You’re facing two term sheets and have boiled them down to the most relevant facts, listed below.
Which do you choose?
- $1mm total
- $500k now, plus commitment to help close $500k more from other angels
- Roughly 33% dilution for full round ($2mm pre-money)
- Highly experienced, top-tier angels
- Vision for B2B, sales-driven technology
- Requires team relocation
- $1.25mm total
- $250k now, plus 2 tranches for another $1mm based on performance goals
- 40% dilution for full round (roughly $2mm pre-money)
- First-time VCs, building on their own entrepreneurial success
- Vision for B2C, virality-driven community
- Conveniently local
The financials immediately jump out when we talk about term sheets: what’s the valuation? What’s the dilution? Can I make those numbers bigger and smaller, respectively?
Next, we check that we’re safe from any particularly onerous terms like participation preferred. Looks good.
Regarding structure, the first deal is a rolling round with committed lead investors. The second is a tranched deal, which is always a bad compromise for founders. If you under-perform, then you don’t get your money. If you over-perform, then you would have raised on better terms in the free market.
At this point I’m leaning toward the first deal, but not by a huge amount since there’s some risk to completing the round in both cases.
But we still haven’t touched the most relevant information. In an early stage deal, you check the numbers to avoid getting exploited, but you make your decision based on the investors.
Depending on your team, the relocation might be an easy deal-breaker. On the other hand, maybe we can move somewhere less rainy than London…
One of the first pieces of startup advice I ever got was to “Never take money from a virgin investor.” That would push me toward Deal 1 (with the experienced angels), but it’s a bias which is still going to get clobbered.
If I saw these term sheets today, my thought process would go like this:
- 0% financials (both are good enough)
- 5% investor experience (to Deal 1)
- 5% avoiding relocation (to Deal 2)
- 90% investor product vision
Deal 1 is a sales-driven company. Deal 2 is marketing-driven.
It’s the biggest factor determining what a particular company feels like.
The former means meetings, slide decks, briefcases, and salespeople. The latter means products, analytics, optimisations, and developers. The former means your friends won’t hear about your company until the acquisition. The latter means you might chat up a stranger who already knows about (and loves!) your website.
You may very well weight the decision differently. I’m a little burned out on chasing the market. I believe that optimising for founder happiness and day-to-day quality of life is a long-term competitive advantage that will help you push through the dark times when they invariably come.
As a small company, raising a round will shift your company’s vision toward the investor’s vision. I’m not saying investment is bad. It’s great! I am saying that your vision will be forcibly shifted, so pick investors who also envision an end-game you’d be happy chasing.
For me, this whole choice, with all its terms and numbers, comes down to just this: Would I be happier running a marketing-driven, consumer business or a sales-driven enterprise one?