Comments on: The problem with tranched VC investments http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/ Mon, 21 May 2012 11:02:16 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Choose the Right Funding for Your Startup | Seeqnce Blog http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-18262 Choose the Right Funding for Your Startup | Seeqnce Blog Fri, 09 Mar 2012 15:15:22 +0000 http://www.cdixon.org/?p=261#comment-18262 [...] first round money came in three tranches. To get to the second and third tranches, the company had to hit certain predefined milestones and [...] [...] first round money came in three tranches. To get to the second and third tranches, the company had to hit certain predefined milestones and [...]

]]> By: Download: Term Sheet Business Angel Runde Muster http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-14561 Download: Term Sheet Business Angel Runde Muster Thu, 07 Jul 2011 18:55:00 +0000 http://www.cdixon.org/?p=261#comment-14561 [...] Ich halte aber auch im Übrigen nichts von Meilensteinen. Das könnt Ihr auch aus berufenerem Munde hier [...] [...] Ich halte aber auch im Übrigen nichts von Meilensteinen. Das könnt Ihr auch aus berufenerem Munde hier [...]

]]> By: Anonymous http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11751 Anonymous Sun, 21 Nov 2010 01:06:00 +0000 http://www.cdixon.org/?p=261#comment-11751 Can you think of any specific examples where a tranche was employed, the milestones were met, but the VC didn't follow on as promised? Can you think of any specific examples where a tranche was employed, the milestones were met, but the VC didn’t follow on as promised?

]]> By: Pre-Marketing 11/19 – gpkendall.com http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11747 Pre-Marketing 11/19 – gpkendall.com Fri, 19 Nov 2010 16:47:49 +0000 http://www.cdixon.org/?p=261#comment-11747 [...] * Chris Dixon: The trouble with tranched VC investments [...] [...] * Chris Dixon: The trouble with tranched VC investments [...]

]]> By: azeemazhar http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11746 azeemazhar Fri, 19 Nov 2010 16:24:00 +0000 http://www.cdixon.org/?p=261#comment-11746 Great point chris, from an entrepreneurs perspective you usually want to focus on execution for 18 months But in your experience, how useful are pre negotiated milestones anyway? What happens if there is a pivot halfway through? Even if there isn't doesn't the trajectory of the business normally follow some unforeseen path? Great point chris, from an entrepreneurs perspective you usually want to focus on execution for 18 months

But in your experience, how useful are pre negotiated milestones anyway? What happens if there is a pivot halfway through? Even if there isn’t doesn’t the trajectory of the business normally follow some unforeseen path?

]]> By: Mike Walrath http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11745 Mike Walrath Fri, 19 Nov 2010 15:33:00 +0000 http://www.cdixon.org/?p=261#comment-11745 Missed this one a year ago, but glad to see it re-opened here. I generally agree with your comments Chris. I did however have a pretty positive experience with tranching that may be an option for both investors and entrepreneurs. When we raised the series A for Right Media, we did a deal for 12M of investment, 7M upfront and 5M in a second tranch which our VC's (Redpoint) had up to 1 year to fund. If they didn't provide they money within a year, they lost the right to provide it. Initially I struggled with the concept. It felt like they were getting a free look. However, ultimately I got over it as I thought through the risks or both parties: - I didn't need more than the 7M of capital (it was in fact plenty to last more than a year). However, I wanted a valuation that meant that Redpoint would own less of the company than they usually wanted for the 7M. - Redpoint (naturally) felt the valuation I wanted to was too high, but they really liked the company and wanted to move forward with some downside protection. If we sucked, they were only exposed for 7M, rather than 12. Think about the scenarios: If all goes well Redpoint puts in the extra 5M and gets the ownership they wanted (and I was willing to give them). I get the valuation I wanted either way - and I have plenty of capital to get through the term of the 2nd tranche. If all doesn't go well they don't fund the 2nd tranche, I still got 7M (the minimum capital I was willing to raise) and and my price. I am free to go into the market and raise additional capital at the best price I can. The upshot in this case (to the extent there's an upshot when you don't execute well) is that we take less dilution than we originally anticipated. In the end, Redpoint funded the extra 5M before the end of 12 month period and the rest of the story worked out pretty well also. A few key points: I would not have accepted a term on the 2nd tranche more than 12 months. Better not to sit longer than that wondering if the money is going to come in or not. I would not have done a milestone based tranche. Too hard to enforce, and who wants to force someone to put money into your business. This is a board member you're going to have to live with...milestone based tranching is much stickier than time-based tranching options. I also hate milestone based earnouts in M&A - way to hard to measure and too much control usually sits with the acquiring company when it comes to execution that gets to the milestones...but that's a different topic. Missed this one a year ago, but glad to see it re-opened here. I generally agree with your comments Chris. I did however have a pretty positive experience with tranching that may be an option for both investors and entrepreneurs. When we raised the series A for Right Media, we did a deal for 12M of investment, 7M upfront and 5M in a second tranch which our VC’s (Redpoint) had up to 1 year to fund. If they didn’t provide they money within a year, they lost the right to provide it.

