
How VCs Block Exits - basilpeters
http://www.angelblog.net/How_VCs_Block_Exits.html
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No YC-funded company should be surprised like he was. We tell them all what
they're signing up for depending on whether they take angel money or VC, and
at what valuation.

If you sign up for VC, you're signing up to take over the world-- to at least
try to get IPO huge (even though IPOs themselves have currently disappeared).
This is ok with founders who were planning to anyway. Founders who aren't
sure, or are sure they aren't, should only take angel money.

Though nearly all later stage investors want a veto on acquisitions, the point
where they'll exercise it varies a lot. It depends mostly on the valuation. As
a rule no investor is happy with less than a 5x return, unless the valuation
was huge (e.g. in mezzanine round) or the company is in trouble. Over 5x they
may still grumble, but most will let you sell the company if you really want
to. Or they'll arrange for founders to sell some of their shares privately.
Over 10x they'll generally be pretty happy.

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sachinag
Paul, but the YC sample docs give YC a veto over change of control as well.
It's not just the VCs who want that power. Now, you may never have - and state
that you never will - exercise that right, but if so, then why is it in there?

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mattmaroon
What's to stop you from taking YC's money, then selling the company to your
wife for $1, assets included, and then shutting down?

YC is very lax in what they allow. There are definitely some deals they've
approved that I suspect a normal angel would have blocked in order to hold out
for more. But they still need protection from unscrupulous founders.

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sachinag
You have a fiduciary duty to your minority investors. They can sue your ass if
you try this.

Look, I understand - if I was going to do it all over again, I'd go through
the YC process. But I still do not understand what the purpose of that term is
if they're never going to exercise it.

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mattmaroon
Fiduciary duties are murky, and what exactly would Y Combinator sue for?
They'd spend 20x more in legal fees than they invested, and after they won,
what would they get? None of their $15-20k back (would be gone in legal fees
from the startup they sued, if it weren't already wasted) and control of a
company that was comprised of 2 or 3 founders who are now gone for obvious
reasons. In the end they'd end up spending a couple hundred grand on a
mediocre domain name. Doesn't it seem far better to just have that provision?

I have no doubt they'll exercise that provision if they have to. Having that
provision ensures they won't. It's like mutually assured destruction, in that
having a large nuclear arsenal prevents both sides from ever using it.

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basilpeters
Paul - I agree with you. No VC backed company should be surprised, but in my
experience, many are. I believe most entrepreneurs don't really understand
share classes and the practical implications of many terms in their investment
agreements. Others may understand the terms but are surprised by how they are
applied. I applaud your outstanding work in helping to maket this clear to
entrepreneurs everywhere. Keep up the great work!

