Illustration by Anonymous
There is an interesting article from Ask the VC – Do Venture Capitalists Fund A Company With An Intent To Steal It? This is indeed a question most new entrepreneurs would ask, and many would not have the right person to ask these kind of Questions!
Here is the Question from the article;
My client is looking for a $5m investment from a VC. What can he do to protect himself if he is worried that the VCs will acquire the rights to his product and then try to fire him and keep those rights? Does this happen often?
And here is the reply;
Reputable VCs don’t engage in this type of behavior – funding and then stealing a company. For one, it’s not a repeatable model. If a VC acted this way, they wouldn’t have any deal flow to consummate future deals. More importantly, VCs invest in folks to run companies – we have no interest in running your company for you, as we have other investments that we monitor.
VCs don’t acquire any rights to your product, they simply invest in the company that owns the rights. So the corporate entity is what controls the rights, not any particular person.
Why do CEOs leave the company that they’ve created and raised money for?
It’s a relatively small number. More interestingly, the vast majority of CEOs that leave companies do it by their election, not that of the VCs. Many CEOs are serial entrepreneurs and prefer starting companies, not running them after they become larger and more successful.
What should one do if the new entity generates tax losses in the early years and wants to share the loss with the VC? Can the VCs be asked to buy back shares if after 6 years the company is still private?
Neither of these will work. Since you will have to incorporate your entity as a c-corp, these loses won’t flow through to the VCs and even if they did, VCs can’t use these types of loses. As for the VC buy back – forget about it. That’s a non-starter. If I fund a company and can’t get liquidity, the founder certainly doesn’t have the right to get me to put even more money in to buy him/her out.
Btw, here is an additional fact that would be nice to know – Do All Venture Capitalists Come From Harvard or Stanford?
It certainly seems like a lot of VCs have pedigrees from Harvard or Stanford, but plenty of folks have degrees from other places too. It appears that much less than half have degrees from there.