Initially I struggled with the concept. It felt like they were getting a free look. However, ultimately I got over it as I thought through the risks or both parties:

- I didn’t need more than the 7M of capital (it was in fact plenty to last more than a year). However, I wanted a valuation that meant that Redpoint would own less of the company than they usually wanted for the 7M.
- Redpoint (naturally) felt the valuation I wanted to was too high, but they really liked the company and wanted to move forward with some downside protection. If we sucked, they were only exposed for 7M, rather than 12.

Think about the scenarios:

If all goes well Redpoint puts in the extra 5M and gets the ownership they wanted (and I was willing to give them). I get the valuation I wanted either way – and I have plenty of capital to get through the term of the 2nd tranche.

If all doesn’t go well they don’t fund the 2nd tranche, I still got 7M (the minimum capital I was willing to raise) and and my price. I am free to go into the market and raise additional capital at the best price I can. The upshot in this case (to the extent there’s an upshot when you don’t execute well) is that we take less dilution than we originally anticipated.

In the end, Redpoint funded the extra 5M before the end of 12 month period and the rest of the story worked out pretty well also.

A few key points:

I would not have accepted a term on the 2nd tranche more than 12 months. Better not to sit longer than that wondering if the money is going to come in or not.

I would not have done a milestone based tranche. Too hard to enforce, and who wants to force someone to put money into your business. This is a board member you’re going to have to live with…milestone based tranching is much stickier than time-based tranching options. I also hate milestone based earnouts in M&A – way to hard to measure and too much control usually sits with the acquiring company when it comes to execution that gets to the milestones…but that’s a different topic.

