No, There Aren’t That Many Deals Where the VCs Make Millions and The Founders Make Nothing

There are a lot of posts about how VCs make a ton of money with liquidation preferences when founders make zero.

I find that’s rarely true. There are cases — 100% for sure.

The way in theory a “liquidation preference” works is the VCs get their money out first in a deal, and sometimes, they get it out first and then they get out their pro-rata stake.

So yes in theory, if you sell for less than you raise in VC money, the VCs in theory would get it all back, and the common stock and founders nothing.

But like so many things … it’s not that simple:

• First, even if a startup sells for say $20m after raising $50m and ev even if the VCs were able to keep all that $20m, that’s still a big loss.
• More importantly, when an acquirer goes to buy a company, they almost always want the founders to stay and go big. Departed founders, that’s different. But they almost always want as much consideration as possible to go to the founders and top execs still there — and NOT the VCs.

In fact, in my worst investments so far in 11 years of investing, the founders made $20m+ and the VCs lost most of their money. The opposite of this narrative.

Liquidation preferences or not.

My main point here is to worry less about being “screwed” on VC terms like liquidation preferences, and worry more about making sure you can sell for 3x-10x what you raise in VC capital or more.

VC capital can be profoundly valuable.  But it’s also profoundly expensive.  Make sure you raise what you need, if you can.  In fact, raise 125% of what you need.  But don’t way overfund your start-up.

That can lead to tears all around.  No one wins unless you win big.  Including the VCs.

And also in a lot of these stories, remember the founders that didn’t make any money on an acquisition not only were at startups that sold for less or not much more than they raised — they are usually the ones that left.

Again, the ones that stay almost always get a carve out even in a small M&A deal.  Stripe, Salesforce, Datadog, etc. aren’t going to spend tens of millions or more to buy a start-up, and have 100% of that money go out the door, and 0% go to retaining the team they just bought.  It just ain’t going to happen.

So if you want to be sure you make money from your start-up, argue less about this and that, and just. … stay.