Fundraising advice: Don’t over optimise on terms

Everyone loves a high valuation and it’s natural for founders to want to minimise dilution. They will most probably go on to raise multiple rounds of venture capital after all. And look at what Zuck achieved…

But companies that spend too much time optimising terms end up as net losers. YC’s Sam Altman explained why in a post last year:

Startups are usually a pass-fail course — either you succeed or you don’t.  If you fail, maybe you get acqui-hired, but that’s happening less frequently and is usually little better than just getting a job at the acquiring company instead.
The important thing is to get good investors, clean terms, and not spend too much time fundraising. The biggest problem comes from chasing high valuations. Contrary to what many people think, at YC we encourage companies to seek out reasonable valuations. Valuations are something quantitative for founders to measure themselves on, and there are lots of investors willing to pay high prices, so they don’t always listen. But I’ll say it again: trying to get really high valuations is a mistake.
If you’re clearly in a position of leverage, it’s fine to push for a high valuation, but don’t jerk investors around. Just say what you want and don’t get into a lot of back and forth or term complexity. Also remember that very high valuations often push out good investors.
And don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one.  If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.

We think about valuation the same way. Much better to have a smaller piece of a bigger pie and the best way to get a big pie is to get good investors and minimise time spent fundraising.