By Chris Yeh  

We’re in a buyer’s market for capital these days, which means that every day I read headlines about how Startup X raised Y million at a Z billion-dollar valuation from Funds A, B, and Tiger Global.

It’s very easy for first-time entrepreneurs to read these headlines and think that the most important number is Z, the valuation. It’s human nature to compare numbers, and what number could matter more than getting the biggest possible Z?

I’ve struggled to explain why valuation isn’t nearly as important as other factors, including but not limited to the various other terms in the term sheet, the entrepreneur’s relationship to the investing partner making the offer, and the broader context of the venture capital firm’s reputation and historical patterns.

These are nuanced points, and when I make them, many entrepreneurs nod their heads vigorously and then ignore them the instant I drop off the Zoom.

So I’ve come up with a new analogy that I think will convey my point more sharply:

“When you’re hiring a C-level executive, do you always pick the candidate who offers to work for the least?”

Good entrepreneurs instinctively understand the value of hiring the best people, even if those people want more equity than lesser candidates. The key measure is the value they bring, not the number in their offer letter.

Venture capitalists are a lot like key employees. A good one can help you succeed beyond your wildest dreams. A bad one can destroy your company. Except that you can’t fire your investors, which makes it even more important to choose wisely.

Choosing a term sheet solely based on the headline valuation is look choosing your employees based on whoever is willing to work for the least. Maybe there’s a reason they’re so cheap!

It’s not a perfect analogy, since the delta in term sheet valuation can be a lot more significant than the options package required for a key hire, even at the C-level. But the fact remains that your first concern should be the value the investor/employee brings to the table, not the number in the offer letter/term sheet.

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