Fundraising · Venture capital

Should I provide incentives for investors to invest higher amounts via a tiered discount rate?

Sean Greene CEO & Founder, Bambino

January 13th, 2016

I'm currently raising money using the SAFE mechanism developed by Y Combinator. It's been going well, but I have a potential investor that has posed an interesting question. He has asked for an increased discount rate for investing over a certain level. In other words, using made up numbers, let's say my minimum investment threshold is $5k. For that, I'm offering a discount of say 10% applied against a future equity round. The investor in question has offered to invest $25k, but wants a discount rate of 12%. Should I do it, or does that muddy up anything in the future?
As a founder, you’re always in fundraising mode (whether active or passive). In this course, we’ll teach you how to successfully raise follow-on capital, establish a valuation for your company, build an investor pipeline for your next round, and more.

Jessica Alter Entrepreneur & Advisor

January 13th, 2016

I've done it but not for a certain amount, only for investors who get in early.  In other words, after you raise first $xooK the discount rate goes up. Helps create urgency and since no one likes to be the first check it rewards them for that.

Peter Weiss President at American Outlook, Inc.

January 13th, 2016

First, you're dealing in very small numbers.  I'd never change terms for a $25,000 investment.  

Second, if you are offering a tiered investment you need to disclose that to all investors.  If you introduce one later on you have changed the terms of the offering and need the consent of all prior investors (and need to disclose it to all later investors in the round).  If anyone doesn't consent you can't move forward or you need to give them their money back.  This is securities offering 101.


Peter Weiss President at American Outlook, Inc.

January 13th, 2016

Complexity = trouble.

Find someone who understands finance, investors and capital structure.  Listen carefully.  If they've been doing if for a long time assume they know more than you do even if you don't like their advice.

I always test the pitch and the offering on friendly but critical acquaintances.  If we get pushback we adjust the terms.  Once the terms are set if someone asks for adjustments there are only two good answers:  (1) No, we've tested what we're asking and believe it's reasonable and appropriate to the market or (2) How much are you willing to invest?  If the answer to number 2 is not a very big slice of the total raise see answer number 1.  

As an investor, when a company raising money is willing to play with their terms for relatively small amounts of capital I think one of two things:  either they haven't thought through what they're doing or they are lousy negotiators and they will not do well in front of a tough customer.  Respect yourself and your business enough to think carefully about what it's worth and how to structure an ask and respect your potential investors enough to give them a solid, reasonable, no BS offer. 

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

January 13th, 2016

Understand that there are legal consequences to issuing stock incorrectly. Don't make judgements about the investors. Money is money and the rules are the rules. There are variables that need to be considered including the size of your offering, how many states investors may live in and what exemptions  your shares are issued under.  Call your lawyer.   . 

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

January 13th, 2016

No. 

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

January 13th, 2016

This is really a question for the company's attorney.  The general answer would be no, but I can think of situations where it might be done.

Edwin Carlson CEO Bitsmart | Fintech | P2P Loan Marketplace| Financial Services | Entrepreneur | Blockchain

January 13th, 2016

I would generally agree that No is the best approach.  However, if the investor is putting in say 40% of the total round or more - then it could make sense.  I would still consult with your attorney - but as Nolan points out if you have a valid explanation that is shared with others then in principle I don't see the harm.

Peter Stone Attorney at Hopkins & Carley

January 13th, 2016

The legal analysis starts with the legal documents under which you sold the investment to the earlier investors. Do they contain "most favored nation" type restrictions? If the documents don't restrict you, did you have any pretty explicit conversations with the earlier investors in which you made promises around equal treatment compared to later investors? Surprisingly, I've seen many deals in which neither of these sources of obligation apply. Then you have to consider your disclosure/transparency obligations under securities laws. These are pretty much the boundaries of the legal analysis. No avoiding your lawyer on this, I'm afraid. But assuming you've met your disclosure obligations, legality turns on the agreements that you have with the earlier investors. Beyond legal, it becomes a matter of fairness and relationships. Perceived unfairness will ruin long-term relationships and that you cannot afford. Re-read Peter Weiss's second post for some sound advice on some of the business considerations. All this said, just about every market in the world gives better pricing for higher volume, and that's what this is. But it has to pass the smell test.

Peter Stone Attorney at Hopkins & Carley

January 13th, 2016

Yes, your exemptions have to be solid. I hope you've already had advice from your lawyer on that score. If not, do not pass Go, do not collect $200 (let alone $10,000 or $40,000) until you get legal advice!

Jor ✓ Co-Founder at Verify Investor, LLC

January 13th, 2016

If you have no prohibitions preventing you from increasing the discount rate for one investor over another, if you take into account all investors who might have a "most favored nation" clause that entitles them to equal treatment, and if you have properly disclosed that you might treat different investors differently (or give subsequent disclosure along with the right to rescind or give everyone the same deal along with the right to rescind), and you don't think there will be political ramifications from your doing so, then you could probably provide the additional discount without muddying too much in the future.  As others have indicated, it's best to check with your attorney on this.  However, as others have also pointed out, it doesn't seem to be worth doing this for a $25k investor unless they are really that important (for example, if they are $25k of a $50k round and have a strong network).