In the video below from This Week in Startups, Jason Calacanis interviews Steve on a range of topics including his current investments in Tesla and SpaceX, his time working with Steve Jobs at NeXT, and the future of biotech.
Two very interesting parts of the interview are when Steve reveals that he never sells the shares of the companies he invests in (unless the company is bought by another, as in the case of when Microsoft purchased Hotmail), and that he doesn’t use lawyers when performing Series A investments. He simply reads the term sheet and trusts that the entrepreneur will reflect the clauses of the term sheet in the Shareholders’ Agreement.
Not selling shares of the companies you invest in is a great way for an investor to align their interests with those of entrepreneurs. However, if you’re investing through a fund, it requires that you be under no pressure to return capital to your LP’s. And if you’re investing your personal wealth, it requires that you have no personal liquidity requirements. I don’t know which is the case for Steve but both are great positions to be in.
Steve has two reasons for not using lawyers to make Series A investments. The first is that the investments are a small enough percentage of the total amount he invests that he doesn’t need to protect himself against the downside. The second is that, if an investor is going to be burned by an entrepreneur, it’s better to be burned when the stakes are small rather than after you’ve invested more money in the company in the future. Although this approach won’t work for small funds where investments at the Series A and earlier stages account for a majority of the fund’s investments, it may make sense for large late stage funds which allocate a small fraction of their assets to earlier stages.
You can watch the full interview with Steve below.