Follow-On Decisions

How to decide whether to participate in a follow-on round, what pro-rata rights actually give you, and when the right answer is to decline.

Whether to put in more money, and when to say no

Lessons

• Would you invest in this round if you had never met the company? — A follow-on decision should be judged as a new investment at today's price and today's evidence. What you already invested is gone either way and should not decide what you do next. (9 min)
• A pro-rata right is an option to keep your share, and options are worth more on the right companies — Pro-rata rights let you invest enough in later rounds to maintain your ownership. They are valuable mainly in companies that are doing well, where access is hard to get, and costly in companies that are not. (12 min)
• If you invest everything in first cheques, you cannot back your winners — Planning reserves for follow-on investments before making initial investments protects your ability to support your best companies and to maintain ownership where it matters most. (11 min)
• Adding to winners at higher prices often beats rescuing losers at lower ones — Follow-on capital usually has a better expected result in companies with strong evidence, even at higher prices, than in struggling companies at lower prices - though the right choice always depends on the specific evidence. (11 min)
• Ask what the bridge is a bridge to — A bridge round is short-term funding to reach a milestone or a larger round. Whether it is a sign of strength or of trouble depends on what specifically it is meant to reach, and whether anyone new is willing to fund it. (11 min)
• Write the follow-on policy before the requests arrive — Deciding in advance what would earn more capital removes the pressure, relationships and urgency that distort follow-on decisions when a request is already on the table. (10 min)

All Investor Academy subjects