Nov 29, 2017 · 26m · 20vc
20VC: Why Convertible Notes Are Ridiculous, Why Party Rounds Are Bad For Both Founder and Investor & Why Pro-Rata Rights Are A Mess with David Waxman, Founding Partner @ TenOneTen Ventures
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, host Harry Stebbings interviews David Waxman, Founding Partner at TenOneTen Ventures, exploring the realities of transitioning from founder to investor, the pitfalls of convertible notes and party rounds, and the evolving mechanics of pro-rata rights. Waxman offers actionable insights for early-stage founders while highlighting the growing strength of the Los Angeles tech ecosystem and portfolio risk management strategies.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 34.9% of the talking time here. How this is scored →
Harry as informed peer 4.6 Guest teaching 5.9 Guest disagreement 3.4 Harry pushing back 3.0
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 11:15 Dismissal of Convertible Notes for Larger Rounds
David forcefully rejects standard startup financing trends, asserting that multi-million dollar convertible notes make absolutely no sense and create severe unaddressed problems.
Hardest push from Harry ▶ 15:42 Ownership Demands as a VC Conviction Litmus TestHarry directly challenges David's advice for founders to push back on Series A ownership demands, arguing that insistence on ownership indicates true investor conviction.
Biggest teaching moment ▶ 13:01 The Structural Mess of Pro-Rata RightsDavid delivers an expert breakdown explaining how structural shifts in venture capital—such as SPV creation and pre-seed layers—create toxic conflicts over pro-rata rights.
Harry holds his own ▶ 15:42 Testing Investor Conviction via Ownership ThresholdsHarry showcases deep industry domain knowledge by reframing VC flexibility on ownership percentages as a test of whether they truly believe the startup can reach massive scale.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Welcome and Origin Story: Transitioning from Founder to VC | 4 | 5 | 1 | 2 | David details his transition from operator to VC using the grandparent analogy and discussing portfolio construction. Harry asks thoughtful follow-ups about what makes VC an artisanal craft, demonstrating familiarity with venture mechanics. | |
| TAM Analysis vs. Founder Vision and Market Expansion | 3 | 6 | 4 | 2 | David criticizes standard TAM slides in pitch decks as 'tamfoolery,' arguing that true market potential comes from founders who redefine markets like Uber did. Harry guides the conversation cleanly without disputing David's thesis. | |
| Evaluating Market Trends: The Joy Mode Case Study | 3 | 6 | 5 | 3 | David highlights Joy Mode as a trend study before strongly attacking large convertible notes and SAFEs for leaving critical deal terms unstated. Harry probes on SAFEs and party rounds to elicit David's contrarian views. | |
| The Modern Friction and Messiness of Pro-Rata Rights | 4 | 7 | 4 | 2 | David provides an insightful breakdown of how pro-rata rights have become messy due to competing pressures from seed funds, SPVs, and stricter Series A ownership thresholds. Harry prompts open-endedly to allow David to break down the ecosystem friction. | |
| Founder Strategies for Managing Series A Ownership Dynamics | 7 | 6 | 4 | 6 | Harry offers sharp pushback, suggesting that a Series A investor's insistence on ownership percentages acts as a litmus test of their conviction in a $5 billion outcome. David acknowledges the pressure founders face while maintaining that founders often hold more leverage than they realize. | |
| Perspectives on Secondary Markets and Exit Liquidity | 6 | 6 | 5 | 5 | Harry cites previous podcast guests to challenge David on secondary market liquidity, while David playfully rejects the quickfire premise by refusing to pick a favorite book. David then educates the host on why top VCs often exhibit higher loss ratios due to aggressive risk-taking. | |
| Quick Fire: The Growth of the Los Angeles Tech Ecosystem | 5 | 5 | 1 | 1 | Harry leads a rapid-fire sequence covering the LA tech ecosystem, cash zero days, and accounting versus finance. David enthusiastically details LA's deep tech roots and his fund's investment in Velocity. |
Statements from this episode (19)
Waxman: VCs have influence over portfolio companies, but founders retain control
“You have influence, but you don't have control.”
