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In past weeks, we’ve covered the legal aspects of your relationship with your investors, mostly by focusing on what is and isn’t fair to include in a term sheet. However, the term sheet doesn’t cover the behavioral norms that you should expect from a 10-plus year relationship. At iNovia, we think about VC expectations through the lens of an SLA (service level agreement), a familiar concept to startup founders. So, what should be in your SLA with investors?
The investor will respect the founders’ time
This is one of the most basic expectations, but will impact every touchpoint you have with your investor. You should expect your investors to come to board meetings prepared, having read the deck and absorbed the information (make sure you give them enough time to do this!).
You should also expect them to respond to your communications, on your terms, within 24 hours. A leading indicator that they’ll perform on this dimension is how they treated you during the investment process. If they closed the investment and performed diligence within a reasonable time frame (based on cheque size, industry complexity, et cetera), it’s safe to assume they’ll continue to value your time.
The investor will be upfront about competitors in the portfolio
Investors rarely invest in competitive opportunities, so you’re unlikely to join a portfolio with a competitor or see your investor invest in a competitor after they’ve invested in your round.
You do not have a right to follow-on funding from your investors. However, you should expect their support in those follow-on rounds.
This doesn’t always hold – some firms make competitive bets across different funds, or have a minimum cheque threshold for the anti-competition rule to apply. However, sometimes a competitive dynamic emerges despite their best intentions – a portfolio company is acquired by your competitor or a portfolio company pivots and the new strategy competes with yours.
This is largely out of your investor’s control, but you should expect them to be candid about this and work with you to develop a strategy of maintaining confidentiality to your comfort.
The investor will give you access to their resources
During the diligence process and after an initial investment, your investors are typically generous with their resources as they want you to succeed (and want to leave a good impression).
However, throughout the entirety of your relationship, you should expect them to introduce you to their LPs or customer contacts, support you with recruiting, share access to their internal operations team (to the extent they’re focused on growth, corporate development, etc.)
You do not have a right to follow-on funding from your investors. However, you should expect their support in those follow-on rounds. This won’t necessarily be with capital, but they shouldn’t badmouth you to other investors or try to interfere with the financing.
The investor will demonstrate maturity by making tough decisions with integrity
Your investor might make decisions that make you unhappy – they might not choose to follow on in subsequent funding rounds, they might identify gaps in the leadership team and encourage you to hire an executive you don’t think you need, or they might not agree with your desire for founder liquidity.
You don’t have a right to any of these things – but you do have a right to have adult conversations about them and gain transparency into your investor’s decisions.
The investor will maintain discretion and confidentiality
Founders should have a reasonable expectation that their investors don’t share company information. Some information will need to be shared with LPs as investors have a reporting responsibility, but this is typically limited to financial data and backwards looking context.
Your investor will share information with the rest of their fund, but this is typically limited to updates on company performance and hiring. If you tell your board member about a personal issue that’s impacting your job, you can expect them not to share that with their firm. Don’t tolerate an investor who shares privileged information outside their firm!
The founders are entitled to continuity within the portfolio
You’ve built a relationship with one person and have a right to work with them throughout the duration of the investment. That individual might introduce an analyst or associate to the relationship, which is not a bad thing! They have much more time, and are sometimes hungrier than the partners. If you treat them well, they’re a second person in your corner and in the worst case scenario, you can feel good about training the next generation of investors.
Even if the partner who led your investment leaves the firm, VCs will sometimes keep “board partner” roles where the individual maintains their board seat in recognition of the relationship they have with the founder (and the carry they have in the fund).
Zero tolerance for bad behaviour
Legally, the investor-founder relationship isn’t covered by employment law, which creates loopholes in terms of enforcement of harassment. It should go without saying, but judging by the past year, it should be said a bit more – no physical, emotional, or sexual harassment!
Christian’s take:
As a founder, you understand all too well how hard it is to run a startup. Having engaged and helpful investors is one critical element that will help lead to success. While investors currently don’t provide service legal agreements, maybe we should. Too much of where we add value is unwritten and thus, often delivered in varying amounts to different companies.
Without a doubt, bad behaviour should not be tolerated. This goes beyond the completely egregious examples of harassment. I’ve seen bullying, grandstanding, and belittling. None of this behaviour should be tolerated by founders. If the offending party is a partner or below, report the behaviour to one of the managing partners. Unfortunately, there aren’t good systems in place today to escalate these issues if the offending party is a managing partner. This is something we have to work on as an industry.
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Photo via Burst