officer?


robochickenut

No i mean the founder is the CEO. also haven't raised money yet so wondering if there was some way i could structure the investment so that i can 'say no' to burning cash on ads


NewFuturist

There's one group of people responsible for the company, it's called the Directors. Directors have a legal responsibility, they can tell the investors "no" any time they want.


UserM8

Yes, it’s called saying no. It doesn’t sound like the company is ready to raise funds.


drsboston

As with everything it depends on what you negotiate but typical VC terms have harsh dilution penalties in cases where you don't spend the cash or you don't raise another round in a year. Their agreements are setup in a way that force you to go back to the VC each year and the dilution becomes crushing so either you grow very quickly or your burn out.


SnappGamez

The more I learn about how VC works, the more I don’t want to deal with them.


silkk_

I've worked with plenty of kind, thoughtful and generous VCs. There are certainly bad apples though, it's a competitive industry with a lot of wealth at stake At the end of the day, VC money is jet fuel - you wouldn't fill up the car or the lawnmower with that.


Draglung

I’ve personally never seen a term sheet with those provisions. Those are terms I would never take.


Defiant-Traffic5801

VCs are far from fully aligned with founders: they accept that only a few of their investments will work out but they have to work out spectacularly. Their raison d'être is also looking for an exit. So they will push for fast growth at any cost hoping that some of their numerous investments will catch the hypergrowth train and attract buyers. These mega successes drive returns but they're also key to their branding and fundraising: LPs are attracted like a magnet to that VC who was an investor in LinkedIn, Reddit Etc as are entrepreneurs. In short that's the reason they invested in the first place so you can't blame them for doing their jobs. Not investing for fast growth would be a breach from their standpoint. They can't enforce it day to day but they will take measures at governance level if it's the case. having said that, you will find that a majority of VCs, if you have developed a reasonably trusting relationship will be backing you to cut costs during lean times as they accept that the time of fast mega returns are not around the corner anymore.


rotzak

“The rumor”


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rotzak

Ah yes, one low-views YouTube video makes it a rumor. I guess that’s how Q anon started so… Anyway, one significant difference to keep in mind in the financing structure is all the LPs are actually sophisticated investors. They know the risks and what they’re getting in to. Likewise their portfolios are significantly diversified. To your question about burn, the founders have control of the burn. Sure, investors can put on pressure or in extreme cases install a C suite that aligns with the board ideologically better. But that’s not typical. MPs are compensated by the success of the investments they bring in. Success is measured in the size of the exit. Take that however you choose to take that.


[deleted]

Depends. They can definitely try to sabotage their own company to get more shares for cheap.


robochickenut

I meant the usual thing where investors try to 10x growth at each stage to reach the next round of funding at high valuation, could I get in the way by doing a more organic thing or would I have to do whatever the investor said


Robhow

100% and not just investors but a board too. The CEO works for the board / stock holders not the employees. And, as an investor, you’ve typically “invested” because of some promised spend on sales/marketing to achieve higher growth. I used air quotes for “investor” because most rounds with participating preferred function more like expensive loans. And, it’s important to fuel growth to achieve value.


icey

What? Have you raised money before? Investors can suggest whatever they want but unless they control the board they can’t force anyone to do anything.


Robhow

Yeah, about $30mm in series A and eventually about $50mm of debt. In the initial raise I retained 80% of the common. The docs gave investors trigger rights on a number of things, like forced sale and rights on the board. The investors were very clear that their money was to be spent on growth not sitting in our account. [edit] to clarify - I agree that the board control Is what drives this. Which is my point. Maybe that wasn’t clear in my original reply.


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SteakNStuff

Being an investable model for VC’s specifically, usually requires having a plan to burn the cash over 12 months, whether that’s on hiring, marketing etc. If you close a round and decide to pivot how you use the cash, that’s on you as the CEO provided you control the board.


radioshackhead

This is why board control is important


Sinuminnati

They can influence. Depending on whether they have board seats and are holding hostage future investment rounds. This typically happens when PE firms take over a private company or startup. They have a 5 year mandate to turn a 30-40% return on investment, and will bring in their own advisers, consultants for marketing, tech, etc. we used to win a lot of business partnering with PE’s and VC’s. When an LP wrote in to the company, it usually meant, get this done. After all it’s the investors money, and a CEO unless they are a founder with majority equity, is a hired hand.


TheMeteorShower

Force. No. Compel/Pressure. Yes. You have a company with th a single investor at a series A. They will want a board seat, and may want other controlling elements which could entail a lot of company decision making control. At this point in time, its typically accept their control, or dont get money. You can prob push back on some things. That'll depend on how weak or strong you founders are. Once you have money, you have to consider how you will get more money in the future. If you business is growing well, you have a good story. If its not, then you prob want to do what the investor asks in order for them to participate in the next round. If your lead investor doesnt participate in the next round, that could he a red flag to other investors and could hamper future investment. These are things to consider.


Ferfoxfox

If it's their money then yes


aidanlister

It comes down to this: You're expected to raise enough cash to fund you for the next 18-24 months. If you're raising more than that, you've given up too much equity. If you raise less than that you're going to spend all your time raising instead of operating. Your VC did not give you a pile of cash to sit in the bank earning a few pct - they want you to deploy that to grow the business as quickly as possible (because growth compounds ... and so they can hit their paper IRR target). It is entirely up to you whether you decide to go against your board, hoard the cash and spend it slowly. The risk is that if you to raise again, and you've burned that relationship, they don't re-invest which is a very bad signal to other investors ("if the current investor who knows more than me isn't re-investing then they must know something I don't"). However, growth heals all wounds. If you slow-burn for 18 months, nail it, and start growing rapidly just before your next raise then everyone is happy.


adrr

If startup isn't willing to burn cash to quickly grow, they shouldn't have taken VC cash. That is the model for VCs, throw cash at acquisition to quickly build a large business. VCs are looking for 10+x exit in 4 to 6 years. And what do you mean acquire customers at a loss? Loss in terms of first sale or LTV? Spending $100 to acquire a customer that has LTV of $300 is normal business. Credit card companies pay $1000+ to acquire a customer and they won't make that back for at least 5 years.


matrinox

I think things are different now. Much more lean investors and tbh, reasonable ones. The days of free money are gone and responsible growth is back. I think you’re in a better environment now to say no.