Many founders are thrilled when they strike a deal. But getting a check doesn’t mean everything from that point forward will be smooth sailing. Even if it is, receiving funds doesn’t ensure you’ll automatically know how to make the most of the arrangement. This is because every deal comes with many variables, and founders often don’t understand the nuances involved.
How your investors underwrite matters. Here’s how it can impact your operations, relationships, and the results you see down the line.
How Your Investment Structure Affects You
Many factors can change investment structures, including the number of investors involved and the nature of their individual contributions. The number of investors in your deal will determine important elements like how equity is divided and how voting rights are set up. It can also directly impact how quickly decisions can be made.
The specifics of what each investor brings to the table will also make a material difference in how your company is shaped. Some investors might offer financial support and strategic guidance, while others might give you access to their networks or act in a hands-on capacity, offering operational help.
The control dynamics within your startup will shift based on what’s being given and by whom. For example, a lead investor bringing significant capital may negotiate preferred terms or board seats, while smaller co-investors may accept less influence in exchange for participation.
Important Factors for the Future
Another reason to understand how your funding deals are underwritten is because of how dilution can come into play down the road. For example, in your next round, you might only want to raise $8 million, but your VCs want to invest $10 million because that fits their model. That extra $2 million will often result in more dilution for you or your early investors.
If you’re not clear on how your current deal is structured and how future capital needs are being underwritten, you could end up giving up more ownership than you planned, or creating misalignment that affects future rounds.
Additionally, being clear about how the underwriting of your funding round allows you to know your options so that you can leverage them in due time. For instance, the business may have met the underwriting criteria at a specific inflection point, like a subsequent round of funding. At that point, instead of additional dilution by taking on more capital, you could purchase that investor’s interest in the company to free up equity as opposed to dilution of your own.
Alignment with Investors
Ultimately, the best deals are the ones in which founders and investors are aligned. This means you need to have important conversations upfront in order to find out what each party wants, and what each is willing to give.
Many founders assume investors are with them until they reach their potential 50X or 100X return, but that’s not necessarily true. Every investor operates from their own fund strategy, return requirements, and timeline, and those factors can determine how they show up in your journey.
An investor might want you to exit sooner than you’re ready, push for bigger raises than you need, or prioritize milestones that align with their goals, not yours. To avoid such misalignment, ask questions early on about your investors’ goals regarding fund size, expectations, and timelines, and be transparent in sharing your own.
In Summary
Closing a funding deal is a big deal and can be what propels your startup toward reaching its vision. But it’s important not to just accept any deal, and to truly understand how a deal is underwritten. This can make the difference between building a company on your terms—with the right support and room to grow—or getting locked into misaligned expectations, unnecessary dilution, and pressure that pulls you off course.
