Milestone payments

That hiring post of Frank Demmler’s drifts into some discussion about milestone-based funding. An entrepreneur agrees to funding terms that in order to get the next round, certain milestones must be met. Hire a VP of sales by Q3. Land 40 advertisers by December 15th.

Frank says…

In the beginning of my career working with early stage businesses, I believed in milestones and tying investments to their achievement. Conventional wisdom was (is?) that milestones help to keep the management of early stage ventures focused.

That assumes that the milestones agreed to at the closing remain the company’s priorities.

In my experience, though, that’s rarely the case.

Things change. Priorities shift. In some cases, strict adherence to the milestones may hurt the company. The conflict between the specifics of the milestones and the company’s needs are often difficult to resolve.

If you’re a first-time entrepreneur, all you know is that getting the next round of funding depends on hitting the milestones. The fact that things have changed is troubling, but you can’t tell your investor that you were wrong (even if the changes had absolutely nothing to do with anything you said or did). You fear that if you try to change the milestones, it will be seen as a sign of weakness. Instead of admitting and addressing the important issues, you play ostrich and forge ahead with meeting the milestones.

Twice I’ve agreed to milestones and been burned. The priorities did indeed change and we moved along with the changes. We shifted our efforts to meet the new realities of the business, but when it came time to collect the money, we had some problems. The milestones hadn’t been met. The contracts all pointed to hitting milestones.

We eventually worked it out, but it was a tense time and caused a lot of distrust between the parties. In one case, it nearly ruined the business.