If You’re Not Sure Whether Your Current Investors Would Give You More Money, The Answer Is Likely “No”

Startup CEOs Should Test Strength of Cap Table Every ~6 Months To Know Where They Stand

I really liked Jason Lemkin’s “Do You Have a Weak Investor Syndicate” blog post from earlier in the summer. Go read it and then come back here….

Photo by Crissy Jarvis on Unsplash

Ok, so there are two different types of ‘weakness’ that Lemkin mentions — one has to do with lack of credibility in your cap table (“Can’t Bring You Good Leads For The Next Round”) which I’ll generally lump into the bucket of ‘you have B-tier investors.’ I’m not going to address this issue here because I think it’s largely a binary attribute of an investor and not as often situational[1] — “punching above the weight of your cap table as a CEO” would be a good post, but separate from the point I want to stress.

Instead I want to focus on Jason’s discussion of bridges and pro rata, because it’s an area which is dynamic in every deal and often misunderstood by founders. Let me do some basic level-setting of how it typically works in a venture deal:

1. A venture fund invests an amount of money into a round. I give you $1m for 10% ownership (to make the math simple). And I probably also have pro rata which simply means the right (but not obligation) to put more capital into your next round equal to my current ownership. If your next round is $10m, and I still own 10% of your company, I would maintain the ability to do $1m of your $10m round.
2. As a venture fund I might have a strategy which says “for every dollar I invest into companies, I will hold one dollar in reserve for additional financings.” If I have a $100m fund, $50m into initial investments and $50m into follow on. Each fund has its own strategy about reserves, follow on and so forth. There’s no industry standard other than most large multistage firms will be interested in pro rata for their successful companies.
3. Now here’s where it gets complicated: follow on decisions are highly dynamic. Reserves are fluid concepts based on what companies are coming up for funding when, how they’re doing at the time, the size/stage/terms of the round and so on. No founder should assume their pro rata from…