Thread by @ryan_caldbeck

1/ In general I think founders are far too concerned about dilution and not concerned enough about the pref stack or the post-money trap.

2/ By the pref stack, I mean the amount of preferred equity (typically what investors invested) that sits on top of the common (what the employees & founders own).

3/ So if a company raises $416m and sells for $465m, almost certainly the team (founders included) won’t make “much” off of the sale.
businessinsider.com/fanduel-founde…

4/ They sold for $465m and they wont make anything. Just let that sink in.

4/ Post-money trap is raising at a valuation that will be exceptionally hard to meet/exceed going forward. See Honest Company pre-Catterton.

5/ Hampton Creek (Just Inc) would have had an exit years ago (despite the challenges) if they hadn’t taken money at absurdly an high valuation from VCs that don't know how to value a consumer co.

6/ Implication, if I’m right, is to turn down the VC that says “look why don’t we just invest more at a higher valuation.” Both the larger pref stack and the higher valuation limit your options for exit.

7/ That VC wants to put money to work so they can raise another fund. That VC cares about swinging really big and doesn't recognize that the $ may be harmful- may cause you to spend in unnatural ways and will certainly limit your exit prospects.

That VC sucks.

8/ The entrepreneur always focuses on “well I don’t want to give up 1% more of my company because that 1% might be worth a ton one day.”

9/ Yup. Maybe. But 99 times out of 100, the bigger issue will be if you can't raise (post-money trap) or if your exit isn’t big enough to support a massive pref stack.