Certainty in Deal Structuring

Thank goodness people know the “correct ways” to structure early-stage investments. Just in our feed today we’ve enjoyed:

  • You have got to be kidding me with participating preferred. Who else has seen it recently? This makes me really angry.
  • There is a special place in VC hell for VCs who demand board seats at pre-seed. Founders, they do not need this.

It’s great how confident (some) people are in an asset class filled with such uncertainty and complexity!

Perhaps participating preferred equity is abhorrent; or perhaps this is one deal term among many in the overall structuring of an early stage investment – a voluntary deal made by consenting adults – with advantages and disadvantages in different scenarios?

Incidentally, between 5% and 20% of early stage (Seed and Series A) deals have some kind of participating preferred (full or capped) right, according to CooleyGo Trends data (the blue lines in the second chart at that link).

Perhaps board seats for pre-seed investments ought to condemn you to eternal damnation; or perhaps they are one deal term among many in the overall structuring of an early stage investment – a voluntary deal made by consenting adults – with advantages and disadvantages in different scenarios?

Historically, angels (≈ pre-seed investors) have been criticized for not taking board seats as often as later-stage VCs. But perhaps a balanced board is the best way to help investors get good returns while also helping entrepreneurs be successful? The data in Are Angels Different? certainly suggests so.

We get it, some VCs drive monetization from Twitter/X and LinkedIn publicity, and others enjoy signaling their virtue to win deals. But if you’re looking to raise capital, or structuring early stage investments yourself, please look beyond the clickbait and anger and consider the merits, issues, and areas for negotiation when navigating the complex world of early stage investing.

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