A nice story on Bloomberg by Sara Frier and Eric Newcomer on the protections that VC’s seek when investing in tech start-ups at multi-billion dollar valuations. The article is worth the read and sufficiently notes a number of the “downside protection” techniques relied upon by VC investors.
The real art being employed by the VC’s, however, is a more subtle one in practice. While the “downside protections” are designed to have sufficient enforcement teeth, rarely are they ever employed as literally conceived. They know (at least the good VC’s do) that it makes no sense to demand an unnecessarily punitive remedy just for the sake of doing so when new facts arise – as they always do.
Rather the exercise is defend that the VC has not only a seat at the table when things evolve, but also a seat that insures their voice will be heard and reasonably (from their point of view) implemented. The good news for entrepreneurs is that once invested, the VC’s interests are mostly aligned with the companies. So long as sensible actors are working together, things mostly get worked out in a sensible way.
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