Jun 14, 2019 · 33m · a16z
How to Raise Money from a Venture Investor
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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 second installment of Andreessen Horowitz's fundraising series, Frank Chen and Scott Kupor demystify venture capital term sheets, corporate governance, and valuation mechanics to help startup founders navigate fundraising with confidence.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The host as informed peer 2.7 Guest teaching 4.6 Guest disagreement 1.0 The host pushing back 0.9
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 7:52 Acknowledging VC-Founder Valuation Tension
Scott explicitly calls out the inherent conflict of interest between venture capitalists and founders regarding valuation, directly confronting the entrepreneur's natural reaction that VCs just want lower prices.
Hardest push from the host ▶ 7:29 Challenging the 'High Valuation Is Always Victory' LogicFrank challenges the idea that overvaluing a company is harmful, framing it from a founder's perspective as less dilution and an obvious victory.
Biggest teaching moment ▶ 18:00 Square IPO Full Ratchet Case StudyScott educates Frank and the audience using Square's IPO data, demonstrating how late-stage full-ratchet anti-dilution protections doubled share issuance and diluted existing equity.
The host holds their own ▶ 2:21 Synthesizing Legal Precedent as Established RailsFrank demonstrates crisp subject comprehension by translating Scott's detailed explanation of Delaware legal precedent into a vivid metaphor about well-defined rails versus clearing paths with a machete.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Introductory Brand Motion & Legal Disclosures | 3 | 4 | 1 | 0 | Host Frank Chen sets up the episode and asks why Delaware C-Corps are required by VCs. Scott Cooper explains legal precedent and share classes, and Frank cleanly summarizes that the rails are well-defined so founders don't have to blaze trails with a machete. | |
| Protecting Intellectual Property While Employed | 2 | 5 | 1 | 0 | Frank asks how founders coming from existing employers can protect their IP. Scott details legal risks and references the Waymo vs. Uber case involving Anthony Levandowski to illustrate proving a negative. | |
| Determining Capital Requirements & Milestone Planning | 3 | 5 | 1 | 0 | Scott explains how to calculate capital requirements by working backward from Series B milestones and shares a story from LoudCloud's fundraising experience. Frank captures the mental framework succinctly. | |
| The Hidden Risks of Excessive Valuations | 4 | 5 | 2 | 3 | Frank probes the downside of high valuations, directly bringing up the founder's perspective that higher valuation equals less dilution. Scott acknowledges the inherent tension between VC financial interests and founder expectations while explaining employee morale risks during down rounds. | |
| Priced Equity vs. Convertible Notes & SAFEs | 3 | 5 | 1 | 1 | Frank and Scott discuss priced equity versus convertible notes and SAFEs. Scott cautions against rolling closes due to inadvertent cap table dilution, while Frank highlights the temptation founders face when early supporters offer quick checks. | |
| Term Sheet Economics: Liquidation Preferences & Anti-Dilution | 3 | 6 | 1 | 1 | Scott breaks down economic term sheet structures including 1x non-participating liquidation preferences and anti-dilution ratchets. Frank guides the conversation by prompting for the most entrepreneur-friendly formulas. | |
| Structure Pitfalls & Precedent for Future Rounds | 3 | 6 | 1 | 1 | Scott uses Square's IPO full-ratchet clause as a concrete example of how structured deals harm common shareholders and establish bad precedent for future rounds. Frank synthesizes that founders must plan their entire financing sequence before taking Series A money. | |
| Governance Terms: Dual-Class Voting Shares | 3 | 5 | 1 | 2 | Frank asks if founders should request dual-class voting shares like Google or Facebook. Scott explains why dual-class structures address public market short-termism rather than private market alignment, and outlines board governance shifts over the past decade. | |
| Pro Rata Rights & Managing Investor Dynamics | 3 | 5 | 1 | 1 | Scott explains pro rata rights and the inevitable tension when new lead investors demand high target ownership percentages. Frank summarizes the importance of transparent communication with early investors to avoid negative signaling. | |
| Stock Restrictions & Managing Liquidity | 3 | 5 | 1 | 1 | Frank asks about employee option vesting schedules, stock restrictions, and exercise windows in an era of extended private company timelines. Scott outlines common practices like expanding the 90-day post-termination exercise window. | |
| Part Two Conclusion & Part Three Teaser | 0 | 0 | 0 | 0 | Frank Chen delivers a monologue conclusion wrapping up Part Two and teasing the contents of Part Three. Because this is a monologue outro, all dynamic scores remain at zero. |
Statements from this episode (19)
Departing founders practically bear the burden of proof in IP disputes
“And the challenge with these cases is you're kind of proving the negative, right? So in that case, you know, ah, you know, Anthony Lewandowski, who was the person, he had to prove that, you know, he didn't take anything, right? As opposed to them proving that …”
Founders must never use employer laptops for side projects
“So our best advice on this stuff is, look, if you've got a great idea number one, you know, don't ever use your work laptop for any of these things, right? So have some physical separation, and you know, when you really get to the point where you feel like, ok…”
Founders raising Series A should work backward from Series B requirements
“If you're raising your Series A round today, you should be at that point in time thinking about what's the pitch I'm going to give the Series B investors and then essentially work backwards and say, okay, for the Series B investors to be compelled by what I'm …”
Loudcloud raised $120 million at an $820 million post-money valuation
“Ben Horowitz and I spent a bunch of time raising this very large round. We raised a hundred and twenty million dollars at an eight hundred and twenty million dollar post money valuation, right?”
