👀5👏2
Man, now suddenly realizing another reason why startups must have a mechanism to majorly dilute / eject misbehaving backers:
(1) Startups ALWAYS raise via dilution, i.e. issuing new shares / tokens and diluting old shares / tokens.
(2) So then, and especially if current backers are short on cash to participate in the next round to prevent being diluted, and if the startup seems promising — current backers are HUGELY incentivized go behind the startups back, and try to kill the next round by trash talking the startup to prospective backers, to prevent being diluted, and by doing so, greatly increasing the chance that the startup implodes
= Broke angels can be incentivized to kill future fundraising deals, even if that elevates the risk of killing the whole startup, unless there’s some way of penalizing bad actors directly trying to kill next raises, to balance out the incentives
— Which is probably a big part of why startups ALWAYS raise via dilution, always require paying more at the next rounds to prevent dilution, and often may not even give some existing backers the option to pay more to prevent their dilution, as an emergency switch for bad actors trying to kill the venture for everyone out of their own self preservation
= MaD, properly balanced incentives, must be potential penalties even for misbehaving investors, so no party can do bad things without penalty, to keep everyone behaving well
(BTW, and not even preemption rights fully protect if there’s ever a serious down-round situation.)
🄳🄾🄾🄼🄿🄾🅂🅃🄸🄽🄶
(1) Startups ALWAYS raise via dilution, i.e. issuing new shares / tokens and diluting old shares / tokens.
(2) So then, and especially if current backers are short on cash to participate in the next round to prevent being diluted, and if the startup seems promising — current backers are HUGELY incentivized go behind the startups back, and try to kill the next round by trash talking the startup to prospective backers, to prevent being diluted, and by doing so, greatly increasing the chance that the startup implodes
= Broke angels can be incentivized to kill future fundraising deals, even if that elevates the risk of killing the whole startup, unless there’s some way of penalizing bad actors directly trying to kill next raises, to balance out the incentives
— Which is probably a big part of why startups ALWAYS raise via dilution, always require paying more at the next rounds to prevent dilution, and often may not even give some existing backers the option to pay more to prevent their dilution, as an emergency switch for bad actors trying to kill the venture for everyone out of their own self preservation
= MaD, properly balanced incentives, must be potential penalties even for misbehaving investors, so no party can do bad things without penalty, to keep everyone behaving well
(BTW, and not even preemption rights fully protect if there’s ever a serious down-round situation.)
🄳🄾🄾🄼🄿🄾🅂🅃🄸🄽🄶
💯5👀3🫡1