Crashing planes and early investors: why you should consider dynamically pricing your seed round
Back in late 2011 a startup I know well was starting to raise a seed round. They were asking investors for between $500K and $1M.
Now, the startup had about a month of cash left before they would all have to start looking for consulting gigs, and had no investors lined up. So at this point, they were like a plane plummeting to the ground. A very risky investment for new investors.
A few weeks later, the startup had raised the first couple hundred thousand from some great investors. At this point, they were more like a plane levelling off and beginning to climb. They were now a better investment for new investors.
Now, with most of the round committed, this startup is a plane taking off. It’s a very exciting investment for the last few investors, who now get to join a funded startup with a great support network.
In retrospect, it’s easy to claim that ‘the startup was obviously fundable, regardless of when the investors committed in the round.’
The first investors funded a much riskier startup. They may have believed more strongly. Had more courage. Had more vision. Cared less about what others thought.
The later investors invested in a company with resources and validation.
Why should these investors pay the same price?
Give early investors a price that reflects the risk, and the reward for believing early, when nobody else does. Think about dynamically pricing the round. PG has written about this, and there’s some good thoughts at Venture Hacks. Ways might include offering a different discount or cap (for a convertible note), or giving a small amount of advisory shares to the first one or two who commit (for an equity round)*.
It doesn’t have to be much, but it should more fairly reflect the risk the first investors take, reward them for believing early, and thank them for committing promptly.
*Others know the intricacies of term sheets much better that I. I’d love to hear of other good ways in the comments…
**Shot by n0nick.