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Re: How VCs Block Exits

From_Hacker_News — Tue, 20 Jan 2009 19:33:58 -0000

points by sachinag on Hacker News 20090120

Paul, but the YC sample docs give YC a veto over change of control as well. It's not just the VCs who want that power. Now, you may never have - and state that you never will - exercise that right, but if so, then why is it in there?
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20 points by pg 17 hours ago | link

The docs he linked to are the Series AA docs we commissioned for YC alumni to use to when raising money from later stage investors. They're not the docs YC itself uses.

In our agreement the clause about change of control is more limited. We only have a veto over selling the company for less than 3x the valuation we invest at. The point of that kind of clause is not to ensure returns (on average, a 3x exit would make us the massive sum of $35k) but to prevent abuse-- e.g. someone selling the company to his brother for $1. Any subscription agreement will have at least that kind of restriction in it.

Re: How VCs Block Exits

From_Hacker_News — Tue, 20 Jan 2009 19:32:24 -0000

From BasilPeters on Hacker News 20090120:

Paul - I agree with you. No VC backed company should be surprised, but in my experience, many are. I believe most entrepreneurs don't really understand share classes and the practical implications of many terms in their investment agreements. Others may understand the terms but are surprised by how they are applied. I applaud your outstanding work in helping to maket this clear to entrepreneurs everywhere. Keep up the great work!

Re: How VCs Block Exits

From_Hacker_News — Tue, 20 Jan 2009 19:31:26 -0000

From Paul Graham on Hacker News 20090120:

No YC-funded company should be surprised like he was. We tell them all what they're signing up for depending on whether they take angel money or VC, and at what valuation.

If you sign up for VC, you're signing up to take over the world-- to at least try to get IPO huge (even though IPOs themselves have currently disappeared). This is ok with founders who were planning to anyway. Founders who aren't sure, or are sure they aren't, should only take angel money.

Though nearly all later stage investors want a veto on acquisitions, the point where they'll exercise it varies a lot. It depends mostly on the valuation. As a rule no investor is happy with less than a 5x return, unless the valuation was huge (e.g. in mezzanine round) or the company is in trouble. Over 5x they may still grumble, but most will let you sell the company if you really want to. Or they'll arrange for founders to sell some of their shares privately. Over 10x they'll generally be pretty happy.