This is a double-edged sword for private companies.
On the positive, it's generally good to raise money when you don't need it. You're more likely to get the most favorable terms. (Or, stated diffrently, it's hardest to raise money when you need it most, with a zero cash date looming).
On the negative, it creates a high bar to clear for the next round of funding. If you don't raise enough, and need more funding later, doing a down round is extremely painful. Worse, if you have anti-dilution and other provisions, the cap table gets blown up. Lots of agita.
Public companies: different circumstances (market cap is a currency for acquisitions).
Finally, I'm respectful of audacious and aggressive entrepreneurs, but I've got a very sensitive hubris detector. A billion is an arbitrary ego number, and "We don’t entertain offers.... . . and it’s literally not worth the time of day, talking" is crazy. Tell that to Groupon shareholders that held stock during Google's (reported) ~$6b offer in 2010. Ouch. Pride goeth before the fall.
> If you don't raise enough, and need more funding later, doing a down round is extremely painful.
I hear this a lot, but I don't quite understand the sentiment. It's painful for whom? The earlier investor, sure, but not the founders.
Scenario 1: I have a round of funding at $1MM valuation then later a round of funding at a $10MM valuation.
Scenario 2: I have a round of funding at $100MM valuation then later a round of funding at a $10MM valuation.
Scenario 2 has a down round, but it's unclear to me how anyone in this scenario is worse off besides the suckers who bought in at a too high valuation. They just overpaid; that's all. The business and the other shareholders are strictly better off because they were able to get more cash for the shares sold.
The investors of the that $100MM round very likely have some downside protection in the agreements, so that the following down round disproportionally dilutes all the owners before that $100MM round - the founders, initial investors, and employees.
Yep, https://medium.com/@CharlesYu/the-ultimate-guide-to-liquidat... is a decent overview. An oversimplified scenario might be that if a VC invests $25mm at a pre-money $100mm valuation with a 2x liquidation preference, and the company eventually sells for say $60mm (or raises money in a down round at that valuation, which doesn't bode well for a sale price much greater than that)... then the VC would get $50mm before any other investors, including founders, could split the remaining $10mm. What was once a 20% share of the company given to that VC balloons to a 5/6 share of the company. Not fun for founders and early investors.
On the positive, it's generally good to raise money when you don't need it. You're more likely to get the most favorable terms. (Or, stated diffrently, it's hardest to raise money when you need it most, with a zero cash date looming).
On the negative, it creates a high bar to clear for the next round of funding. If you don't raise enough, and need more funding later, doing a down round is extremely painful. Worse, if you have anti-dilution and other provisions, the cap table gets blown up. Lots of agita.
Public companies: different circumstances (market cap is a currency for acquisitions).
Finally, I'm respectful of audacious and aggressive entrepreneurs, but I've got a very sensitive hubris detector. A billion is an arbitrary ego number, and "We don’t entertain offers.... . . and it’s literally not worth the time of day, talking" is crazy. Tell that to Groupon shareholders that held stock during Google's (reported) ~$6b offer in 2010. Ouch. Pride goeth before the fall.