Founders' Lock-in - From Investors Perspective

Founders Lock-In

Founders Lock-In – this is one of the most discussed and negotiated point in every startup investment transaction. Every time, I am negotiating a term sheet or SHAs on behalf of my investor clients, this is one point where founders have discomfort. They are not ready for lock-in themselves or they want to reduce vesting period. I have seen deals not going forward due to non-acceptance of lock-in requirements of investors which most of the time is non-negotiable. Let’s try to understand importance of lock-in from investors perspective.

Why you are not comfortable? I ask this question to founders...

Reply: I get reply saying that “my advisor / consultant says that I will not be able to do anything else or if I agree on lock-in, I will not be able to sell my shares for next few years” and so on.

Friends, when you get into entrepreneurship as a founder or co-founder, your commitment to the startup needs to be 1000%. Your total time, energy and focus has to be towards your startup. Yes, you are not supposed to do anything else except your startup. If you think of something else, investors’ money goes in risk. Whether you raise money or not, you need to be committed to your startup. As a promoter, you are not supposed to sell any shares you held in the company. So if you can't sell your shares that's absolutely fine.

Whenever founders negotiate on lock in, I feel lack of confidence and commitment from them towards startup... if they are not committed to own self how are they going to stay committed to investors?

For any investors, they invest in a startup by evaluating founders, team, business idea and opportunity founders bring on the table. They bet on founders and their vision. Founders’ commitment to the company is the most important and key factor while deciding on investment, which they will never compromise on, and therefore founders’ commitment is so important to them. Investors have their own ways and means to judge founders’ commitment, if their sixth sense creates even 1% doubt on founders’ commitment, they don’t invest.

Imagine a situation where investors have invested money and founding team is not around... what happens to the investors money?

When you agree and don't negotiate on Founders' Lock-in ...

• It gives them comfort and assurance - Lumbi rase ka goda hai... door tak jayega. (Startup success is not an overnight game. It will take few years to see multi x returns or writing off the investment amount).
• It shows your seriousness and commitment towards problem you are trying to solve.
• It encourages them to cut the cheque and get you on action quickly.

Conclusion:

It's investors right to ask for founders' lock-in. Give them that comfort. Show them your commitment (genuinely). A right investor partner can take you miles. I invite founders, investors, and other eco-system partners to share your experience and views on this topic.

Still do you need help? Feel free to reach out to me - vipulmehta@tippingpnt.com or DM me.

About Tipping Point - We are a Startup business management consultants providing transaction advisory and consulting services to Investors, VCs, Family offices, Angel Networks and Startup Founders. We engage with Startups from seed stage to series A/B/C and angels/VCs from investment to exit stage.