When it comes to choosing an investor, valuation should be just one of many selection criteria. The non-valuation terms of a deal are also critically important. Minor changes in the deal terms can lead to wildly different economic outcomes for the founders. Work with your lawyer to watch out for terms like the liquidation preference, number of board seats, option pool, founder vesting, and type of security. Any one of these can be much more materially significant than a 20% difference in the valuation.
Beyond the terms of a deal, bringing on a new investor is the beginning of a long relationship. You will have to work relatively closely for years to come. Investors can be a major distraction, so working with someone who respects your time can make a big difference. Also, an investor with the right connections can open doors. Interview CEOs of the portfolio company to get a feel for how helpful an investor is.
There’s a lot to consider besides the valuation that an investor semi-arbitrarily assigns to your company. As with anything else in life, you get what you pay for. Don’t miss an opportunity to form a great alliance over a few percentage points.
