
The Cost of Preemptive Deals - craigcannon
https://blog.ycombinator.com/the-cost-of-preemptive-deals/
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sethbannon
This post doesn't mention what is perhaps the greatest benefit for founders of
accepting a preemptive offer from an existing investor: getting a known and
trusted person on the board.

At the Series A and later, founders typically have to give up a board seat in
financing rounds. This is no bueno, because it means they're giving up control
of the company. Board members are hard to get rid of, can often veto big
moves, and after a certain point can even fire the founder CEO.

Ensuring only extremely trusted, founder friendly, values aligned people make
it on to the board should be a top priority of every startup founder.

By accepting a preemptive offer from an investor the founders have worked with
directly for months/years, the founders are limiting the risk of having the
wrong people on the board. Founders can, of course, run reference checks with
other founders on new investors, to try to gauge how they would act as board
members, but there's no stand in for direct experience working with an
investor.

Given that the most important things to optimize for during later stage
financings are ownership and control, it makes sense that founders might trade
some ownership to have more certainty about the control situation.

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antognini
> ...we looked at 120 US Series A rounds...

> ...on average, founders taking preemptive offers are taking ~1.4% more
> dilution for less money.

Is this finding statistically significant? It's unclear what the standard
deviation in the distribution of dilutions is, but if it's less than ~7.7% or
so then this would be less than a 2 sigma result. Granted, given that their
prior was that this should have gone the other way, that would increase the
statistical significance of the result. I really have no idea what this
distribution looks like, though.

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derp_dee_derp
you are reading this blog post like a research paper, which is wrong. This is
not a research paper.

this is the writers trying to influence the market so that future start ups
they work with accept terms that are more favorable to YC.

they are using data and statistics because their target market would dismiss
the information outhand if they did not.

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streulpita
This is helpful. Core takeaway at the end: "That suggests that to get the best
of both worlds – to minimize the Work Premium as well as the work of running a
full fundraise – founders should use pre-emptive offers to run an accelerated,
abbreviated process with a handful of select investors. The way to do this is
for founders to make sure they are cultivating relationships with a subset of
investors they think would be good partners for their company far in advance
of their actual raise."

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xivzgrev
Makes sense - one should always price shop when able to.

As an employee When you get a job offer the very next thing you should do is
reach out to those companies you are most interested in / furthest along in
the process and ask for acceleration. They won’t always be choose to
accommodate but I’ve had it happen / improves the quality of my offers.

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plinkplonk
Sorry for the dumb question, I'm not an expert on startup finance, but what
_is_ a " pre emptive offer"?

The article assumes the reader knows( which is fine, but I don't know, hence
the question here, thanks in advance )

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pdpi
The usual assumption is that founders go talk to investors to try and acquire
funding. This article is about the scenario where the investor preemptively
approaches the founders offering funding.

~~~
plinkplonk
Thanks a lot!

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venantius
I don't find this surprising at all and I think it's likely often in founders'
best interests to still take a preemptive deal. It removes risk (which creates
value) and also allows them to remain focused on operating the core business.
There are obvious downsides here but I'd guess on average the benefits of that
slight extra dilution far outweigh the costs.

~~~
xivzgrev
Remember dilution compounds into future funding rounds. I agree with point of
this article intuitively - just take a month or two to run an accelerated
process.

It’s not just about the money, it’s also entering into a partnership. So you
shouldn’t take the first offer, you should at least shop it to know your
options (quant and qual).

~~~
zterky
There's a bias here in that as a founder if I'm disappointed in one of my
investors I would decline the pre-emptive offer and actively seek
alternatives. In some cases I may even be interested in more dilutive options
if it re-structures the companies governance.

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TadaScientist
This finding talks volume about two facts:

1) Competition, even among smart money investors, works 2) The implicit value
of, as user sethbannon stated, "getting a known and trusted person on the
board"

