I think the comments you've received here are spot on. But wanted to make one additional comment for your friend.
If I had to guess, the Series A terms provide that in order to issue new shares on parity with or senior to Series A shares, the company needs to get Series A shareholder approval. In other words, to raise a Series B, he'd need to get Series A shareholder approval.
How does that fit in here? Well, the prior comments you received essentially point to two strategies:
1) Get the company into a position where VCs want to compete to invest in it; and/or
2) Simply make the company profitable so that a Series B isn't essential.
The problem with the requirement of getting Series A approval for the Series B is that, to an extent, the fact that other VCs might want to compete to provide better terms is somewhat irrelevant. The Series A VC can turn down any Series B term sheet it wants.
In other words, the real leverage is in strategy #2. Make the company profitable without the need for funding if at all possible.
Will that net your friend enough money to scale in the way millions in VC funding would? Quite possibly not. But at least it changes the negotiating dynamic with the Series A VC. If the Series A VC knows the company NEEDS Series B funding, then the VC knows it has veto power and can control the terms of the Series B. If the VC knows that the company is profitable and can live without any Series B funding, then suddenly the VC is in a weaker position - the company can "walk away" from the Series B negotiations altogether.
[Note for anyone reading: if you have the negotiating leverage in your Series A, rather than agreeing to the protective provision I mentioned above requiring Series A shareholders to agree to any Series B funding, see if the VC will agree to merely require the Series A BOARD MEMBER to approve a Series B round. This, of course, assumes that there is a Series A board member, of course, and will be a tough sell. But it, again, changes the dynamic. The Series A board member has fiduciary duties to the company and can't simply say no to competing Series B term sheets for self-interested reasons. But if the Series A shareholders have to approve the round in their role as shareholders, the same fiduciary obligations don't apply the same way.]
Comments
I think the comments you've received here are spot on. But wanted to make one additional comment for your friend.
If I had to guess, the Series A terms provide that in order to issue new shares on parity with or senior to Series A shares, the company needs to get Series A shareholder approval. In other words, to raise a Series B, he'd need to get Series A shareholder approval.
How does that fit in here? Well, the prior comments you received essentially point to two strategies:
1) Get the company into a position where VCs want to compete to invest in it; and/or 2) Simply make the company profitable so that a Series B isn't essential.
The problem with the requirement of getting Series A approval for the Series B is that, to an extent, the fact that other VCs might want to compete to provide better terms is somewhat irrelevant. The Series A VC can turn down any Series B term sheet it wants.
In other words, the real leverage is in strategy #2. Make the company profitable without the need for funding if at all possible.
Will that net your friend enough money to scale in the way millions in VC funding would? Quite possibly not. But at least it changes the negotiating dynamic with the Series A VC. If the Series A VC knows the company NEEDS Series B funding, then the VC knows it has veto power and can control the terms of the Series B. If the VC knows that the company is profitable and can live without any Series B funding, then suddenly the VC is in a weaker position - the company can "walk away" from the Series B negotiations altogether.
[Note for anyone reading: if you have the negotiating leverage in your Series A, rather than agreeing to the protective provision I mentioned above requiring Series A shareholders to agree to any Series B funding, see if the VC will agree to merely require the Series A BOARD MEMBER to approve a Series B round. This, of course, assumes that there is a Series A board member, of course, and will be a tough sell. But it, again, changes the dynamic. The Series A board member has fiduciary duties to the company and can't simply say no to competing Series B term sheets for self-interested reasons. But if the Series A shareholders have to approve the round in their role as shareholders, the same fiduciary obligations don't apply the same way.]