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Protect the Mothership

December 16, 2021

Usually, when you're negotiating a term sheet or an SHA, it's easy to think that there are two categories of parties involved: the founders and the VCs. Those are the ones arguing over terms. However, there is of course another party involved (although it may not always formally be a signatory), which is the company itself.

This is very often neglected, yet a very important fact. Some decisions might be bad for the company itself and some good. Sometimes founders or VCs are arguing for clauses that are good for them and also good for the company. Every clause can be put in one of those two buckets, and the former should be much easier to get in the term sheet than the latter.

One thing that VCs often argue for is vetos so much that they sometimes creep down into the operational questions and make the business harder to manage for those who are actually running it day-to-day. This might be (or feel, but not necessarily be) good for the VC but it is probably bad for the company.

Another common clause is to have a pay-to-play, i.e. the loss of certain rights, should investors choose not to participate in future rounds. This means that investors are incentivized to participate in future funding, which sends a strong signal to external investors. It is in the interest of the company, so it's not a dumb thing for founders to ask for.

Founders sometimes argue for shorter vesting. This is obviously very important to founders since as a founder you often feel that you have a certain entitlement to the company's upside for the work you have put into starting the company, even if you quit. But here, as a founder, you are arguing for yourself and against the success of the company. A smaller share of the cap table is allocated to people who are working with the company's success. From the company's perspective, those shares could probably be put to better work somewhere else.

When thinking about what to negotiate in funding, it's always important to think about everything through the lens of the company itself. Because this fact can be a strong card to hold in discussions. It should be much easier to push back on clauses where a VC wants to enjoy rights to the detriment of the company itself. And when you're deciding what to negotiate for yourself, it's much easier if you pick the things that are good for you as well the company, which is a benefit for everyone else, too.

Everyone should protect the mothership because if the mothership does well everyone will be happy.