I’ve seen it a hundred times. A founder, beaming with pride, forwards me a term sheet for their Series A. They’re excited. They should be. But then I see the follow-on language and my stomach drops. They’re about to get taken for a ride, and they don’t even know it.
Let’s be clear: your VC is not your friend. They are your business partner. And when it comes to follow-on investing, they have a playbook designed to give them every possible advantage. I know, because I’ve used it myself as an investor in over 200 companies. But I’ve also been on the other side, as a founder who raised millions for my own startups, RemoteTeam and MovieLaLa. I’ve learned the hard way what VCs are really thinking when they talk about follow-on rounds.
They’ll tell you it’s about supporting the company. They’ll say they want to “double down” on their winners. And sometimes, that’s true. But more often than not, it’s about control, optics, and their own internal fund dynamics. They have a set of unwritten rules they play by, and if you don’t know them, you’re playing a rigged game.
The VC’s Secret Playbook
When a VC invests in your seed round, they’re not just thinking about that one check. They’re already thinking three moves ahead to the Series A, B, and C. A huge part of that is their pro-rata right—the right to invest in future rounds to maintain their ownership percentage. They will fight tooth and nail for this right, and they’ll present it as a sign of their commitment. It is. But it’s also a powerful lever.
I remember one of my early angel investments. The company was doing okay, not great. A big-name VC had led the seed round. When it came time for the Series A, the company had a decent term sheet from a new investor, but the original VC was dragging their feet on their pro-rata. They hemmed and hawed. They asked for more data. They wanted to “see how the quarter closed out.”
What were they really doing? They were sending a signal. A negative one. By not immediately committing, they were telling the new investor, “We’re not so sure about this one.” It was a power play. They were trying to spook the new firm and get a lower valuation. It almost worked. The new investor called me, worried. “Sahin, what’s going on? Why are they being so cagey?” I had to spend an hour on the phone talking them off the ledge, explaining the game being played.
This is one of the dirtiest secrets of follow-on investing: signaling risk. If your lead investor from the previous round doesn’t participate in the next one, it’s a huge red flag for new investors. It screams, “We have inside information, and we’re running for the hills!” Your existing investors know this. And they will use it to their advantage.
They also have their own portfolio construction to worry about. A typical VC fund might make 20-30 seed investments. They know most will fail. A few will be modest successes. But they need one or two to become massive, 100x returns to make the fund work. So, they reserve a significant portion of their fund—often 50% or more—for follow-on investments in the companies that look like they’re breaking out. This is where the real money is made.
This creates a bizarre set of incentives. If you’re a company that’s doing well, your existing investors will be desperate to put more money in. But if you’re a company that’s just chugging along, a “zombie” in VC parlance, they have zero interest. They’d rather let you die and reallocate that capital to one of their rising stars. They will never say this to your face, of course. They’ll give you a soft “no” couched in a lot of jargon about “fund strategy” and “market conditions.”
Your Counter-Playbook
So how do you, the founder, fight back? You have to create your own playbook. You have to understand the game and use the rules to your own advantage.
First, create a competitive process. Never, ever, go into a fundraising process with only one term sheet. That’s like going to a gunfight with a knife. You need multiple firms at the table. This is the only way to create real leverage. When VCs know they’re competing, they’re less likely to play games. They’ll be more aggressive on valuation, more flexible on terms, and they’ll move faster.
I learned this lesson the hard way with MovieLaLa. We had one lead investor who was stringing us along for weeks. The moment we got a second term sheet, everything changed. Suddenly, the first investor was ready to sign. We ended up with a valuation 30% higher than their initial offer.
Second, understand the key terms. Don’t just focus on the valuation. The headline number is ego, but the terms are the ballgame. Pay close attention to:
- Pro-rata rights: Who has them? Are they capped? Can they be transferred? You want to limit these as much as possible, especially for smaller, less helpful investors.
- Liquidation preference: Is it 1x non-participating? That’s standard. Anything more than that, and you’re getting screwed. I’ve seen 2x and 3x preferences, and it’s always a sign of a predatory investor.
- Board seats: How many seats does the new investor get? Are you maintaining control of your own board? Don’t give up control of your company for a check.
Third, know when to use your existing investors. If you have a strong inside lead who is genuinely supportive, you can use them to anchor the round. Go to them first, get them to commit to their pro-rata, and then use that commitment to build momentum with new investors. A strong signal from a respected insider can make a huge difference.
But be careful. Don’t let them set the price. The old saying is true: “The first money in sets the valuation.” If you let your existing investor lead the round and set the terms, you’re leaving money on the table. Always go out to new firms to get a market-clearing price.
The Unspoken Truth
Here’s the final, unspoken truth about follow-on investing: it’s all about momentum. VCs are momentum investors. They want to back the companies that are hot, the ones that everyone is talking about. Your job as a founder is to create that perception of momentum, even when it feels like you’re pushing a boulder uphill.
This means managing your fundraising process like a military campaign. You need a clear timeline. You need a well-rehearsed pitch. You need to have your data room in order. You need to create a sense of urgency and scarcity.
I’ve seen founders who were masters at this. They would line up all their meetings in a single week. They would hint at other term sheets, even if they were just verbal offers. They would use social proof, name-dropping other prominent angels or advisors who were in the round. It’s a bit of a game, yes. But it’s a game you have to play.
Don’t let your VC’s playbook dictate the terms of your success. Build your own. Understand their motives, create competition, and control the narrative. The future of your company depends on it. It’s not just about the money; it’s about finding the right partners who will be there for the long haul, not just when it’s easy. I’ve been lucky to have some of those, and I’ve seen the difference it makes. But I’ve also seen the alternative. Don’t be the founder who gets taken for a ride. Be the one who drives.
Frequently Asked Questions
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.