If you’re an entrepreneur raising funds and the investor is keen to put in specific targets in your shareholder agreement & link it to valuation/ investment tranches, understand 3 things before you sign:
1. Get ready to be distracted
This isn’t super founder friendly behavior and builds uncertainty on your dilution/ funds availability. It will be distraction that’ll keep from 100% focus on business even after fund closure. Question if the investor is right for you.
2. You’re inviting conflicts and deviation from core
What gets tracked gets done. The metrics in the agreement will become your topmost priority whether you think so initially or not. If you’re not sure they’re the right metrics, brace for conflicts with investors and co-founders. You might find yourself wavering from your core just to meet the targets.
3. It is irreversible
It’s very tough to roll back once you’ve signed on the dotted line, however good your relations are with the investor. If you were to pivot and those metrics are not relevant anymore, you will be in a tough spot. Sometimes it’s procedural issue at investor’s end, where no one wants to advocate deviation from a written agreement.
I speak from firsthand experience as an angel investor where the VC did this and which created a lot of trouble in the startup.
Negotiate aggressively against this.