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Skip the auction, keep the time
Why no auction
The company needed only one or two investors and was growing fast, and an auction means running many management meetings and answering diligence questions constantly. Peter Rahal, its CEO, was sensitive to what that would take from the operating business.
Pricing the round
He also priced the round as if he were on the other side of the table, aiming for a valuation that was rich but not so rich that an investor would take the deal while disagreeing with it. He was investing his own money in the round too, which created a conflict, because he could have lowered the valuation for himself. So he separated the roles in his head: Peter the CEO, and Peter the investor.
What matters instead
Two percent of valuation does not matter to him at this stage. He cares how the people on the team feel, whether they are excited and aligned, and he finds founders who put enterprise value first this early gross. The stage is about the right people and the mission.
How does a competitive fundraising process work?
A company or its bankers send materials to many investors at once and set a deadline, so offers arrive together and compete on price. Each interested investor typically gets a management meeting and access to a data room of company documents. The competition tends to raise the price, and it multiplies the meetings the executives must run.
Why can a very high valuation backfire?
A company that raises at a price its growth cannot support may later need money at a lower valuation, called a down round. Many investment contracts include anti-dilution protection, which gives earlier investors extra shares when that happens and shrinks everyone else's stake. Down rounds also tend to hurt hiring and morale, since employee stock options are tied to the company's valuation.
Why does an insider investing create a conflict?
A founder who invests in the company's own round sits on both sides of the price, since a lower valuation gives the investor more ownership per dollar. Boards and lawyers commonly handle this by disclosing the conflict and letting independent directors or outside investors set the terms. Outside investors in the round also act as a check, since they will not accept a price they think is too high.
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