Waxman: No early Uber investor imagined it growing beyond black car industry
“I doubt that if you went back, and maybe some are revising history, I don't know, but I doubt if you went back to any of the investors who looked at Uber, I doubt any of them imagined that it could be bigger than the black car industry. And maybe a few imagine…”
Waxman: Analytical TAM models systematically miss startups that fundamentally change markets
“And I just think if you study the market, like any way you analytically go at that market, when you see an Uber kind of pitch, you're going to miss it if what the company does is change the market.”
Waxman: Standard pitch deck TAM slides showing massive markets are virtually useless
“And every, you see a lot of pitch decks now, every pitch deck seems to have the same slide It's got a big circle in it with the biggest number the founder can find, and it's pretty much a useless slide, right? The number almost doesn't matter because it's real…”
Waxman: Joy Mode is directly challenging the concept of personal product ownership
“So I believe, you know, it's a big swing what joy mode is doing, but if they win, they're really taking on the very idea of ownership and there's nothing big than that.”
Waxman: Convertible notes make absolutely no sense for multi-million dollar rounds
“But when you get into a multi-million dollar round, I think that convertible notes make absolutely no sense at all.”
Waxman: SAFEs are just as bad for early-stage financing as convertible notes
“I do. I think they're pretty much just as bad.”
Waxman: Party rounds harm startups by lacking a lead investor during crises
“When the company encounters challenges, sometimes an investor group really needs a lead because they need leadership. It's very, very easy to be a good investor when everything's going up and to the right and, you know, the founder is doing all the right thing…”
Waxman: Seed pro-rata rights force founders into terrible Series A trade-offs
“Founders are put in this terrible situation of trying to do right by their early investors. And respect all of the contractual rights that they signed up for and new investors demanding minimum ownership thresholds. These founders are forced to either screw ov…”
Waxman: Founders underestimate their leverage when Series A VCs commit to investing
“I think that they underestimate the power of the situation that they're in, because when one of those firms really decides that they want to invest in you, it's not, as you say, it's not a couple percent that's going to push them off.”
Waxman: TenOneTen Ventures never contractually guarantees LP co-investment rights
“I think we certainly never give them as a contractual right because once again, back to the founder, they know me, right? They know my partner. They know my Austin, our associate who works with us. You know, they want us around for a reason. They don't necessa…”
Waxman: A major asymmetry exists between investor diligence and founder diligence
“I think there's a big asymmetry in how much diligence investors do to companies versus how much companies do to investors.”
Waxman: An investor's true character is revealed only during bad times
“It's easy to be a great investor, as I said before, that it's easy to be a great investor when things are going up and to the right. When you see someone's true metal is when things are going badly, when things are scary and difficult. And it's important for f…”
Waxman: Taking Series A capital is a marriage with no divorce option
“It's crazy because it's a marriage that is very, very hard to get out of, as you know. When you've taken an investor, particularly that first A-round investor, they are with you for the duration, whether you like them or not, and it's nearly impossible to, the…”
Waxman: Selling late-stage Uber stakes on secondaries makes sense to reallocate capital
“I think that there probably are some sensible situations that probably if I were an Uber now, not to pick on them, I would be ready to be liquid and figure that the, you know, maybe the next billion dollars I could catch somewhere else.”
Waxman: Top-performing VCs have higher loss ratios because they take greater risks
“And if you look at the data, the best VCs have slightly higher loss ratios than the middling ones because they're not afraid to swing hard and take more risks.”
Waxman: TenOneTen's Fund One loss ratio is extremely low, which worries him
“And so, actually, right now, our loss ratio is Fund One is extremely low, and it worries me.”
Waxman: Finance is prospective and more critical to startups than retrospective accounting
“Finance and accounting are totally different disciplines. Finance is Completely prospective, and it's super important for startups. It helps guide where you're going, helps you model the future, helps keep the company on the right track. Accounting is retrospe…”