Dear SaaStr: Is It Common To Have a VC Fund a Seed Round in Milestones?
It’s not common with typical Silicon Valley investors. But outside of that? It’s a little old school, but it’s not that uncommon.
And run from a milestone-based “second check”. Because really, it’s just a one-way option for the investor.
If you had just one investor, then in a perfect world, this investor would get to dole out chunks of the initial investment and see how it goes.
The problem is twofold:
- First. there’s a tragedy of the commons. It doesn’t work with a syndicate. Will the others do it as well?
- Second, and much more importantly, these deals are almost always structured in practice really as options for the VC. They can choose to invest if milestones are met, but don’t have to. All this does is give you a false sense of confidence more money is coming. And often blocking other investors from coming in.
We’ll evolved. It’s fine to do 2 seed rounds now. Doing multiple rounds of SAFEs does this informally all the time now.
Avoid “tranches” if you possibly can. I almost never see the investor fund the second tranche. And it just creates a lot of headaches.
