Founders FAQ #3

The dups Founders’ FAQ is a compilation of the most common questions founders ask us about their startup, their fundraising or their relationship with investors.

The investors don’t believe I can achieve the goals set up in my business plan and are trying to negotiate a lower valuation. This is frustrating but I have little bargaining power. If I end up achieving my goals, can we set up a value-correcting mechanism?

Whether or not the investors trust your business plan is a key element in your fundraising and will often determine the outcome of the price negotiation.

When the fundraising price ends up being much lower than the founders’ expectations or initial offer, strong frustrations may arise.

It is of course understandable that some investors see higher risks than founders, and want to negotiate a lower price as a result. On the other hand, if the founders end up achieving the goals set up in their business plan, the investors would’ve bought their shares at a discounted price, lower than their actual value. Yet, that situation is not necessarily unfair. It is indeed quite normal that the risks identified by the investors have an impact on the price negotiation, even if they end up not occurring.

However, in order to balance their respective interests, founders and investors can set up a value-correcting mechanism. There are many options to that end, e.g.:

• Stock options or subscription rights may be granted to the founders if some goals are achieved, with a price equal to or lower than the initial fundraising price.

• Investors can commit to make additional contributions in case the goals set up in the business plan are achieved, without new shares being issued. That way, the contributions will benefit the company and increase its overall value, without diluting the other shareholders.

You have a question about your business plan, valuation or other topics? Let’s have a chat, we’d be happy to help!