
Milestone Based Investing - peter123
http://www.avc.com/a_vc/2009/08/milestone-based-investing.html
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adamt
I agree completely.

Several of my past businesses have gone through tranched rounds and each time
I have found it to be significantly destructive.

The VCs who think financially tend to like it for several reasons:

* They are effectively only risking half the capital at any one time reducing their downside. * They are investing the second tranche later which improves their IRR * In their minds they think they have more control over the business.

The reality is, as some the linked and original blog post touch upon:

* The VCs expect you to grow at the same rate as though you'd raised the full amount despite the fact you've only got about 6 months worth of cash in the bank. * It puts loads of pressure to hit short term targets. Both on the company to the VCs and on the VC on the board to their partners. In startups things don't always go to plan (and rarely go completely to plan), and software, markets and deals always take longer. This short-termism is a killer. * It means you are constantly being drip fed and having to worry about manage the shareholders rather than working together about creating a long term view. Very few tech businesses were overnight successes.

In my experience the net effect is considerably to the detriment to of the
business, and of entrepreneur/VC relations.

The other thing to realise is the VC is actually getting (assuming 50:50
tranche) X/2 shares and the option to buy X/2 shares in the future if
everything at the same price if everything is still peachy. Considering the
pretty volatile nature of startups, a rough Black-Scholes calculation will
show you're effectively discounting the shared by about 40% by tranching it in
that way. E.g. it's better to sell shares at $7 a share untranched rather than
$10 tranched.

