Silicon Valley Self Regulation

Story Two

VCs Change Terms After Round Closes

 

A founder had accepted an investor's term sheet and turned down other interested investors when the investor pulled out at the last minute for no particular reason and left her in a really difficult situation

andrew-neel-218073 copy.jpg
 

PPPR, a new social platform company, has just concluded meetings with a number of potential investors. The founder, Alice, has reached a decision along with her cofounders on what investor will lead this new round of fundraising. Yoakam Capital has offered to finance a $5 million Series A round for PPPR, and agrees to terms with Jessica and her team. They assure the team that they can inform other investors of the agreement, and Jessica tells other investors that they have selected their financiers for this round. Once all other investors have disengaged, Yoakam Capital then informs Jessica that they will be giving less money at a valuation of only $3 million dollars. Jessica and the rest of her executive team had been planning their business with the larger valuation and funding amount, meaning that they simply don’t have the runway to support repeating the fundraising process, especially when the top alternative investors like Owens-Cash wouldn’t be interested in a higher valuation as they would likely see this financial stalling as an indicator of trouble at PPPR. Jessica and her team are coerced into accepting Yoakam’s new terms, and as a result has to lay off five engineers. The majority of investors uphold the proper values in negotiating terms, however there are many entrepreneurs who have faced strong-armed tactics from exploitative financiers.