Friday, August 31, 2012

How to destroy initial investors trust in a new financing round

I hope I will never be in that situation as a founder. I have invested in an early round of a friend startup several years ago and it was time for them to grow with VC founding.
Due to some new law that was impacting capital gain, they proposed to the shareholders to transfer our priviledge double dip shares to commun class A share with a ratio. I suspect that, the reason they brought the issue in a rush was to simplify the founding by not having to negociate our priviledge dillution.
In addition to loose our preferential priviledge, the deal was securing our initial investment if the compagny value was doubling, what a bad dead for early investors. Of course, the CFO was trying to drawn us in the details and make us believe it was a good dead.
We exposed the issue in the shareholders meeting and the CEO has still voted for the inital proposal. The interest of the company had surpassed the interest of the early investers. Unfortunately, the trust is now broken. I hope I will never be in that situation and it is inforcing the idea that we shouldn't raise money from friends and its easier to screw others like what Manatthan financial thief experts are doing daily. 
Please, don't use fear and urgency to force your early investors to do moves against their interests. Early investors interests has to be protected by the founder if they can.  

But the sad conclusion is that you shouldn't invest in early stage startup because they will most likely take th eVC route at one point to grow the company. Don't get me wrong, VC are doing their work but are shoutting into their own feets on the long run. The sade part is that it will reduce early stage founding available and wealth and knowledge creation. This is bad for an economy that rely on innovation. CEO are the only gate keeper.    
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