An investor asks for a 6% cumulative dividend. I've been reading up but there seems to be a disagreement whether this is a common term or not and whether to accept or avoid in a seed round. Any thoughts?
To me, an investor seeking dividends has objectives that are misaligned with the capital structures typically beneficial for startups of the type associated with Silicon Valley. Dividends provide regular cash flows to investors at the cost of a reduction in the working capital of the business. Nothing wrong with that, it can be a good fit for businesses that maintain a steady size or expected to have linear growth. However, those are not characteristics of businesses typically considered by Silicon Valley venture capital type investors. That sort of money seeks compounding growth. Rather than extracting dividends, the goal is reinvestment of cash on hand to further fuel growth. These investors seek returns based on an increase in the value of the underlying equity (i.e. shares of stock). Amazon's historic lack of profits and ever rising share price provides a good example of this model...Amazon kept getting bigger by reinvesting revenue and putting more assets on the books and Amazon's shareholders made capital gains by holding the shares. Most investors are not really suited to Silicon Valley type startup investing. Likewise, most new businesses are not really startups in the sense that they are structured to provide returns via compounding equity growth. This doesn't mean that the investment terms are bad. It just means they may or may not be suited to your particular case. Good luck.
To me, an investor seeking dividends has objectives that are misaligned with the capital structures typically beneficial for startups of the type associated with Silicon Valley. Dividends provide regular cash flows to investors at the cost of a reduction in the working capital of the business. Nothing wrong with that, it can be a good fit for businesses that maintain a steady size or expected to have linear growth. However, those are not characteristics of businesses typically considered by Silicon Valley venture capital type investors. That sort of money seeks compounding growth. Rather than extracting dividends, the goal is reinvestment of cash on hand to further fuel growth. These investors seek returns based on an increase in the value of the underlying equity (i.e. shares of stock). Amazon's historic lack of profits and ever rising share price provides a good example of this model...Amazon kept getting bigger by reinvesting revenue and putting more assets on the books and Amazon's shareholders made capital gains by holding the shares. Most investors are not really suited to Silicon Valley type startup investing. Likewise, most new businesses are not really startups in the sense that they are structured to provide returns via compounding equity growth. This doesn't mean that the investment terms are bad. It just means they may or may not be suited to your particular case. Good luck.