]]> By: DaveJ http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11744 DaveJ Fri, 19 Nov 2010 15:12:00 +0000 http://www.cdixon.org/?p=261#comment-11744 Just to be a devil's advocate (and also because our Series A-2 was tranched and it worked great): 1. Maybe. In the early stages of a company, if you're hiring people who are worried about whether they will have a job in six months and who somehow think that it's somehow separate from their performance, you're hiring the wrong people anyway. Early stage companies should be hiring people who are not only comfortable with the risk but don't *see* it as a risk because they believe in what they can do. 2. The entrepreneur needs to be nurturing these investor relationships anyway. Eventually there will be a next round anyway, and it's better to cultivate relationships early and have them follow the company's progress. 3. Agree with this: the follow-on tranches should be in the investor's sole discretion so that no one is under any illusions. 4. Is this really different from what the relationship is with respect to the next round? Whether the entrepreneur has 18 months or 6, he or she has to learn how to communicate honestly and openly with the investor while still selling the promise of the company. Is it really better to have open communication for 12 months followed by six months of information manipulation? Also, as an investor you should have a finely tuned BS detector - if you're getting BS from the entrepreneur you should shut it down after one tranche rather than putting it all in and having the stakes be higher. I do think tranching makes the most sense early on. It's try before you buy, keep the pressure on, keep the capital raised low until you figure out the strategy. Just to be a devil’s advocate (and also because our Series A-2 was tranched and it worked great):
1. Maybe. In the early stages of a company, if you’re hiring people who are worried about whether they will have a job in six months and who somehow think that it’s somehow separate from their performance, you’re hiring the wrong people anyway. Early stage companies should be hiring people who are not only comfortable with the risk but don’t *see* it as a risk because they believe in what they can do.
2. The entrepreneur needs to be nurturing these investor relationships anyway. Eventually there will be a next round anyway, and it’s better to cultivate relationships early and have them follow the company’s progress.
3. Agree with this: the follow-on tranches should be in the investor’s sole discretion so that no one is under any illusions.
4. Is this really different from what the relationship is with respect to the next round? Whether the entrepreneur has 18 months or 6, he or she has to learn how to communicate honestly and openly with the investor while still selling the promise of the company. Is it really better to have open communication for 12 months followed by six months of information manipulation? Also, as an investor you should have a finely tuned BS detector – if you’re getting BS from the entrepreneur you should shut it down after one tranche rather than putting it all in and having the stakes be higher.

I do think tranching makes the most sense early on. It’s try before you buy, keep the pressure on, keep the capital raised low until you figure out the strategy.

]]> By: infoarbitrage http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11743 infoarbitrage Fri, 19 Nov 2010 05:13:00 +0000 http://www.cdixon.org/?p=261#comment-11743 chris, in the scenario you outlined (which represents the lion's share of tranched deals i've seen) i completely agree. personally, i have used tranching successfully in incubation scenarios, where the dollars are small, the milestones clear and the near-term personnel needs limited. it is designed such that if the first tranche milestones aren't hit within a reasonable time frame, it's probably best to take the loss and have the entrepreneur seek more fertile pastures. however, if they are hit the second tranche is sufficient to carry them to the series a, which is done on a fully marketed basis. i have seen nightmarish scenarios similar to the one you outlined, $5MM, blah, blah, blah. hate them. chris, in the scenario you outlined (which represents the lion’s share of tranched deals i’ve seen) i completely agree.

personally, i have used tranching successfully in incubation scenarios, where the dollars are small, the milestones clear and the near-term personnel needs limited. it is designed such that if the first tranche milestones aren’t hit within a reasonable time frame, it’s probably best to take the loss and have the entrepreneur seek more fertile pastures. however, if they are hit the second tranche is sufficient to carry them to the series a, which is done on a fully marketed basis.

i have seen nightmarish scenarios similar to the one you outlined, $5MM, blah, blah, blah. hate them.

]]> By: taylorwc http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11741 taylorwc Fri, 19 Nov 2010 03:18:00 +0000 http://www.cdixon.org/?p=261#comment-11741 have also seen it happen where the VC will commit money they haven't yet raised for an additional closing of their new fund. Company hit milestones beautifully, but there was no money to invest. Set the company back almost a year. have also seen it happen where the VC will commit money they haven’t yet raised for an additional closing of their new fund. Company hit milestones beautifully, but there was no money to invest. Set the company back almost a year.

