The three things founders want when they raise

Brian Nichols is the co-founder of Angel Squad, an angel investing community where aspiring and active angels learn from Hustle Fund’s approach, review curated deal flow, and connect with peers.

A fundraising decision can lock a founder into a long relationship with an investor. At Camp Hustle in Northern California in 2022, I heard Charles Hudson, founder and managing partner of Precursor Ventures, describe the trade-offs founders face when choosing an offer.

Here's what he said

Hudson's framework for what founders want when they raise had three parts:

1. Their preferred investment firm.
2. Their preferred valuation.
3. Their preferred terms.

I'm paraphrasing his Camp Hustle remarks. He described a fundraising environment in which founders might have to compromise on one or two of those preferences to close a round.

What's most important: firm, valuation, or terms?

Hudson advised founders to protect the terms. A financing deal can affect control and eventual payouts long after the round closes. The right trade-off still depends on the company and the offers available.

Why founders care about the firm

Being backed by a well-known and respected venture capital firm can give a startup credibility. Founders may put a prominent backer's name on their company page, or mention it when reaching out to reporters and candidates.

Another reason a founder may prefer a specific firm is its ability to introduce potential customers or future investors.

Those benefits depend on the actual partner and the company's needs. Our co-founder and general partner Elizabeth Yin says, “Money has always been a commodity.” Relevant help and follow-through matter after the check arrives.

Why founders care about their valuation

Founders may want a high valuation for several reasons:

1. When selling shares at an agreed price, a higher valuation means selling a smaller ownership percentage for the same amount raised, assuming the other terms stay the same.
2. It can look like a vote of confidence to other investors.
3. It can make the company appear successful to prospective employees.

A higher valuation doesn't determine what founders take home in an acquisition. The investment terms matter too.

Why founders should care about the terms

When a founder is short on cash, an offer with an attractive valuation can make restrictive terms easier to overlook.

For example, an investor may ask for multiple board seats. For a Delaware corporation, board voting rules and the company's governing documents help determine who can make decisions. Seats alone don't tell you who controls the company.

An investor might also ask for a 3x liquidation preference. In a simplified hypothetical deal, that sets a priority payment at three times the original investment, ahead of common shareholders such as founders and employees.

It doesn't guarantee a threefold payout. Available proceeds, debt, other investors' priorities, and the rest of the signed terms affect what anyone receives.

These provisions can change both the founder's decision-making authority and the money left for founders and employees when the company sells. A familiar firm or attractive valuation doesn't make those consequences disappear.

What's the takeaway?

As an investor or advisor, you can help a founder compare the whole offer. Ask which compromises would hurt this company most, and explain the consequences without making the decision for the founder.

Our co-founder and general partner Eric Bahn begins difficult conversations with “I’m going to be brutally honest with my feedback” and explains that it comes from a good place. Give candid advice while leaving room for the founder to choose a different trade-off.

To build that judgment alongside other investors, apply to join Angel Squad. Our community combines investing education, curated deal flow, and peer learning so you can discuss a deal's reasoning as well as its headline valuation.

This is educational information, not legal, tax, or investment advice. Seek independent review of your own transaction from qualified legal and tax professionals. Startup investing is risky, and most individual bets may fail.