The investor-founder relationship can be a tricky balance to strike. The founder wants funding with fair terms, the investor wants returns within a fair amount of time. At times, this balance has been off, with VCs wanting to capture quick wins at any cost. But being more “founder-friendly” is a growing trend.
“There was a time where investment was too funder-friendly, but it’s now moving towards a better balance between funder rights and founder rights,” says Jamie Roberts, chief investment officer at YFM Equity Partners, a UK-based investment firm.
But Roberts argues that being founder-friendly shouldn’t just be a trend — YFM Equity Partners has taken this approach for 40 years.
Here’s what being founder-friendly means and why it’s important beyond the trend cycle.
Building trust from day one
A positive performance is always the aim for founders, but sometimes things just don’t work out. Roberts says in these moments, some investors punish founders through terms that mean they lose equity or board seats for low performance.
We support founders creating their businesses — but we’re not going to come in and do it for you.
“For me, it’s about being honest about how we’re all going to behave when we hit those bumps in the road, and what we’ve all said to each other about how we’re going to behave and what we’re going to do,” he explains.
“We want to go into a relationship with a founder and management team that says they will do their absolute best to use their commercial judgement to deliver the outcome that we’ve given them the money for. As long as they are doing all of those things, why should they be overly penalised if it doesn’t go well?”
For Dan Secretan, COO at Xapien, an AI-powered dynamic due diligence scaleup and YFM portfolio company based in London, being founder-friendly includes fair equity terms. He says historically, these terms have skewed much more towards the investor’s favour, but times are changing — and this applies to control and governance too.
“Founder friendly investors are where the funder is actually backing the team,” says Secretan. “In most investments, they are, but sometimes they try to back seat drive. They say a founder has to sign off new hires with them, or the budget needs to be signed off when spending a certain amount of money — these are things that get in the way.”
For Paul Chorley, CEO at AutomatePro, a GenAI platform and YFM portfolio company based in London, a founder-friendly investor means three things: collaboration, mutual respect and trust.
When it came to finding investors for AutomatePro, Chorley wanted an investor that felt like an extension of the AutomatePro team, as opposed to an organisation that sat outside the company and just provided capital.
“High levels of trust lead to open and transparent dialogue — founders can trust that they can share when things are not going well or where there are risks,” he says. “Rather than trying to avoid having difficult conversations, founders feel like they can problem-solve together with the investor.”
Chorley adds that fair and realistic expectations about the performance of the business mean that founders can feel supported rather than criticised or controlled by the investor
“We support founders creating their businesses – but we’re not going to come in and do it for you. It’s all about being aligned with the founder,” says Roberts, adding that this means founders remain incentivised to grow the business too.
Mutual benefits
Another benefit of a founder-friendly approach to investment is protecting dilutions for the founders. Secretan says there are many different ways of doing this, but most investors want to make sure that the founders are cut in enough to the business and they’ve got the right level of equity ownership. He believes that founder-friendly firms are now very comfortable saying that some options must be issued.
We need founders to be ambassadors for us.
“When you add options to the pot, you dilute your existing investors and the new investor often doesn’t get diluted,” says Secretan. “With YFM, they said they’d take half the pain, which meant that they would issue half the options before the round was done, and then half the options after YFM had invested. That was founder-friendly, but it was also existing investor-friendly too.”
Roberts says YFM’s number one priority is ultimately to create returns for its investors – but doing so in the right way. He says the biggest benefit of a founder-friendly approach is how it generates the best returns as well as the best behaviours.
“People show you evidence of what they really think in the way they behave,” says Roberts. “If we’re really open and transparent with founders, we find that makes them behave back to us in the same way. When we put out an offer, and it’s a long offer letter — it’s not a two-page term sheet, it’s a 20-page heads of terms because we want founders to see everything.”
Roberts also credits YFM’s founder-friendly approach to helping them earn more business through word-of-mouth.
“We need founders to be ambassadors for us,” he says. “My job is to deploy money into great businesses — and great businesses have choices. If we find something we want to invest in, we want them to go and take references from the people we’re already invested in.
“We really want them to be saying good things about us, because if they’re not, why would anybody take our money?”
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