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"The first reason is that you want he founders to be focused on the company, and not struggling to make ends meet."

Pay yourself a higher salary. If you're paying yourself less than 80k, bump it up. When you're selling stock, you're usually talking about tens of thousands of value at the minimum. Founders and especially employees shouldn't seek to take money off the table because it rewards them for hitting the wrong milestones. Fundraising is not the goal -- a sustainable business is. They should get rewarded for the latter and use the former as a source of fuel to achieve it.

"Secondly, every round the founders lose more and more control. They should be compensated for this."

They are compensated for this in the form of their net worth skyrocketing come fundraising event. Really, the question is should they receive liquid compensation. Sure, it would be nice for some risk to be left off the table, but if you signal to people that you're selling your own stock, what does that do to the employees mentalities? The cost is higher than the reward.

"One of the big problems with venture capital these days (and the reason I won't take it anymore) is that it disrespects the founders by demanding liquidation preferences for the VCs."

I agree! If the stock is liquid, I see no reason why VCs should get preference... the only thought that comes to mind is that they wouldn't invest if the preferred treatment didn't exist, or that the funding market would be significantly smaller. Remember... VCs are paid a lot to mostly lose money.

net worth skyrocketing come fundraising event

Which is monopoly net worth - those billionaire charts are fantasy land when it comes to actual liquidity as we all know.

but if you signal to people that you're selling your own stock, what does that do to the employees mentalities?

Ok, fine. Then make the deal that employees have the option to liquidate a percentage of shares at the same time. Ends up looking like a dividend.

Not all VCs are in it for sustainable businesses. Same goes for the founders. This is the case for at least one company that Google Ventures invested and made money on. I heard no outcry from Google Ventures when they made money from that business. Hypocrites.

Your statement about salary is right. In early funding the founders and employees should get salary bumps that bring them closer to market rates, depending on the stage of funding.

So maybe A&B rounds result in salary bumps.

When the company starts being worth something significant, like over $20M valuation, during funding founders should take some money off of the table-- if they want. It's prudent financial planning (don't have all your retirement in the stock of one company) and while they are giving up potential upside they are ensuring long term security for their family against failure of the company combine with an economic downturn. (A combination I've seen twice in my lifetime.)

And when your company is in the billions you should have the option to take some off so that you can start angel investing on the side.

It doesn't sound like you understand the purpose of liquidation preferences. This isn't about equality or respect. It's about economics. If VCs are buying common instead of preferred shares you have a whole bunch of problems:

1) Immediately after taking the investment founders could sell the company for the value of the cash and profit handsomely while the investor loses the bulk of their money. That's clearly no good.

2) If VCs are buying common then it will push up the value of common stock much faster leading to much much higher strike prices for employees. That's clearly bad for them.

3) By ensuring downside protection VCs are willing to invest at higher valuations leading to less dilution which increases the upside reward if the company is successful. If you're focusing on downside protection instead of upside reward as a founder then what are you starting a company for in the first place?

Common stock purchases for investors are only problematic if you structure them that way.

1. To who? There is a liquidity problem here. No one would buy a company at par value that just had the founders bail - and no founders are going to bail on a company that is killing it. This is such an outlier case that it's ridiculous to assume its a primary motivator.

2. Simple, give employees vesting equity grants like the founders, not options.

3. Downside protection is anti-pattern for VC. High risk = high reward. You might get more investments, but those are inflated and skews the market toward making riskier investments if they know they have a fall back. Secret is a perfect example.

The reality is LPs are in there because that's been standard and companies who need investment would rather take the money with shitty preferences than not take it at all.

If you don't want to do investments with LP, then either be so good that people want to invest on any terms you offer or don't take VC.

1. To anyone. You're just buying the cash. Sell it at a 5% discount to cash on hand and I'll buy it. What the founders do is irrelevant.

2. Founders do get options. They just get them with a very low strike price because when they start the company it's worthless (essentially).

3. Secret didn't fail because it raised money at too high a valuation. It failed because it didn't achieve real product market fit. If it had achieved fit then the excellent terms on which they raised money would have been very good for them.

To your point about "invest on any terms you offer" what I'm trying to show you here is that having investors buy preferred shares is good for everyone involved.

Sigh, don't presume I "don't understand", and then feed me self-serving VC rationalizations that are essentially propaganda.

> " Immediately after taking the investment founders could sell the company for the value of the cash and profit handsomely while the investor loses the bulk of their money."

That's nonsensical on the face of it. If the company is worth $10M and an investor puts in $2M for %20, then the remaining equity is $8M. I don't consider selling a $10M asset for $2M (and netting %80, or $1.6M) to be "profit[ing] handsomely". It's giving up %84 of the company.

Plus it's trivial to prevent this by requiring, as part of the deal terms, that a sale of the company have investor approval.

Your second point presumes that there's only one class of stock. There can be preferences, such as the anti-sale clause I mentioned that common shareholders don't have. That's completely different from liquidation preferences.

Your third point is silly, I'm focusing on being denied a fair deal in a liquidity even and you're talking about "Donswide protection". It is true that treating people fairly works better on the downside too.

