Thread by @dunkhippo33

Friday thread on honoring commitments.

One of our founders called me up today & asked me what he should do about a situation. It took him a while to raise and all of a sudden today everyone wanted in.

He asked me if he could bump up the valuation cap.

Read on >>

1) He had told all the investors he was mtg w that his cap was $x.

But now he was oversubscribed and didn’t want the extra dilution. So he wanted to move it up.

2) I told him that was shortsighted. And that even if he hadn’t signed w these ppl yet, he should honor his word - that they could come in at $x - what he told them.

3) I told him he could pare ppl down but that he shouldn’t change the terms. Because that’s not a good experience and trust starts at 100% and only goes down.

4) I told him that one way he could try to finagle a higher valuation is to pare ppl down and then say you can’t take more capital than $Y at that cap per dilution considerations but would be open to doing additional capital at a higher cap.

5) In addition he could also use the oversubscription situation to force everyone to move faster. Ie tell all potential investors you are oversubscribed but would honor the valuation as long as ppl could sign and wire by Z date.

6) But whatever it was - he could NOT change the valuation for the tranche he was raising. Even though nothing was signed.

Because your word in business needs to mean something.

7) In addition, investors talk. A LOT. I’ve seen investors not touch a deal because a founder screwed over 1 investor.

It’s just not worth it to do business with ppl who aren’t able to follow through on what they say. Even if they become a unicorn.

8) I think most of the time when I run into these situations - either w my portfolio founders talking to other investors or potential portfolio founders who have done this to me, I chuck it off to ppl being naive and not communicating well.

9) But it sure feels like mal-intent as a user experience.

So to avoid these issues, clear communication is impt. How much are you raising on this tranche? At what cap?

What are the caveats? Ie you’re talking w a lot of ppl today who could fill it by tmrw.

Clear communication matters.

Think about the other person you’re considering working with. What user experience are you creating?

Because trust starts at 100% and only goes down.