A few weeks ago at Camp Hustle – an investor event among the trees in Northern California – one of the speakers said something that struck me.

Now, I was the event coordinator at Camp Hustle, so I didn't have time to sit and enjoy most of the talks.

But when I heard this bit, I didn't just stop and listen. I fully wrote it down.

The speaker was Charles Hudson, founder and managing partner at Precursor Ventures.

Here's what he said

(I'm paraphrasing.)

Until recently, market conditions have favored founders. This was especially clear during a fundraise.

VCs were willing to compromise on a bunch of things in order to get allocation into a compelling startup.

This was good news for founders. They had a good chance of getting three key things:

their preferred investment firm

their preferred valuation

their preferred terms.

Remember that, ok? Firm, valuation, and terms.

But now that we're entering a bear market, conditions for founders are changing.

Founders who are raising in the coming months will most likely need to concede on one or even two of those things.

The question is... how to decide which is the most important of those three factors? Where should founders be willing to compromise, and where should they draw a line?

What's most important: firm, valuation, or terms?

According to Charles Hudson, the one thing founders should not budge on is terms.

Why? Let's break it down.

Why founders care about the firm

The power of name recognition is a real thing.

Being backed by a well-known and well-respected VC firm can give a startup a ton of street cred.

Founders will often include the name of their most famous backer on their company page, or mention it when they reach out to reporters and candidates.

Losing out on this benefit is not ideal.

Another reason a founder may prefer a specific firm is if that firm can help with strategic introductions... like to potential customers or future investors.

Both of these factors – credibility and introductions – can be useful to startups, but neither one will make or break the company.

Why founders care about their valuation

Founders want a high valuation for their company for a number of reasons:

1. It means they (the founder) own a bigger piece of the pie
2. It makes the company appear desirable to investors
3. It makes the company appear successful to prospective employees

However, having a super high valuation isn't always a good thing.

And even if the founder has a big exit, bad terms means they might not see a big return.  

Why founders should care about the terms

When a founder is strapped for cash and needs to raise, but conditions favor investors rather than founders, some investors will try to take advantage of the situation.

For example, an investor may ask for multiple seats on the board.

And if the founder gives them a bunch of seats on the board, those investors could then force the founder to sell at a bad time, or even fire her from the company.

Example #2: the investor may ask for 3x liquidation preferences.

This means that in the event of an acquisition, the investor is guaranteed a payout that's 3x their piece of the pie before anyone else gets paid... regardless of how big (or small) the acquisition price.

In these instances, it doesn't matter if the founder got her preferred valuation or her preferred firm... the icky terms of the deal means that she'd leave a lot of money on the table.

What's the takeaway?

As the fundraising landscape changes, founders' expectations need to change as well.

You have an opportunity as an investor and advisor to help your portfolio companies make the best possible decision.

And the best possible decision for pretty much every startup is to secure the best possible terms during a raise.

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