Understanding a VC Case Study

My friend raised $100 million from well-known VCs and is shutting the company down in the next couple of weeks. I met with him to learn what went wrong. He asked me to share his recent startup experience with my LinkedIn community, hoping it could benefit other founders. His biggest regret on his nearly 7-year journey was accepting a significantly overvalued Series A round. He raised a large financing round at a massive valuation from well-known VCs, which generated significant media buzz. This was the kind of moment many founders post about and celebrate. He had many term sheets and took the one with the largest valuation. Turns out, that inflated valuation from his round created immense pressure and set expectations so high that securing crucial follow-on funding became impossible. Then a few product delays hit. A key hire fell through. Normal startup turbulence. Follow-on funding dried up. Morale dropped. The story shifted. He also had many early VCs on his cap table that were chasing markups. Their playbook was simple: inject capital, hype the company, and flip it to the next investor at a higher valuation. The lesson? Valuation is not validation. It’s a bet. And if it’s misaligned with reality, it can sink even the most promising company. A more grounded valuation is the key to sustainable growth and navigating the long, unpredictable startup journey. Raise what you need. From people you trust. Build a good foundation to get through any ups and downs. #founder #funding #investing #vc #venturecapital #entrepreneur #startup

The founder stared at his bank account. $2.4M from a $50M exit. Five years of 80-hour weeks for less than he made at Google: "How is this possible?" Page 12, buried in legal language: "Liquidation Preference: 1X Participating Preferred with 8% Cumulative Dividend" He remembered signing it. "The VC said it was standard," he recalled "Just protects their downside if things go badly." Things didn't go badly. His company grows from $500K ARR to $8M ARR. They build a team of 45 people. Dominated their niche market. Strategic buyer offered $50M. Headlines read: "AI Startup Sells for $50M After 5-Year Journey" His parents called to congratulate him. LinkedIn exploded with celebration posts. TechCrunch covered the "success story." But the math told a different story: Investors put in $18M total across three rounds. Each round had standard but stacking preferences: Seed: 1X liquidation preference Series A: 1X participating preferred Series B: 1X participating preferred + 8% cumulative dividends The liquidation waterfall looked like this: Series B investors: $10M + 5 years of 8% dividends ≈ $14M Series A investors: $5M + participation ≈ $7M Seed investors: $3M + participation ≈ $4M Total investor claims: $25M Available proceeds: $50M Founders and employees: whatever's left after lawyer fees. Which was\$2.4M to the founder. Before taxes. "I thought liquidation preferences only mattered if we sold for less than what investors put in," he said. That’s what most founders think. Until they learn about participating preferred. And compounding dividends. And they discover anti-dilution provisions. The VC firm made 3–4X their money. Founder made about 0.5X his original Google salary. From the same exit. Sounds like a horror story. This is just another Tuesday in venture capital. Term sheets aren't contracts to help you succeed. They're insurance policies that guarantee investors win. Even when you win. The next time a VC tells you "don’t worry about the fine print," worry about the fine print.

"My VC blocked my follow-on deal just so they could get a bigger share of my company." His Series A lead investor sabotaged a competing term sheet... Not because the deal was bad, but to force a flat round and increase their ownership. The company was growing 15% month-over-month, but bleeding cash. It had six month of runway when the new investor offered $20M Series B round at $70M valuation post - a somewhat aggressive dilution. The Series A lead didn't like the dilution and wanted a bigger share of the company. Instead of taking the deal he trashed the new lead and convinced the other investors to wait for a better deal. The BOD decided to reject the offer. Three month went by and fundraising was going sideways. With only three month of runway left, the series A lead forced the company to do an insider round - $10M at $40M valuation - an extension of the series A - because "their company's back was against the wall". This is down/flat round manipulation that VCs don't want you to understand. After seeing this across my network, I've identified the pattern: Some VCs intentionally create funding crises in their potential winners to consolidate ownership at low valuations. The playbook: - Block or discredit competing investors through blocking rights or negative references - Wait for runway to dwindle and desperation to set in - Offer "rescue" financing at punitive terms - Blame market conditions while accumulating ownership The founder's choice: Accept dilution or watch his company die. The cynical part? This strategy is perfectly legal and often praised internally as "savvy investing." If you're raising venture capital, remember: Not all VCs want to help you build maximum value. Some want to maximize their outcome, even at your expense. Pick your funding partners carefully. In my next post, I'll share exactly how to protect yourself from down round manipulation. #VentureCapital #DownRounds #FounderAdvice

Crunching the numbers: liquidation preferences, conversion, and participation 📊 In our recent VC class at Stanford University, we examined the features of convertible preferred stock – what VCs receive for their investments in startups – and their impact on founder payouts. While the theory is important, real-world examples drive the lessons home. Case Study 1: Jawbone – Jawbone's last convertible preferred stock (Series Z) featured a 3X liquidation preference – When the company went out of business a year later, all common stockholders (founders, employees) were wiped out – Founders, beware of high liquidation preferences! Case Study 2: Uber – Uber's Series Seed convertible preferred stock had a $0.07 conversion price – Each subsequent round was at a substantially higher valuation, meaning low dilution for existing shareholders – At IPO, each Series Seed share converted into one common share worth around $45, a more than 500X return – Up rounds often matter more than the initial valuation Key takeaways for founders: • Terms matter – preferences, conversions, and participation all impact your payout • Model it out – build a cap table to understand your dilution and payout curves • Leverage advisors – lean on experienced startup counsel to ensure fair terms • Avoid non-standard terms, such as multiple liquidation preferences, early on #stanford #stanfordgsb #venturecapital #startups #innovation #technology #founders #venturemindset