Dear SaaStr: Is There Any Downside In Asking a Potential Investor for a Higher Valuation?

You’d hope not. Certainly not, when you’re in control, have multiple offers … and are at least 90% OK walking.

Just always know your BATNA. And be careful to not push it too far. Even … accidentally.

Let me just share one story.

When I went to raise the Series A for my first start-up, NanoGram Devices, it was tough. I was a first time founder and first time CEO in a unproven space, and in tough times (between Web 1.0 and Web 2.0).

I did what many of us do — I got qualified intros, from ex-bosses mainly.

It worked and I got VC meetings with most of the key VCs at the time in our space.

They all were interested … we had something (strong pre-wired customer interest, unique technology, patented IP, good market trends). No VC passed other than the first I met with (where I screwed it all up — the first meeting needs to be your warm up). Every VC followed up, did second meetings, diligence, etc. They all were warm and smiles in the way that you know they smell money.

The first to give me a term-sheet was a newer, more hungry firm. They offered $5m on a $5m pre. Or for 50% of the company. The offer came fast — in 2 weeks.

It was fine. Expensive from a dilution standpoint, but I was in a tough spot. I’d already recruited the team and had 9 employees including 2 Ph.D.s on the payroll. I’d almost burned through the tiny amount of “seed” capital we had. I had about 45 days left. Get it done.

I went to our “board member” who was willing to follow in the deal. He said it wasn’t enough.

I went back to the VC, and said the deal sounded fair to me, but my existing shareholder / “board member” wanted more.

The VC got pissed. He’d taken a big risk on me, in a complex space, an unproven founder. He walked. Not a crack opened on the door.

Then things got dark.

None of the other VCs that were interested came in, except one. And that was an even worse deal, with horrible terms. So bad, I couldn’t even bring myself to contemplate it.

Now there was about 21 days of cash left. I’d burned through the one real offer, and couldn’t even work with the impossible offer. All the others were gone. Gone.

A week goes by. 14 days of cash left.

I finally went back to the Other VCs that Had Passed. They’d formed a syndicate and said, we will fund you if:

  • You prove it by closing > $1m in revenue in binding, signed contracts; and
  • Ship product; and
  • Guarantee the company in the interim with a $750,000 personal note.

Yikes. I went back one more time to the VC that got pissed. He angrily hung up on me.

I had 14 days. Never has life been more lucid. We skipped payroll to stretch it to 30. We closed $6m in signed revenue in 30 days, shipped the product.

And I signed the $750,000 personal, full-recourse note. When my only asset was my house.

The VC syndicate was shocked. They agreed to fund at a $9m pre, with a $9m raise. But — they’d “changed their mind” on how the pool and other things would be calculated (e.g., 5x full participation with a senior 1x).

This deal ended up far worse than the $5m on $5m from a founder ownership and control perspective despite the seemingly better top-line number. And I’d had to do the impossible. Close $6m in 30 days with no product. And ship and deliver the product. And skip a payroll and keep the entire team together. And sign a $750,000 full-recourse note and lose my house, life savings, and everything if it didn’t happen. This was so ridiculous, I never told my wife.

So anyhow.

Just a cautionary tale. When you don’t have the leverage.

You never know how your honest and best intentions will be interpreted. You really don’t.

I almost lost everything by not taking the first offer. And I never even rejected it. I was humble.

Anyhow we sold the company for $50m 12 1/2 months later. But as founders we would have made more money, with far less risk, with far more control, and no chance of losing my home and entire life savings … if I’d just taken the first offer as is.

SaaS Multiples Are At a 3+ Year Low. Where It Goes From Here.

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