You lose an element of control that otherwise would be all internal, so in a very broad sense, it’s a bad thing. Often, the interests of an external stakeholder are not aligned with those of the original company.
These external stakeholders may take advantage of their position and force you to sacrifice something once internal. Furthermore, there is the cost associated with it. The founder or its principals should always have skin in the game – that’s how they should be judged.
But let me give you some real-world examples of what I’m talking about:
- The company gets a term sheet from someone, but the VC demands a board seat. A board seat without an actual economic stake is almost always a disaster for the entrepreneur – it’s the only leverage the founder has to get anything done.
- The VC forces management to take salaries that are too high because they’re backfilling their capital.
- The VC wants to spend money on things that aren’t directly related to the business – events and venues, first-class flights for family members, and so on.
- “I’m sorry, but I can’t fund your round, but I’m going to tell you why.” Yay.
This happens almost every day of the week in this business. It goes back to a fundamental difference between founders and VCs – they’re not playing the same game because they don’t have the same objectives. Founders want control over their companies; it’s an extension of who they are as people. They can either take it internally or give it away externally. But losing control externalizes all the negatives in the list above.
There are exceptions to every rule, but I can’t think of one off the top of my head.
Disclaimer: This post is mostly my opinion on this subject. You are free to disagree with me, as it’s your right as a human being if you’re reading this. If you want to engage in a debate, there is a comment section below for that purpose. Thanks!
