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- #120 VC Down Rounds & Broken Cap Tables
#120 VC Down Rounds & Broken Cap Tables
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In Case You Missed It: The Year-End CFO/Finance Checklists
We’ve seen a lot of different frameworks over the years to keep track of all the requirements for funds at year-end. One of our favorites is breaking things down into four buckets: portfolio companies, investor reporting, compliance/legal, and operations/HR. Here’s some of the top items in each bucket for year-end…
VC Down Rounds & Cap Table Impacts
A lot has been written about VC cap tables and down round impacts in 2023 and prior years. Some of our favorite prior takes / insights on this are here:
#89 VC Deep Dive: Brad Gurley (Benchmark) + David Sacks (Craft) (August ‘23): “The 1,000 unicorns are complex. Because they grew up in 2019-2021, their cap tables are very complex and rigid.” Bill Gurley
#72 What LP's Are Thinking About VC Right Now (May ‘23): “Flat and down rounds are on the rise. There could be ‘a lot more on the horizon’” -Anne Sraders, Term Sheet and “Why a Stripe down round would be a ‘good lesson’ for startups” -Term Sheet
VC Optimism Returning But More Pain Ahead In Their Portfolios (Hunter Walk) (August ‘23): “Restructures, Down Rounds, and Pay to Plays. Whatever gets reported is just the tip of the iceberg. The reality is lots of companies – many of them quite promising – have already undergone, or will be facing, next financings which “clean up” old cap tables.”
Recently, Chris Harvey shared an insightful post on down rounds and their second order effect: broken cap tables. He shares the following:
“With Down Rounds at 20%+ of all venture deals closed in 2023, a second order effect is coming into play: Broken cap tables. What are broken cap tables? Simply put, taking too much dilution, too early.”
Sam Altman said this about down rounds: “Don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round.”
“The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one.” If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.”
Here are the median founder dilution percentage decreases:• Seed: 20.5%• Series A: 19.5%• Series B: 17.2%• Series C: 12.6%• Series D: 10.3%
In sum:• Raise at the right valuation, not the highest valuation possible• Raise the least amount possible to achieve founder's goals
Fund Model Updates at Year-End w/ Updated Dilution Numbers
As VC GPs & CFOs / Finance Pros update their fund models at year-end, they should take into account these updated dilution percentages! Happy modeling!
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