

Fred Wilson, Chris Dixon, & David Lee On High Valuations & Competing - thankuz
http://techcrunch.com/2011/06/08/fred-wilson-platforms-valuations/

======
spinlock
In the second clip, David Lee calls a cap on a convertible note a "valuation."
This is so wrong it makes my brain hurt. You only value a company when you buy
equity. You don't value the company when you buy debt. As an entrepreneur, I
think caps are the worst innovation that investors have cooked up in a long
time and I also think they are completely counter productive. The only
entrepreneurs who agree to caps are those who think they are valuations. Do
you really want to invest money with the dumb people who don't understand that
they're getting screwed on the transaction?

~~~
joshu
I think it's shorthand. As an investor I think of caps as "worst-case"
valuation -- the highest valuation I might end up seeing.

You realize that the startups write the convertible note right? They are the
one offering the terms to the investors.

The issue with uncapped converts is that you are taking risk early but getting
priced later. Thus the appearance of caps in the terms.

Of course I'd prefer to have an actual priced round.

~~~
spinlock
The problem with a cap - or rather calling a cap a valuation - is that
unsophisticated entrepreneurs don't understand the consequences of the cap. To
you point about entrepreneurs offering terms, I find that terms are negotiated
and that angels are the ones who suggest a cap (and call it a valuation). The
problem comes when the naive entrepreneur finds out what a cap really is. This
is where they lose focus on building the most value with the capital they have
raised and start focusing on the investors who "screwed" them. Once this
realization is made, entrepreneurs will try to raise a series A _at a
valuation equal to the cap_. After all, why try to add more value when it will
go disproportionately to those investors who added a cap and called it a
valuation.

Anyway. I understand that caps are a way for investors to avoid dilution in
massively up rounds. I just think they are the worst way to do it. It gives
the entrepreneurs the incentive to raise their next round at the cap and not a
penny more. In my opinion, a good deal will give the entrepreneur the
incentive to raise the next round at the highest valuation possible and not at
some arbitrary number. If you want anti-dilution protection as an investor, I
think warrants are a much better tool. They allow you, as an investor, to
maintain a desired percentage of your portfolio company without removing the
entrepreneurs incentive to go for the highest valuation possible in the next
round.

At the end of the day, the most important thing is the relationship between
entrepreneur and investor. And this is where I have the biggest problem
calling a cap a valuation. It can really destroy the bond of trust and leave
an entrepreneur feeling screwed. That's just not a good mindset to start a
company from.

------
speek
I don't want to be "that guy," but there are a few typos in the article,
thought it'd help to see a couple here:

"... startups in the Twitter ecosystem ti stop “filling holes.” "

"He disagrees with Michael’s ffirst Blubble post in which he..."