]]> By: bussgang http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11742 bussgang Fri, 19 Nov 2010 03:18:00 +0000 http://www.cdixon.org/?p=261#comment-11742 Funny - we've had numerous good experiences with tranching, particularly at medical start-ups where there are "bright line" milestones. It's in neither the entrepreneur nor the VC's interests to waste capital and overfund a company. Yet when there is a "bright line" technical milestone that has not yet been achieved, it is nearly impossible to raise outside capital. Tranching allows the existing syndicate to commit to funding at a pre-negotiated price when the milestone is achieved and reduces risk and uncertainty for the entrepreneur as to when it comes to the next round of funding. For many deeply technical start-ups, there are rare cases of big up rounds, so the "cost" to the entrepreneur is pretty minimal as compared to the risk mitigation. Funny – we’ve had numerous good experiences with tranching, particularly at medical start-ups where there are “bright line” milestones. It’s in neither the entrepreneur nor the VC’s interests to waste capital and overfund a company. Yet when there is a “bright line” technical milestone that has not yet been achieved, it is nearly impossible to raise outside capital. Tranching allows the existing syndicate to commit to funding at a pre-negotiated price when the milestone is achieved and reduces risk and uncertainty for the entrepreneur as to when it comes to the next round of funding. For many deeply technical start-ups, there are rare cases of big up rounds, so the “cost” to the entrepreneur is pretty minimal as compared to the risk mitigation.

]]> By: Trance http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-11236 Trance Fri, 08 Oct 2010 23:09:00 +0000 http://www.cdixon.org/?p=261#comment-11236 agreed! What about tranching as an option, doesn't it leave chances for the entrepreneur to outperform and this way keep more of her own company? agreed! What about tranching as an option, doesn’t it leave chances for the entrepreneur to outperform and this way keep more of her own company?

]]> By: It’s Not That Seed Investors Are Smarter — It’s That Entrepreneurs Are | TechsZone http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-9795 It’s Not That Seed Investors Are Smarter — It’s That Entrepreneurs Are | TechsZone Mon, 02 Aug 2010 06:52:55 +0000 http://www.cdixon.org/?p=261#comment-9795 [...] the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit [...] [...] the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit [...]

]]> By: interesting read: It’s not that seed investors are smarter – it’s that entrepreneurs are | RSS Lens http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-9671 interesting read: It’s not that seed investors are smarter – it’s that entrepreneurs are | RSS Lens Sat, 17 Jul 2010 16:37:10 +0000 http://www.cdixon.org/?p=261#comment-9671 [...] the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit [...] [...] the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit [...]

]]> By: It’s not that seed investors are smarter – it’s that entrepreneurs are cdixon.org – chris dixon's blog http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-9544 It’s not that seed investors are smarter – it’s that entrepreneurs are cdixon.org – chris dixon's blog Mon, 05 Jul 2010 18:03:59 +0000 http://www.cdixon.org/?p=261#comment-9544 [...] the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit predefined [...] [...] the first round of funding, investors owned 56% of the company. Moreover, the $2.6M came in 3 tranches: $500K, another $500K, and then $1.6K.  To get the 2nd and 3rd tranches we had to hit predefined [...]

]]> By: Investments Guide http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-7862 Investments Guide Sat, 17 Apr 2010 12:14:36 +0000 http://www.cdixon.org/?p=261#comment-7862 Hi your topic interesting and usefully in life. Olivia ............................... Hi

your topic interesting and usefully in life.

Olivia
………………………….

]]> By: anonymous http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-7182 anonymous Sun, 07 Mar 2010 05:29:32 +0000 http://www.cdixon.org/?p=261#comment-7182 I am an engineer's engineer who joined a vc funded startup without knowing much about how vc operated and how much trouble the startup was in. Investors had thrown out some cofounders and had placed a vc partner as ceo. This vc/ceo one day singled me out and laid me off in a very bad way (he's known for being dismissive and rude) with no explanation to anyone incl mngmt. I am looking for some advice on whether I can do something related to termination terms (layoff vs others). Does someone know any engineer vs vc forum where i could get some feedback from people more familiar with such stuff? I am an engineer’s engineer who joined a vc funded startup without knowing much about how vc operated and how much trouble the startup was in. Investors had thrown out some cofounders and had placed a vc partner as ceo. This vc/ceo one day singled me out and laid me off in a very bad way (he’s known for being dismissive and rude) with no explanation to anyone incl mngmt.
I am looking for some advice on whether I can do something related to termination terms (layoff vs others). Does someone know any engineer vs vc forum where i could get some feedback from people more familiar with such stuff?

