During a fundraising process, don't minimize friction/tension between founders & investors. On the contrary, seek some!

When founders and investors discuss an early-stage fundraising together (from digging into the business to negotiating a termsheet), their natural tendency is to avoid potential sources of tension to "secure/derisk" the deal. Which seems very sound and legitimate! But, counterintuitively, it typically makes the deal more risky in the long run! Let me explain why.

I'm convinced that it's actually a "must" for both founders and investors to experience moments of "friction/tension" together in the course of their discussions, before committing to a long-term relationship (and being on a captable together is a hell of a long-term commitment!).

In my experience, these moments are indeed extremely healthy & informative: seeing how people react to stress, tension or bad news is critical to assess the behavior, mindset & values of people. You learn so much about who people truly are in those moments!

And the alignment & quality of people is a key success factor in the long run for both founders (to select the best investors for them) and investors (to make the right investments for them), to prevent avoidable regrets down the road. This is a great example of "short-term pain for long-term gain".

Especially when a company is extremely early (pre-seed & seed stages), with little to no achievements beyond a group of talented individuals sharing a vision.

To the point that if these moments of tension/stress don't happen organically during the discussions, founders and investors alike should probably seek a way to make them happen before making an irreversible decision ?? (e.g. by focusing on topics where there are some disagreement & digging into them).

In the past few months, we've seen first hand several examples of fundraising behaviors providing critical insights into people:

• Founders handling tough fundraising discussions/negotiations in a very impressive & professional way, making investors further bullish on backing them (VCs especially love to hunt for “weak signals” in the behavior and attitude of founders ??);
• Conversely, founders becoming even more keen to work with their lead investors based on how the negotiations were handled (concessions, advise, fairness, attitude, etc);
• Many investors being very nice, understanding & constructive when they ultimately didn't get an allocation in a oversubscribed deal (making founders sometimes almost regret their choice);
• On the contrary, a few investors becoming angry, arrogant or close to nasty in the face of rejection (further comforting founders in their decision);
• Founders focused on creating strong momentum across a large range of investors, with questionable trustworthiness & relationship building, and a transactional mindset centered on maximizing terms;
• An existing business angel in a company being very reluctant to sign the docs for a new fundraising (to express a wrongful frustration, negotiate some last minute favors, and also by lack of professionalism/availability).

You'd rather figure this all out before making the decision to share a captable together, not after! Especially for founders, who often underestimate imho the pain/harm that a "bad" investor can cause to them & their company.

Thankfully (!!), those moments of "tension" between founders and investors can occur quite naturally during a fundraising process since, by design, there is typically some misalignment of interests on some key deal parameters (valuation, terms, syndication & allocation of capital to different investors, governance, etc).

But, as mentioned earlier, the natural tendency is often to lean towards minimizing these moments, which lead to some bad practices imho (but I'm sure not everyone would agree), like:

1. Not discussing divisive/tense business issues/stakes before making a mutual decision (that being said, on founders' end, if you don't have the luxury of choice for your investors, it makes sense!);
2. Overly short & simplified termsheets from VCs; easier to digest & negotiate, but ultimately meaning that some discussions on key terms are deferred to after founders having signed it, meaning (i) less leverage for founders to negotiate those terms, and (ii) hard for both parties to change their mind if they don't like the behavior of the other afterwards in the potentially tough conversations;
3. Selecting smaller investors / angels solely based on a perceived/claimed value add, or a brand name, without further assessing their relevancy, commitment, and, most importantly, non-toxicity.

So... as tempting as it might be, don't minimize friction/tension during a fundraising process, but on the contrary, seek some! ;)