Mark Suster

Different investor prices in the same VC round?

September 20, 2012: 3:30 PM ET

Should all early-stage investors live by the same valuation?

By Mark Suster, contributor

If you were on Twitter this past Saturday, you might have noticed a lively discussion with Dave McClure, Fred Wilson, Chris Dixon and myself. And a few others.

Luckily there are tools like Storify – so you can actually see a synopsis here.

If you do an uncapped note it's bad for the investor. If you do a capped note it's bad for the entrepreneur. I'm not sure why people don't see that. It has both a "full rachet" and "multiple liquidation preferences." I wrote more about it here.

Fred, who also wrote about convertible debt (significantly more succinctly than I) believes that the price of a single round should be the same for everybody.

For the most part I agree with Fred. I would never as a VC fund a round and then expect somebody else to pay a higher price right after me. I also would never expect another VC to do that to me. We're either "all in the round together" or we're not.

But Paul Graham really did have a point in his "high resolution fundraising" post – that there is a problem – particularly in angel financing – with herding cats.

Since 2009 I have been counseling people to offer discounts to the first angel investors. It is part of my stump speech:

With the tagline something like,

"Most investors are sheep. They hate making decisions. They're looking for "social proof." It shouldn't be – and most people deny it – but I have found it to be true.

The trouble is, nobody has an incentive to agree to write the first check. And no matter how rich people are – they still want a good deal. That's probably how they became rich in the first place.

So you need an anchor. But how to get one?"

If you remember the three rules of sales:

  • Why buy anything?
  • Why buy me?
  • Why buy now?

The last one kills all deals. There is simply no reason for the first angel to write you a check until you have the whole round secure, which is why people herd cats. Here is what I recommend very often – privately – to startup entrepreneurs for angel funding.

1. Price the round. Everybody deserves to know how much they're paying and the people who commit when you are at your most risky deserve to pay less for that risk.

2. You need an anchor. Two ways to get one. First, you can make somebody an advisor and get them working with you. And after you feel they're bought in intellectually and emotionally you can ask them to make a small investment. This can be time consuming.

The second way is to pitch them like normal but offer them a discount. The pitch is really simple:

"We're going to be raising $750,000 – $1 million. We plan to raise at a $5 million pre-money valuation.

We know how hard it is to get the first people committed. And we know it's a challenge to herd cats. So we've reserved the first $150,000 at a $2.5 million pre-money.

We would be honored if you would consider being one of our first angels."

3. You can do it with equity and a price. You simply draft up a series seed term sheet. In the document it outlines that you will issue stock at a $5m pre-money valuation and in recognition of the additional risks and commitments of early money you have allocated warrants to the first $150,000 of investors. You outline that you need at least $150k to do your first close and that your maximum round size will be $1 million in total. They way it works structurally is that you issue stock (let's say it's at $1 / share) and for the first 150,000 shares you also grant a warrant for common stock equal to $1 for every share they buy. That means they get a 50% discount to the round.

I don't believe that VCs or professional seed investors ought to get this discount. It's bad precedence for the reasons Fred outlined. But nobody would care if a high-profile (or not so high-profile) angel got it. Especially if it was memorialized in the documents why you were doing it.

That should offer enough "resolution" to do multiple closes. The next people who close pay full price and since you've already hit the minimum raised they can just close as you collect checks.

By the way, this is EXACTLY how VCs close their funds.

And if you absolutely had to do an interim funding at a mid-way point you could always issue a half-a-share in warrants for every full share purchased for the second $150,000.

I've seen it done several times. It works. The fact that you can't do it without debt is a canard. Think about it … once you DO convert your debt to equity in the future … this is exactly what you're eventually going to do anyways.

And finally, in my opinion – that first investor is taking real risk. The rest of the round might not close. They might have all of their money smoked. I'm ok with that getting a discount. And you should be, too.

  • Almost every startup needs an anchor
  • Almost every wealthy angel wants a deal

Mark Suster (@msuster) joined GRP Partners in 2007 as a general partner after selling his company to He focuses on early-stage technology companies. He blogs at

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