]]> By: Finance Geek » Seed investments from big VCs http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-4032 Finance Geek » Seed investments from big VCs Tue, 13 Oct 2009 12:26:18 +0000 http://www.cdixon.org/?p=261#comment-4032 [...] The problem with tranched VC investments (cdixon.org) [...] [...] The problem with tranched VC investments (cdixon.org) [...]

]]> By: Twitter Trackbacks for cdixon.org / The problem with tranched VC investments [cdixon.org] on Topsy.com http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1751 Twitter Trackbacks for cdixon.org / The problem with tranched VC investments [cdixon.org] on Topsy.com Sun, 30 Aug 2009 03:42:13 +0000 http://www.cdixon.org/?p=261#comment-1751 [...] First Tweet 15 days ago cdixon chris dixon Highly Influential the problem with tranched venture capital investments http://www.cdixon.org/?p=261 view retweet [...] [...] First Tweet 15 days ago cdixon chris dixon Highly Influential the problem with tranched venture capital investments http://www.cdixon.org/?p=261 view retweet [...]

]]> By: Options on early stage companies | Igniting Startups - nPost http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1584 Options on early stage companies | Igniting Startups - nPost Wed, 26 Aug 2009 21:43:28 +0000 http://www.cdixon.org/?p=261#comment-1584 [...] The point is with the super high volatility of startups, you can structure the option in almost any way and it’s still like giving someone shares.  (I discuss the problems with tranching in more detail here.) [...] [...] The point is with the super high volatility of startups, you can structure the option in almost any way and it’s still like giving someone shares.  (I discuss the problems with tranching in more detail here.) [...]

]]> By: The problem with tranched VC investments | Igniting Startups - nPost http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1349 The problem with tranched VC investments | Igniting Startups - nPost Fri, 21 Aug 2009 17:07:34 +0000 http://www.cdixon.org/?p=261#comment-1349 [...] From cdixon.org [...] [...] From cdixon.org [...]

]]> By: Ryan Graves http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1294 Ryan Graves Wed, 19 Aug 2009 19:40:17 +0000 http://www.cdixon.org/?p=261#comment-1294 Chris, I'm continually impressed with your posts. I always learn. Keep it up, I'll be around. Subscribing to RSS now. Cheers, Ryan Chris,
I’m continually impressed with your posts. I always learn. Keep it up, I’ll be around.

Subscribing to RSS now.
Cheers,
Ryan

]]> By: Dave Hendricks http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1255 Dave Hendricks Tue, 18 Aug 2009 18:13:35 +0000 http://www.cdixon.org/?p=261#comment-1255 I've worked at startups that have been tranched by VCs. I mistakenly did not pose the questions that Chris advises a prospective employee to ask. Instead of driving sales and marketing I ended up supporting BOD presentations and coming up with sales projections to satisfy the tranching needs. And guess what? We didn't get the funds that the CEO said were there for the asking, when we needed it. Never again. Great post. I’ve worked at startups that have been tranched by VCs. I mistakenly did not pose the questions that Chris advises a prospective employee to ask. Instead of driving sales and marketing I ended up supporting BOD presentations and coming up with sales projections to satisfy the tranching needs. And guess what? We didn’t get the funds that the CEO said were there for the asking, when we needed it. Never again. Great post.

]]> By: cdixon.org / Options on early stage companies http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1244 cdixon.org / Options on early stage companies Tue, 18 Aug 2009 05:44:02 +0000 http://www.cdixon.org/?p=261#comment-1244 [...] The point is with the super high volatility of startups, you can structure the option in almost any way and it’s still like giving someone shares.  (I discuss the problems with tranching in more detail here.) [...] [...] The point is with the super high volatility of startups, you can structure the option in almost any way and it’s still like giving someone shares.  (I discuss the problems with tranching in more detail here.) [...]

