Founders that are fundraising for the first time do not know how venture capital works and need to rapidly learn in time to negotiate terms. Investors have access to more data—they see many deals, know the terms, and how the negotiation went in those deals. Founders need to ask investors about comparable deals or have a network of other founders that can provide this information because it is not public.
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Links to this note
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Most investors use the ‘post-cap’ version of a SAFE note (post-money valuation with cap). The terms to negotiate and how they impact the value of the company are:
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Making two offers with different tradeoffs sets the framing of the negotiation and reduces the amount of back and forth. For example, making two job offers to the same candidate—one high salary but lower equity and one lower salary but higher equity—and asking them to pick—eliminates a lot of the need to negotiate (which most people don’t like to do). Using this strategy makes it more transparent to the other party how to model the deal and empowers them to decide.
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Investors Invest in Lines Not a Dot
Meeting an investor for the first time and trying to get them to invest immediately is difficult. They have little information about you or the company. They have no understanding of your trajectory or the company’s. There’s no relationship that’s been built over time.