Whenever I submit a term sheet, I always caveat it by saying the following:
“This is the one time we’re completely misaligned. I’m incentivized to buy up as much of the company at as low a price as possible and you’re incentivized to sell as little of the company as possible by raising the price.”
Founders seem to get that. The price negotiation process is pretty straightforward, and once a deal has been agreed upon we move on.
That doesn’t mean we trust each other. Don’t get me wrong—I don’t mean trust in the sense that VCs think founders are just going to get a fake passport and move to Fiji, or that investors are secretly plotting to take over the company.
I mean trusting what each one brings to the table—and being honest about the process of earning that trust and what it means to having a productive relationship.
For example, if you’re a sales oriented founder that gets backed pre-launch, then an investor isn’t going to assume that founder has any product design skills. They may not trust that the direction that they’re giving the team doing the UX and the build comes from a place of expertise—and frankly, rightfully so. In this case, a VC would have every right, having seen lots of products get built and succeed or fail, to want to observe and discuss that process.
What happens sometimes is that we don’t have an honest conversation about that. Founders suffer enough from imposter syndrome without investors constantly getting all up in their shit as if they don’t trust them. Well, on certain things, they don’t.
What’s harder to notice for a founder is all of the things that a founder isn’t being asked to review in detail that a VC has no problem trusting the founder on. That same VC may not ever ask that founder for a peek at the sales deck or the process they’re using to score leads—because they implicitly trust that sales-oriented founder when it comes to sales.
Of course, we never say that—and so as investors we probably don’t let founders know where trust has been built up often enough.
On the flip side, investors often go poking around the company with commentary and feedback across lots of different areas, but not all of those areas are ones where the founder trusts our view. Its one thing if your investor is the former CTO of a blue chip startup and they’re commenting on the engineer hiring process or various technical platform choices—but when that same investor starts to opine on the color scheme for the brand guidelines, that may not come in as an opinion you can trust.
If that’s not a conversation you have upfront, the founder may come off as a bit dismissive when they hear the color commentary—and why shouldn’t they? VCs aren’t experts at every aspect of a startup at the same level across the board.
Maybe that would be helpful for a founder to share:
“I’m excited to have you as part of this round. What I see as your expertise is X and I trust your feedback in that area implicitly. I’ll keep you informed on other parts of the business, of course, but just want to let you know that it would be helpful if you gave some context or relevant examples you’ve seen when you weigh in on other things.”
If I ever heard that, I’d really appreciate it—because I’ve been in meetings where I weigh in on marketing, for example, but that strategy is something that already seems to have been locked down in a separate conversation with a VC who appears to be more brand oriented. I’d rather know that’s the bucket you’re intentionally putting me in than walk away feeling like you just don’t want to hear any pushback from an investor ever. Plus, I would jump at the chance to explain where I’m coming from and the direct experience I’m basing my opinion on… so I can build up that trust with the founder.
Ideally before an investment ever closes, but certainly before the first investor check-in meeting—whether you call it an official board meeting or not—founders and investors should ask each other the following questions:
1) What aspects of being involved with this company do you want me to trust your instincts on most?
2) What areas that I might have opinions on are areas that you need trust to be built up and how can I build that trust with you?
I think of each person had an honest discussion that led to an understanding of the other person’s assumptions about their expertise, you’d make the whole relationship a lot easier and more positive.