A Letter to a Founder Who Just Raised

Dear Priya,

Congratulations. I mean that without qualification — closing a round in this market is hard, and you did it with a product that half the people you pitched didn't initially understand.

Now let me spoil the week slightly, because you asked me once to tell you the things nobody tells you at the point when they'd actually be useful, and this is that point.

The arithmetic your investors are doing

Your new investor is not trying to make your company succeed. I want to phrase that carefully, because it sounds cynical and it isn't: they would very much like your company to succeed, they'll work hard towards it, and they're not lying to you. But their job is not your company. Their job is a portfolio, and the portfolio obeys a mathematics you should understand in detail, because it will shape every conversation you have with them for the next eight years.

A fund of this size will make perhaps thirty investments. Of those, a familiar distribution applies: roughly half will return nothing at all. Perhaps eight will return something between a fraction of the cheque and two or three times it — which, after a decade and after fees, is indistinguishable from failure in the numbers that matter. Two or three will do genuinely well, at five to ten times. And one, if the fund is any good, will return more than everything else combined.

That last sentence is the whole industry. Returns are not normally distributed; they follow a power law, and the practical implication is that a fund's performance is determined almost entirely by its best outcome. This is why your investor will consistently encourage you to take the larger, riskier path. From where they sit, an outcome of three times the money and an outcome of zero are nearly the same result. From where you sit — with all your capital, all your time, and the years you're not spending on anything else in this one company — they could not be more different.

That asymmetry isn't a conspiracy. It's structural, both parties entered it knowingly, and you'll navigate it far better if you can name it out loud in a board meeting than if you spend three years vaguely sensing that the advice you're getting is calibrated to somebody else's risk appetite.

What the preference stack actually does

Read your term sheet again, specifically the liquidation preference.

Your investors don't hold the same shares you do. They hold preferred stock with, in the standard case, a one-times non-participating preference: on any sale, they take back their investment first, and only then does the remainder split among everyone by percentage. They choose whichever of those two outcomes pays them more.

Run the numbers on your own cap table before you need to. If you've raised twenty million across your rounds and the company sells for twenty-five, the preference stack takes twenty, five is distributed, and the founders — who on paper hold half the business — receive a sum that will not feel like the outcome of eight years. That's not a scandal; it's the deal you signed, and it's why raising at a high price is not the unambiguous good the announcements suggest.

Which brings me to the thing I most want you to hear.

A valuation is a promise, not a prize

You raised at a number you were pleased with. Understand what that number commits you to.

Your next round needs to be at a higher price. That means the metrics that justify this valuation must be comfortably exceeded within eighteen to twenty-four months, not merely reached. If you fall short, your options are a flat round, a down round, or dilutive structure — and every one of those is painful in ways that extend well beyond the cap table, because a down round resets employee option values, triggers anti-dilution provisions, and is read by the market as a verdict.

Founders who raise less at a sensible price and grow into it are consistently in a stronger position three years later than founders who raised more at a price that was really a forecast. The second group usually discovers this at the worst possible moment.

The two numbers to keep in your head

Ignore vanity metrics. There are two you should be able to state from memory at any moment.

The first is months of runway, measured honestly — including the hires you've committed to and the annual contracts renewing next quarter. The second is what one writer calls being default alive: if you never raise again and grow at your current rate, do you reach profitability before the cash runs out? Most founders have never calculated this, which is remarkable, because it's the single number determining whether your next fundraise is a negotiation or an emergency.

If you are default alive, every conversation with an investor is optional and you will get better terms. If you are default dead, everyone in the room knows it, including you, and the terms will reflect it.

About the board

You now have a board, which means you have a job you didn't have last month: managing it. Send a written update before every meeting, so the meeting is for decisions and not for information transfer. Put the bad news first and put it plainly — investors forgive problems disclosed early and remember problems disclosed late, and the second category is how founders lose their own companies. Ask for specific help rather than general advice. "Do you know a VP of Engineering who has scaled a team from twelve to sixty?" gets you something. "What do you think?" gets you forty-five minutes of pattern-matching from somebody who is on nine other boards.

Finally

The money you just raised is not revenue and it is not validation. It is a loan against a future you've now publicly described, and the clock started the day it landed.

You are also, at this moment, one of a small number of people on earth doing exactly the thing you set out to do, with the resources to do it properly. That is genuinely rare and it is worth noticing, ideally before the quarter ends and you forget to.

Take the weekend. Then look at your runway.

With admiration and slight concern, as always,

M.