Once there are investors that want to invest in your business, there are many things that you should consider. Investors don't just provide money only to never talk to you again—they typically have legal rights to vote on key issues and to get access to the company's records. More positively, a good investor can really help propel your business. The term sheet they offer also delineates many rights that may differ from those offered by others. Therefore, enormous care should be taken to match your business with the right investors.
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Ask an entrepreneur what they’re looking for in an investor and they won’t say things like “advice, corporate governance, recruiting.” Entrepreneurs would prefer someone who has specific connections, interest, and knowledge about the market they’re attacking and the technology they’re building.
At some point in the life of a venture-backed startup there typically arises a choice between doing an inside round, where the existing investors lead the new financing, or an outside round, where new investors lead the new financing. At this point interesting game-theoretic dynamics arise among management, existing investors, and prospective new investors.
Often the reason that startups offer performance-based warrants (PBW) is because they’re asked to. You should think of PBW’s in the same way as you think about employee options – they are an incentive for an important partner in your business to help you achieve success over time.
Pricing in any market is a function of the information available to investors. In the public stock markets, for example, the primary information inputs are “hard metrics” like company financials, industry dynamics, and general economic conditions. What makes venture pricing special is that there are so few hard metrics to rely on, hence one of the primary valuation inputs is what other investors think about the company. This investor signaling has a huge effect on venture financing dynamics. If Sequoia wants to invest, so will every other investor. If Sequoia gave you seed money before but now doesn’t want to follow on, you’re probably dead. Smart entrepreneurs manage the investor signaling effect by following certain rules.
I would say that most entrepreneurs do almost no reference checks or at least do them very informally. Don’t let that be you. Most VC’s will happily supply you with a list of CEO contacts of the people who will speak to you about working with them. Don’t be afraid to (politely and respectfully) ask for this. In fact, they will think better of you because you’re demonstrating that you’re the kind of thorough person that they wanted to invest money into in the first place. Don’t stop there.