The smartest deal is sometimes the one you walk away from: David Richards

In the late 90s I took venture capital into a young company. The cheque was welcome. The terms were not.

What followed was the slow loss of the thing founders least expect to surrender: not money but control. Management was installed over the founders’ objections. Deals we had carefully built were allowed to collapse. Partners we had spent years cultivating were alienated. There was no dramatic boardroom coup. It happened gradually, politely, under our noses, until the company was run by people who had not built it.

Ravikant’s deeper point is the one that matters. A contract is two parties agreeing to constrain their own futures in order to build something together. You surrender the other paths you might have taken. That can be a magnificent trade. It can also be a cage, because optionality, the freedom to choose differently later, is among the most valuable things a founder owns, and most sign it away without noticing the price.

To be specific, then. Equity is not control. Founders comfort themselves with percentages and assume the company is theirs to run. They are wrong. The board hires and fires the chief executive, and if you do not control the board you do not control your company, whatever the share register says. Be ruthless about the so-called independent seat. A director chosen by your investors is not independent. It is a second investor in disguise.

Then there are the veto rights bolted onto investor shares. Some are reasonable. But watch the ones that creep down from the boardroom into the building, demanding sign-off on hiring, partnerships, ordinary spending. That is how partners are alienated and deals are lost.

Investors are entitled to govern. They are not entitled to run the place. Settle the question of time before you sign. A fund has a clock. If it needs an exit in five years and you mean to build for fifteen, you are not partners. You are a collision waiting to happen.

None of this is an argument against venture capital, which has built remarkable companies. It is an argument for clear eyes. An investor is not your friend, however warm the lunch. An investor is a fiduciary, legally bound to maximise returns for other people’s money. That is honourable work. It is not the same as caring about your company, and one day those interests part. A good set of terms is merely the peace treaty negotiated while everyone is still smiling.

This matters here more than most places. The North is at last building companies of real ambition, and founders in Leeds, Sheffield and Manchester are offered capital unavailable a decade ago. Gratitude is a fine instinct and a ruinous negotiating position. The founder, so relieved to be funded, signs anything, which is the one most likely to lose what he built.

Compromise, Ravikant says, is the enemy of building a great business, and deep down you always know when you are being forced. He is right.

The story has an ending. The founders left and started again, the same people with the same idea, this time with no venture capital at all. Within twelve months the new company was bought by a Nasdaq-listed business. The wrong capital cost us one company. The absence of it built a better one in a year.

David Richards MBE is managing partner of Yorkshire AI Labs