Why later stage VCs buyout early investors

There is constant chatter in the startup/VC ecosystem on the practice of later stage (Series B or later) investors buying out ‘early’ investors (Seed, Angels, etc).

Later stage investors come in with larger rounds of financing ($10m or more) with often eclipses the investments of earlier entities which often range from $10k and up. For good or for bad, these early investors have influence on the startup’s future direction from voting rights, vetoes and more. This often acts as an irritant to later-stage investors that need a direct decision making process between themselves and founders on all strategic matters. Therefore, the need to ‘clean out the cap table’ and purchase shares from all early investors.

Of course, this practice violates a basic tenet of capital efficiency – that is the need for each Rupee to go towards growing operations – marketing, sales, hiring, office space and more. Buying out early investors ends up being a ‘necessary evil’ – kinda similar to paying investment banker fees. In other words – frown on it – and then grudgingly agree.

Like most things in the VC world, there is not much publicly available data and information is largely anecdotal. My take is that there is an increasing number of such deals happening at ticket sizes > $10m, where the existing cap tables is fairly crowded and the existing investor base is unusually vocal (thereby creating significant nuisance value).



About Devang

Angel Investor, Sports Enthusiast, Voracious Reader, Chess aficionado, and more...
This entry was posted in Funding lifecycle, Series B and tagged . Bookmark the permalink.

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