We met this VC, who started mentoring us without asking, when we were an early stage startup. He helped us right from business planning till pitching, now he is asking for 50% stake, and earlier, it was decided to be just 30%. In the meantime, we met a new VC who is ready to invest the same amount for just 15%. How do we reject the first VC? I don't want spoil our relationship, as it is of more than a year. Please, someone help me. Are we doing right by leaving first VC?

Answer by Jason M. Lemkin, Managing Director @ Storm Ventures. Co-founder/CEO at EchoSign (acq'd by Adobe), NanoGram Devices, on Quora,

Let me step back a minute and use myself as a case-study. I have one spoiled VC relationship--all the rest I consider pretty strong.

Here's what happened to me:

  • I told this Top Tier VC what the valuation was, my Ask. I was 100% clear on this in every way, shape, and form.
  • The First VC nevertheless wrote me a term sheet at a lower valuation.
  • The First VC also wrote in this term sheet granting his firm 3/5 of the Board seats at Series A.
  • I didn't respond in any way, at all. The First VC then left to go vacation on Some Expensive Island.
  • The Second VC then gave me the term sheet I asked for, the asked-for valuation, and 1 Board seat.
  • Before accepting from the Second VC, I called the First VC, who was still vacationing on Some Expensive Island. I told him.
  • The First VC became outraged, and said at his Top Tier VC Firm, no one had ever not closed a signed term sheet. Ever.
  • I told him I'd never signed it (I hadn't), we'd never even discussed it--and that it wasn't what I'd asked for, and that we'd never agreed.
  • The First VC got so mad, he went to the Second VC, and insisted they not fund me.
  • Which created huge drama.

Ok so what happened? Did I do anything wrong? Was I less than transparent, ever?

No. Of course not. Not only did I sign absolutely nothing, but my ask wasn't met. And I was completely, 100% transparent in the process. To my detriment, in fact, such that the First VC went and tried to force the Second VC not to do the deal.

The learning: you'll spoil a VC relationship when they use internal political capital to get you a deal that you don't take.

So just make sure VCs know exactly where they stand. Be 100% crystal clear, in writing, in email.

>> Don't let them VCs think they have a deal if they don't. Even completely inadvertently.

That spoils the relationship.

...

Answer by Michael Wolfe, On startup #4 and counting, on Quora,

Tell him:

  • You have really enjoyed getting to know him and appreciate the early show of support from him.
  • You are going to start fundraising in earnest now, and you will be talking to several firms, but you want to keep him in the mix given the help he has given you.
  • (A bit later). You are starting to get offers and will make a decision by date X.
  • (A bit later). Your current best offer from other investors is an $X investment at a $Y valuation with Z terms. Given that, please let us know if you are would still like to pursue this.
  • If he says no, you have your answer.
  • If he says yes, then you have two investors bidding against each other, which is what you want. It would be better if you had even more.

More questions on Quora:

Published on: Aug 29, 2014