Most founders feel that getting the highest possible valuation is the right goal for a fundraising round and that is mostly correct. However, there are some scenarios where taking a lower valuation may make sense:
1. Bad Terms
Changes to liquidation preferences, providing warrants to certain investors or giving them more voting rights. These are the kinds of terms that tend to be problematic in future rounds and so it’s worth accepting a lower valuation to avoid them.
2. Investor Reputation
If your investor is very well known or has a large audience, this can be very helpful when it comes to hiring, distribution and raising your next round. So it might be worth the lower price. However, this also works in the other direction, as an investor with a bad reputation can hurt your chances of success.
3. Partner Relationship
If you really enjoy working with someone and you feel like they will help you a lot over the next few years, then it might be worth taking a lower price to work with your preferred partner. Having someone on your board who you don’t like, that’s tough.
4. Too High to Pass
As a founder, you want each round of fundraising to be at least 2x the valuation of the previous, usually more. But if you take an inflated valuation in your current round, it may be hard to pass that number at all for the next round, especially if there are changes in the macro market.
Best of luck out there.
Sterling Road invests in idea stage and pre-seed B2B startups based in the US, Canada and UK.