But your comment "what are you starting a company for in the first place?" makes me think you're naive and reacting as if I've dared to disagree with the common wisdom of our lords and saviors the VCs.

I've been starting companies for 30 years, this is experience talking, kid.

1) That 8M of equity in your example is theoretical value, not cash you can spend. The 1.6M is real money. There are a lot of people that would trade the former for the latter. You're right about there being other ways to deal with this, but preferences are one of the cleanest.

2) If you have different classes of stock that pay out the same in a liquidation event you aren't going to be able to get a significant difference in their value.

3) Who's to say what's fair? We're talking about capitalism not an ethics textbook. Fair is whatever you can negotiate. And providing downside protection to the people putting in the cash enables you to enhance your upside reward. If you're raising 2M on 8M pre and you're more concerned about what happens if the company liquidates at 5M than what happens if you get to 50M or 100M then I do honestly wonder why you're starting a company in the first place.

This is something that has bugged me too..

Company A has 4 founders, each with 25% share and are doing well and valued at say 4m

Scenario 1 An investor wants to enter the game and buys out one founder for 1m No change in company's value of 4m and they go on to the sunset

Scenario 2 An investor wants to enter the game and joins the other 4 founders with 1m cash New equity split is now 20% each and company has 1m cash in the bank, valuing them at 5m with each having a 20% stake

Any exit from this position should allow the assets to be paid out equally to the 5 shareholders

if it is ok for one stakeholder to negotiate to be paid out first a preagreed sum, then it should also be okay for other stakeholders to negitiate to take money off the table during funding.

I don't understand this return money to investors bit. Shouldn't it be share the money equally among all stakeholders.

Here is where the mistake in your thinking is. In scenario 2 the investor will only agree to put in 1M for a 20% stake if he gets preferred shares. If he only gets common shares he might only put in, say, 500k for 20%.

Assuming that you think the company is going to increase in value, the fact that he has preferred shares won't matter in an exit so you're much better off taking 1M instead of 500k (assuming you can put the extra money to good use). And if you don't think that the company is going to increase in value then why did you start it in the first place?

Preferred/common dual structure allows the preferred shares to rise in price differently than the common shares.

Congrats, you've created a huge tax burden for options holders.

If you let the options holders cash out some of their shares during the financing round, that offsets the tax issue. Then they could afford to exercise, pay the tax bill, and take some money off the table.

Also, how do you come up with the price for the common shares when they aren't liquid and aren't changing hands? It seems weird to give a price of $10/share for a common share when you aren't able to sell at that price.

409a valuation. There is a process. But generally the common price is much lower than the preferred.

It's still just a fantasy price if you can't actually sell your shares at that price.

I don't really understand what point you are trying to argue. It's not a price, it's a valuation; the price is derived from there. Do you think that companies have zero value always?

VC's are different type of partners. The VC's need to sell their shares in the end of a fund.

VCs have their investors too, the LPs, and they need to have liquidity to sell their shares and take the profit. If you don't give liquidation preferences or drag and tag-along rights to VCs will not be able to sell and make any profit if the fund is about to close.

> The first reason is that you want he founders to be focused on the company, and not struggling to make ends meet. That way they can make long term decisions.

If a company makes it beyond the seed stage, it should be capitalized well enough to allow the founders to take a reasonable salary. If there are any founders employed at venture-backed startups struggling to make ends meet, I think it's safe to say the vast majority of them are not struggling because they're not being paid well enough.

> Secondly, every round the founders lose more and more control. They should be compensated for this.

Why? If you want to maximize control, build a business that doesn't need to sell equity to raise capital. Or build such a great business that you can raise large sums of capital without having to sell much equity.

Incidentally, when founders cash out their shares, they're only hastening the loss of control, especially if this is done early when the company's valuation is lower.

> One of the big problems with venture capital these days (and the reason I won't take it anymore) is that it disrespects the founders by demanding liquidation preferences for the VCs. As if the VCs who merely put up other people's money should have rights superior to the people who literally put part of their life into the company. That's not right. All shares should be equal, and if not, the founders should at least be respected.

This is silly. You're not going to raise millions of dollars from professional investors who have fiduciary duties to their limited partners without said investors demanding reasonable protections. Period.

If a founder is worried about a 1x preference, which is fairly standard, it suggests the founder is not confident about the company's prospects, at least as far as investor expectations are concerned. For example, if a founder raises $5 million round at $15 million pre and is worried about a 1x preference, one would have to question whether the founder really believes the company is actually going to be able to deliver the type of growth his or her investors expect.

If an investor demands a 2x or greater preference in this market, it probably means the company is not in a good position because nobody competing for a deal is likely to demand more than a 1x preference today.

> Thirdly, too often I've seen VCs force founders to revest shares. But the value of those shares was already earned. The founder incentive to do well comes from increasing the value of the shares... and revesting the shares denies the founders crucial voting rights that they have earned already. (And makes it that much easier for the VCs to force a founder out, which is usually a bad idea in my experience.)

Revesting is negotiable and if you set up a reasonable vesting schedule when you form your company, chances are you'll be able to avoid this issue entirely. A lot of founder revesting issues arise because the founders purchased their shares for virtually nothing with no restrictions attached when they formed the company.