Investors are growing more conservative as valuations are cooling down, and the balance of power between entrepreneurs and VCs may be shifting back toward the money men.
Four Ridiculous Demands That Venture Capital Investors Make
Many VC firms still accept legal fee reimbursements from the startups they invest in. Ludicrous.
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Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.
As a result, some investors feel more empowered to add crazy terms to a deal before closing. We chose not to include strictly financial demands, such as liquidation preferences that let investors cash out before anyone else, because they’re really set on a case-by-case basis. But here’s a collection of other terrible demands that entrepreneurs should watch out for.
1. Requiring a startup to reimburse them for the legal fees they incurred to make the investment.
This has been going on for years, but I’ve still never heard a compelling case for why VCs shouldn’t pay their own fees, which are associated with the core function of their own jobs. Some have ended this practice and others have capped the amount their portfolio companies have to reimburse, but many firms still accept some money from the startups they invest in. Ludicrous.
2. Requiring a startup to place the venture firm and investor’s name on the startup’s homepage. This just sounds sad. If you’re a good investor that the founders value, recognition shouldn’t be a problem. And the front page of a company website is quite the odd choice for a place to display such recognition.
3. Exploding offers coupled with new hire demand. There are plenty of people who think exploding offers — an investment offer that expires after a short period of time — are bad practice on their own. (“Those kinds of things are signs of insecurity,” Fred Wilson said back in 2010.) But some investors have been known to issue them alongside a requirement that the startup make a specific senior hire before the deal actually closes. It “would effectively keep them on a hook indefinitely until they brought this person in,” one entrepreneur said.
4. Relocate to the San Francisco Bay Area. San Francisco and Silicon Valley are still the undisputed kings of startup land, and the talent there is a big reason why. But, these days, exciting young companies are starting up in cities around the globe, from New York to Stockholm to Delhi. Still, there are investors who demand a startup relocate as part of a financing deal. With geographic boundaries shrinking by the day thanks to all the communication tools at our fingertips, this demand is definitely antiquated.
I’m confident there are a lot more where these came from, so kindly tweet or direct message me @DelRey or email me at Jason@recode.net if you have some others to add to the list.
This article originally appeared on Recode.net.
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