Investors are NOT on Our Side of the Table

Investors want to believe that we're on the same side of the table and are interests are aligned — but it's all bullshit.

The pitch from investors goes something like this "We want all of our incentives to be aligned, so that a big win for us is also a big win for you. We're on the same side of the table!"

That sounds wonderful, but what's missing from that pitch is the fact that only a tiny number of outcomes wind up with both of us having the same upside. Like when you hear about a company getting acquired for a giant sum or going IPO — that's what investors are referring to.

But statistically, that's not how it actually goes. Less than 1% of funded startups are going to have that kind of outcome, which means we should be way more concerned about where our interests align (or don't) when all of the other bad outcomes happen.

This is Our Only Bet

Unlike most investors who are investing in order to spread their risk across many bets, Founders are generally "all in" on a single bet. This is it. If this thing takes 8 years, goes nowhere, and we're left with nothing but a crappy salary and a ton of personal debt — we don't have another bet to back it up.

Investors are not on our side of that table. On their side of the table, they have many, many bets across many investments, any one of which can make up for all of their losses. Unless our only investor is our rich Uncle who put all of his life savings into our startup, chances are our investors will be just fine if this thing tanks.

If things go worse and this thing tanks altogether, we have nowhere to go. Investors will have to write off the investment and move on — but we can't move on anywhere.

We're Not Guaranteed a Paycheck

VC investors are typically paid a management fee for the time they spend investing other people's money. Typically when a VC raises a single fund (and they may have many) they command a 2% per year "management fee" to cover their costs of operations. That's 2% — PER YEAR. That means if you hear of a VC raising a $100m fund, they get $2m in fees each year to pay their salary, regardless of what the performance of the fund is.

Oddly, we as Founders have no such fee. At best we've got what usually amounts to a below-market salary that we honorably accepted because we wanted to preserve as much cash for the company as possible. Every single time our startup hits a bump in the road or runs out of money, our paycheck evaporates with it.

In good times we don't think about this lack of alignment. But in bad times, while our investors can still afford to book exotic vacations, we're still trying to figure out how to pay our rent. We have to think about how we're going to survive personally while the investor has the luxury of worrying about whether or not this investment will make them "less rich."

Big for Me, Useless to You

Even if we're as fortunate as we all hoped we'd be, and we get to the point where we find a suitor who wants to buy the business — are we still aligned? Probably not. If we've raised $5 million and we get an offer for $10 million, that still probably won't end well for us.

First, our investors have the luxury of saying "no" to a payout that simply isn't big enough. We typically don't. We usually get to a point where any kind of payout would be a giant win. The investors can look at that deal and say, "We'd barely get our money back" (they usually get their money out first, BTW).

Conversely, we might look at that deal and say, "That's enough for me to finally buy a house, clear some debt, or, heaven forbid, take a vacation." But our investors don't have to care about that - they can already do all of those things.

Make no mistake — we're not aligned with investors unless everything goes damn near perfect. And largely, that's OK, so long as we understand what the score really is.

In Case You Missed It

Raising Money is a One Way Street (podcast) There is a lot to think about before raising money. If we weigh out all the possibilities, we can be confident in choosing that path for our company.

Will Investors Want to Run My Company? If I take on investors, will they push me aside and run the company?

What Should I Never Say to an Investor? I'm going to be raising capital for the first time — I know what I want to tell investors, but what should I avoid saying altogether?