"When capital becomes more expensive, how do you evaluate and decide on the best financing option for your company?”

Asks Shangda Xu, Alex Immerman, and David George from a16z.

There is (or at least there should be) a VC industry saying: “Give me your headline price, and I’ll give you a deal.” The idea here is that founders tend to think in terms of valuation and dilution, while an investor might be more interested in knowing their minimum guaranteed return on the downside and the size of potential returns on the upside.

In a normal market, investors sometimes, but less frequently, use contract terms—such as liquidation preferences that are greater than 1x, warrants, and anti-dilution clauses—to invest at the valuation a founder wants, but with terms that make sense for the investor. In a down market, when capital is more expensive and valuations are down, these structured deals—that is, a deal with non-standard clauses—become more common, as founders look for ways to avoid raising money at a lower price per share than your previous round (i.e., a down round). "