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Tranches Suck


If you are lucky enough to get a term sheet your VC might recommend funding the company in several tranches. For example, your VC is willing to invest $5MM in a Series A round releasing $500K upon close and the rest in $500K installments one the company reaches certain milestones. Adam explain s, “Traunching is bad for the company. If your investors exercise the traunche(s) then it means that the company is now worth more than they’re paying you, so you’re leaving value on the table. You might want to raise a smaller round and go to the market again when your valuation is higher.”

Nivi explains further, “At best, tranches give your current investors a right to invest at yesterday’s valuation if your company is doing well. If your company is doing poorly, your investors will figure out how to get out of their obligation to invest. The tranches will probably have material adverse change clauses that allow your investors to get out of their obligation. Almost all tranches are call options for the investors, not put options for the company. If your investors back out of a second tranche, you will need to figure out how to manage the negative signal that your current investors don’t want to invest in your company, even at yesterday’s valuation. Remember the Golden Rule: “He who has the gold rules.” Get the gold while you can. If your prospective investor wants tranches, say: “Currently, we’re focused on raising this round, not the next one. Let’s negotiate the next round at the next round.”