]]> By: Johan Söderberg http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1178 Johan Söderberg Sun, 16 Aug 2009 13:16:23 +0000 http://www.cdixon.org/?p=261#comment-1178 I agree with bunterberg. I would never give the VC the upper hand like that without getting anything in return. In my opinion it is clearly possible for the entrepreneur to get upside potential in such a deal. For instance if certain goals are beaten the number of shares for the same amount of VC-money will be lower. It is all about how well you negotiate with the VCs. I agree with bunterberg. I would never give the VC the upper hand like that without getting anything in return. In my opinion it is clearly possible for the entrepreneur to get upside potential in such a deal. For instance if certain goals are beaten the number of shares for the same amount of VC-money will be lower. It is all about how well you negotiate with the VCs.

]]> By: bunterberg http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1177 bunterberg Sun, 16 Aug 2009 09:15:11 +0000 http://www.cdixon.org/?p=261#comment-1177 Found an answer in various blog posts (by Peter Davis) via Fred Wilsons hints. Instead of tranching she would plan this case via two rounds while the investor of the first round agrees upon details (and a higher pre) for the eventually upcoming round. She probably needs a strong standing to close such a deal but if it works out she saves time and shares. Anyways, finally it will still be up to the investor to actually do the second round and if not she might have a serious problem to find alternatives. Found an answer in various blog posts (by Peter Davis) via Fred Wilsons hints. Instead of tranching she would plan this case via two rounds while the investor of the first round agrees upon details (and a higher pre) for the eventually upcoming round. She probably needs a strong standing to close such a deal but if it works out she saves time and shares.

Anyways, finally it will still be up to the investor to actually do the second round and if not she might have a serious problem to find alternatives.

]]> By: bunterberg http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1171 bunterberg Sat, 15 Aug 2009 17:53:42 +0000 http://www.cdixon.org/?p=261#comment-1171 @Dharmesh: Everything can be questioned. Given a case where she achieves more with less and she just doesn't terribly need the next tranche. Shouldn't she be able to keep more of her company rather than taking in the tranche? @Dharmesh: Everything can be questioned. Given a case where she achieves more with less and she just doesn’t terribly need the next tranche. Shouldn’t she be able to keep more of her company rather than taking in the tranche?

]]> By: Dharmesh Shah http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1168 Dharmesh Shah Sat, 15 Aug 2009 16:06:18 +0000 http://www.cdixon.org/?p=261#comment-1168 bunterberg: In most cases, tranching is done as a "if you hit X, you get Y". So, the best case scenario is that the milestone is hit and you receive the additional funding. Generally, there's no clause that says if you hit 3X (i.e. blow out the milestones), you get a better deal or more money or whatever. So, it's downside protection for the investor, not an opportunity for upside for the entrepreneur. bunterberg: In most cases, tranching is done as a “if you hit X, you get Y”. So, the best case scenario is that the milestone is hit and you receive the additional funding.

Generally, there’s no clause that says if you hit 3X (i.e. blow out the milestones), you get a better deal or more money or whatever.

So, it’s downside protection for the investor, not an opportunity for upside for the entrepreneur.

]]> By: bunterberg http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1167 bunterberg Sat, 15 Aug 2009 15:27:37 +0000 http://www.cdixon.org/?p=261#comment-1167 agreed! What about tranching as an option, doesn't it leave chances for the entrepreneur to outperform and this way keep more of her own company? agreed! What about tranching as an option, doesn’t it leave chances for the entrepreneur to outperform and this way keep more of her own company?

]]> By: fred wilson http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments/comment-page-1/#comment-1165 fred wilson Sat, 15 Aug 2009 14:34:21 +0000 http://www.cdixon.org/?p=261#comment-1165 i totally agree chris. this never works well. i did a follow up post on my blog. http://www.avc.com/a_vc/2009/08/milestone-based-investing.html great topic for discussion. i totally agree chris. this never works well. i did a follow up post on my blog.

http://www.avc.com/a_vc/2009/08/milestone-based-investing.html

great topic for discussion.

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