Rolling SAFEs cause founders to accidentally over-dilute their equity
“In some respects, because number one, it's so easy to raise money on a safe, you often find people do what are called rolling closes, which is, you know, usually on a priced round, we're like, this is your date, right? Get your money in by June 30th or else yo…”
Series Seed offers SAFE efficiency with priced round cap-table clarity
“I think you can accomplish the same efficiency goals with there's a thing called series seed, which is a very, very lightweight way of doing an equity deal. So, you know, I just would encourage entrepreneurs to make sure if they go that route, they really do p…”
1X non-participating liquidation preference predominates in Silicon Valley deals
“Yeah, the most entrepreneur-friendly, and the one that I think generally predominates, quite frankly, particularly in Silicon Valley, is what you would call a one X non-participating liquidation preference.”
Participating liquidation preferences are fundamentally unfair to founders
“Fundamentally, you know, and I say this in the book, like, I think that's very unfair to the entrepreneurs and to the common shareholders, because liquidation preference is really intended to protect your downside, and so it's not obvious to me.”
Founders should prioritize clean term sheets over higher valuations
“You know, kind of people are trying to balance off valuation with some of these other rights, and that's really a lot of what I try to point out in the book is that it's very hard to look at these in isolation because they all have some kind of economic value,…”
Square's full ratchet forced double share issuance at its IPO
“When Square went public, they went public at eight dollars a share. Their last round of financing was at 16 dollars a share. And those 16 dollar investors had this full ratchet that we were talking about. So those 16 dollar shareholders basically got issued tw…”
Conceding special rights to early investors sets dangerous precedents
“Everything you do today has the risk of creating precedent for the future. And so you may think, hey, look, you know, you and I are buddies. This is, you know, I'm giving you these special rights because we're friends. But when that next investor comes in and …”
Dual-class shares are unnecessary in private markets due to illiquidity
“The reason why those tend not to exist in the private markets is we're all completely aligned, which is none of us have liquidity, right? So we can't, you know, in general, and many times we are prevented from selling our shares legally, so there's no liquid m…”
Andreessen Horowitz approves dual-class shares only as companies approach IPO
“What we've done with many of our companies is as they get closer to going public, we have agreed with them that, okay, having these dual class shares when and if you go public is a good thing to do. But we haven't done that obviously in the private markets.”
Venture boards have shifted away from VC majority control toward founders
“Over the last 10 years, that's really shifted, and more of our boards have more common shareholders, more founder and, you know, employee-led board members then do, then they have preferred shareholders.”
The two cardinal sins of venture capital investing
“There's kind of two big cardinal sins in this business. One is you miss one of those companies. You don't invest in them. The other is that you invest in it, but you don't own enough of it so that when it gets to be Facebook, it still doesn't meaningfully chan…”
Andreessen Horowitz expects to exercise pro-rata rights after leading Series A
“The way we do here is if we're the A round investor, our general thinking is that, you know, unless something dramatic happens with the company, You know, we should expect that we are going to participate pro-rata in the next round of financing.”
The median time to IPO has increased from six to 12 years
“It used to be not a big deal because companies about, you know, six years or so from founding was kind of the median time to going public. Now we're talking to 10, 12 years.”