As far as valuations go, don’t do it for the headlines, do it for the long-term outcome.

April 22, 2020

In start-up utopia (start-up-ia?), everything goes gangbusters from Day O. 

You hire the best people (and they give you their car keys and shoes when they arrive because they are NEVER EVER leaving), your customers go ga-ga for your product, the market is massive, your revenue growth is exponential, your margins are vast, and you can’t see your feet because you’re knee-deep in profit and krugerrands. 

Photo by 🇨🇭 Claudio Schwarz | @purzlbaum on Unsplash

The media then celebrates you as walking the gilded path to “Unicorn.” There is much rejoicing.

I can’t tell you how many founders I have spoken with who are attempting to follow this model built on fluff, fantasy and folly. They think they have to grab headlines to grab talent.  They’re so pie-in-the-sky, so focused on what the media says about their valuation that they forget to do, you know, the stuff that’s gonna justify that rosy valuation.

So forget the headlines. Because while it’s seldom sexy,  the fine print is where the deal is made. Things like:

  • The 1.5-3x  liquidation preference
  • the control that the new investors obtain
  • anti-dilution provisions
  • drag along rights
  • the refreshing of the optional pool

And all of the other structures, that for good reason, smart investors include in those deals.  

So forget the headlines.

Because while it’s seldom sexy, 

the fine print is where the deal is made.

So, if your business is killing it, your crystal ball confirms you are the chosen one and you’ve seen your face on the cover of Forbes more often than in the mirror, then by all means, throw a couple of zeroes on that valuation.  Hell, throw a couple on for me. But for most everybody else, if you want to take care of yourself and your hard working employees, then don’t worry about what the media wants to write. Write your own future by making sure:

  • your business is set up so that if things do go wrong, you still maintain control of your company.
  • your employees are set up to walk away with some money even if you left a little bit on the table throughout the journey.  
  • You sacrifice a little  on valuation to get simpler and cleaner terms even if that means you have to take more dilution.  

A few percentage points along the way won’t matter in a successful outcome. What will matter is when you lose most or all of your company because  things didn’t go the way the tea leaves foresaw.  

Unfortunately, I have seen the worst-case scenario play out, and I can tell you 99 out of 100 of those founders would tell you that  if they had to do it again, they would have gladly traded the cover-story fluff pieces and taken a lower valuation with clean terms over the higher valuation with a lot of suffocating structure.  

File that under: headlines you’ll never see.