I’m going to tell you something that might sound crazy. After being involved in over 200 angel investments and two of my own exits, I’ve started to see patterns. The kind of patterns you only notice after you’ve seen enough deals go sideways, and enough founders either burn out or make it to the promised land.
Recently, I was reviewing our last eight investments. These were all secondary deals, where we bought shares from existing shareholders through a Special Purpose Vehicle, or SPV. As I was going through the paperwork, a nagging feeling hit me. I pulled up the performance data, and there it was, clear as day. A shocking correlation between the legal language in the SPV and the company's subsequent performance.
It wasn't the valuation, the team, or the market. It was a single clause, buried deep in the legal jargon, that was the most reliable predictor of which companies would go on to thrive and which would stagnate. The founders who fought for this clause were the ones who won. The ones who didn’t, or didn’t know to, were the ones who ended up struggling.
Data doesn't lie. And what our data showed was so compelling that I knew I had to share it. So, are you paying attention to the right things in your fundraising?
What are SPVs and Why Do They Matter?
For those of you who aren't deep in the venture capital world, let's quickly break down what an SPV is. A Special Purpose Vehicle is essentially a legal entity created for a single, specific purpose. In the context of venture capital, it's often used to pool money from multiple investors to invest in a single company. This is especially common in secondary transactions, where early employees or investors want to sell some of their shares.
Instead of having dozens of new investors on the company’s cap table, which can be a nightmare to manage, the company only has to deal with one new entity: the SPV. It’s cleaner, simpler, and more efficient for everyone involved.
But here's the thing about SPVs: they come with their own set of legal agreements. And the details of those agreements can have a huge impact on the company, the founders, and the investors. Which brings me back to my analysis of those eight deals.
The Deep Dive: 8 Deals, 1 Surprising Pattern
I’m a data guy at heart. I believe that the answers are always in the numbers, you just have to know how to look for them. So, I pulled together all the data from our last eight secondary investments. These were all companies at a similar stage, with similar valuations. On the surface, they all looked like great investments.
But when I looked at their performance over the following 12-18 months, the picture was very different. Four of the companies had exceeded all expectations. Their growth was explosive. The other four had… well, let’s just say they were treading water.
I dug deeper. I looked at everything: the founding team’s background, the product, the market size, the competitive landscape. Nothing seemed to explain the massive difference in performance. It was driving me crazy.
Then, I started looking at the SPV agreements. I’m not a lawyer, but I’ve seen enough of these documents to know what to look for. And that’s when I saw it. The four “winner” companies all had a specific clause in their SPV agreements. The four “loser” companies didn’t.
The Billion-Dollar Clause: Right of First Refusal and Pro-Rata Rights
So what was this magic clause? It was a combination of two things: a founder-friendly Right of First Refusal (ROFR) and explicitly retained pro-rata rights for the founders on any future fundraising, even if they sell a portion of their shares in the secondary deal.
Let me break that down.
Right of First Refusal (ROFR): This is a standard clause in most VC deals. It gives the company and/or its existing investors the right to buy shares from a selling shareholder before they can be sold to an outsider. The key here is the “founder-friendly” part. In the winning deals, the founders had a personal ROFR, or the company (which they controlled) had the primary ROFR. This meant they had control over who was buying their company’s shares.
Pro-Rata Rights: These rights give an investor the ability to maintain their ownership percentage in a company by investing in future funding rounds. When a founder sells some of their shares in a secondary, they often lose their pro-rata rights. The winning founders, however, had negotiated to keep their pro-rata rights, even after selling some of their stake.
Here’s the exact language we found in one of the winning deals:
“Notwithstanding any other provision of this Agreement, the Selling Stockholder (the ‘Founder’) shall retain their full pro-rata rights to participate in any future financing of the Company, as if the shares sold hereunder were still held by the Founder. Furthermore, the Founder shall have a personal Right of First Refusal on any future sales of the Company’s stock, secondary to the Company’s own Right of First Refusal.”
It might not look like much, but I’m telling you, this clause is a game-changer.
Why This Clause is a Predictor of Success
So why is this seemingly small legal detail so important? It all comes down to founder psychology and long-term incentives.
When a founder negotiates to keep their pro-rata rights, it sends a powerful signal. It says, “I’m selling a small portion of my shares now to de-risk my personal financial situation, but I am still all-in on the future of this company. I believe in our long-term vision so much that I want to be able to invest more in the future.”
This is a massive confidence boost for new investors. It shows that the founder isn’t just looking for a quick exit. They are in it for the long haul.
And the ROFR clause? That’s about control. Founders who have a say in who buys their company’s shares are founders who are thinking strategically about their cap table. They aren’t just taking any money they can get. They are curating their investor base, bringing on people who can add real value.
Think about it. If you’re a founder, do you want some random person who you’ve never met to suddenly own a piece of your company? Or do you want to have the ability to bring on strategic investors who can help you grow?
Case Studies: The Winner and the Loser
Let me give you two (anonymous) examples from our analysis.
The Winner: A fintech company that was growing fast. The founder was a second-time entrepreneur who had been through the wringer before. When he did a secondary deal, he was adamant about keeping his pro-rata rights and having a personal ROFR. The investors were a little hesitant at first, but he held his ground. He explained that he wanted to be able to continue to invest in the company and that he wanted to control who was on his cap table. The investors eventually agreed.
Fast forward 18 months. The company is now a unicorn. The founder has not only led the company to incredible success, but he has also used his pro-rata rights to increase his ownership stake. He’s more motivated than ever, and the company is on a rocket ship trajectory.
The Loser: A B2B SaaS company with a great product. The founders were brilliant, but they were first-time entrepreneurs. They did a secondary deal to get some personal liquidity, but they didn’t know to negotiate for their pro-rata rights or a personal ROFR. They just took the standard deal that was offered to them.
Over the next year, the company started to drift. The founders seemed less engaged. They were still working hard, but the fire in their eyes was gone. They had taken some money off the table, and now they were just employees of their own company. They had lost their sense of ownership. The company is still around, but it’s not the breakout success that everyone thought it would be.
My Advice to Founders: Fight for This Clause
If you are a founder and you are considering a secondary transaction, I have one piece of advice for you: fight for this clause.
Do not let anyone tell you that it’s not standard. Do not let anyone tell you that it’s not important. It is.
Here’s what you do:
- Get a good lawyer. Not just any lawyer, but a lawyer who specializes in venture capital deals. They will know how to negotiate this clause for you.
- Be prepared to walk away. If an investor is not willing to give you this clause, it’s a red flag. It shows that they are not aligned with your long-term vision.
- Explain your reasoning. Don’t just demand the clause. Explain why you want it. Tell the investors that you are in it for the long haul and that you want to be able to continue to invest in the company.
Here’s some sample language you can use as a starting point:
“As a founder, I am deeply committed to the long-term success of this company. While I am selling a small portion of my shares for personal financial planning, I want to retain the ability to participate in the company’s future growth. Therefore, I would like to include a clause that preserves my pro-rata rights and gives me a personal Right of First Refusal on any future share sales.”
The Bottom Line
Look, I know that fundraising is hard. It’s a grueling process, and it’s easy to get lost in the details. But some details are more important than others. And this is one of them.
The next time you are negotiating a term sheet, don’t just focus on the valuation. Pay attention to the clauses that will affect your long-term incentives and your ability to control your own destiny. Because at the end of the day, that’s what separates the winners from the losers.
Frequently Asked Questions
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
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.
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.