>the author should both agree that a founder should slightly prefer the identical terms without a pro rata.
Framing in language like "prefer" is misleading the analysis of the situation.
The gp's point is there are unstated market forces of leverage that affects both sides ability to negotiate the terms they want -- but can't always get.
As other examples, consider "liquidation preference" or "50% ownership":
- Sure, a founder would "prefer" that there is no liquidation preference. But that preference is meaningless because investors won't invest money without it. Therefore the "unseen" alternate universe is the startup founder that convinced a hypothetical investor to pay millions with unprotected zero liquidation preference. Since that alternate universe doesn't exist, the current reality is that the investor has leverage on this term.
- An angel investor would "prefer" ownership percentage of 50% instead of 7%. But that preference is meaningless because most startup founders would not give up that much ownership because it's no longer worth it to build the company. The founder has leverage on this term.
Both sides want things they can't get.
Overlayed on top of this is shifts in leverage because of the balance of power between the available funds -vs- # of quality startups. If there's more money chasing the available startups with strong founders, they may have leverage to eliminate "pro rata". This wouldn't have been possible in the investing climate of 2008 when all VC funds got tighter with money.
Comments
>the author should both agree that a founder should slightly prefer the identical terms without a pro rata.
Framing in language like "prefer" is misleading the analysis of the situation.
The gp's point is there are unstated market forces of leverage that affects both sides ability to negotiate the terms they want -- but can't always get.
As other examples, consider "liquidation preference" or "50% ownership":
- Sure, a founder would "prefer" that there is no liquidation preference. But that preference is meaningless because investors won't invest money without it. Therefore the "unseen" alternate universe is the startup founder that convinced a hypothetical investor to pay millions with unprotected zero liquidation preference. Since that alternate universe doesn't exist, the current reality is that the investor has leverage on this term.
- An angel investor would "prefer" ownership percentage of 50% instead of 7%. But that preference is meaningless because most startup founders would not give up that much ownership because it's no longer worth it to build the company. The founder has leverage on this term.
Both sides want things they can't get.
Overlayed on top of this is shifts in leverage because of the balance of power between the available funds -vs- # of quality startups. If there's more money chasing the available startups with strong founders, they may have leverage to eliminate "pro rata". This wouldn't have been possible in the investing climate of 2008 when all VC funds got tighter with money.