A 21 year old Stanford grad recently raised $25 million before even launching his payments company.  It was said to be the largest seed round of funding in Silicon Valley history.

This, for him and his other founders, was a terrible mistake. Before I go into the reasons why let’s talk in broader strokes about what the first early years of growth of a company should be.

Initially, you have an idea (a hypothesis) and you sketch it out on a napkin.  You then determine who else you need on your team – go recruit them – and establish the founding group of 3 or 4 people.  After that, you build a prototype as quick as possible and you get it into customers or users hands.  Once released, you observe the usage, gauge what’s working and what’s not, keep what’s working and toss what’s not and iterate as quick as possible.

All the while, you keep your team small, lean and working efficiently running like hell and trying to keep the wheels on the car.

All this could take anywhere between 6 months and 2 years – maybe longer – but it’s the most important time in the company’s history because this is where you are testing things to find the “secret sauce” and how repeatable it can be.  Before leaving this phase you should experience a massive uptick in growth, proving you actually have something worth investing in.  That, or the reality is you just have an idea but you don’t have anything people will use/buy yet.

I explain this because it is not how Clinkle’s, the startup I mention above, story unfolds.  From my understanding – and I don’t have all the facts for sure – is they have been working on this concept for some capacity for almost 2 years, already have roughly 50 employees and just raised $25 million all the while with no product launched.

The crazy thing is the list of investors is star-studded; they are A list investors who have backed many other successful technology companies.  I don’t blame Clinkle for being naive and short sighted when you have these types of people begging you to take their money.

But the reality is they just signed their companies life over to the devil.

The devil?  Yes, they have entered startup hell.

At this point, some simple math and logic can explain. By taking $25 million this early, they just lost all leverage with investors.  They also just put the horse before the cart. When raising money at an early stage, a startup generally gives away anywhere between 20 – 40% of their company.  So, if they raised $25 million and gave away 25% of the company, it’s fair to say this unlaunched company is valued at $100 million post money.

You read that right – $100 million valuation for a startup that hasn’t even put out a product.  This is absurd and it’s a terrible situation for any founder to put themselves in.

You might say that’s too high.  Okay, so maybe it is but given this much invested this early, I have a hard time seeing investors with less than that amount so it’s fair to see the investors share 20% on the low end.

Also, it now raises the exit question.  Given such high investment it now means Clinkle will have to exit for north of $100 million to simply not lose any investor money.  More likely, a $200 or $300m exit would be needed for VC economics to work.  This is not an easy task at all.  A nice $50 million acquisition will now be seen as utter failure.  You don’t think investors wouldn’t block an acquisition offer to sell at a decent price, because it would be bad for their return?

Another thing to consider, down rounds.  Raising this much money and allowing for at least some sort of valuation on the company (even if it was completed using convertible notes there still is an implied valuation) now sets the bar for future fundraising.  Basically, Clinkle just did the equivalent of making their first skydive the Felix Baumgardner Skydive from space.  It’s a bit difficult to repeat this feat.

More to the point, if Clinkle stumbles at all with during their first $25 million and they don’t have out of this world user adoption, they will be facing a down round of funding – meaning they will need to raise another round of funding at a lower company valuation than the previous raise.  The result strips out founders ownership and gravely demotivates the entire team.

Look, I have no idea if Clinkle will be successful or not, they might end up the new Paypal or Square for all we know.  But make no mistake, these are very important founder lessons for a few reasons.

Founders’ best asset is time, in the sense that if they can buy themselves more time to figure stuff out they generally do figure it out.  They key is to figure it out while still retaining the highest percentage of your company possible.  But when you raise $25 million right out of the gate you are not afforded that luxury.  Investors will rake you over the coals if you slip up and not perform.  The problem is Clinkle has no idea how the market will adapt and adopt their product.  That’s what raising a smaller seed round over the first few years and growing naturally affords.

Secondly, the press will kill you if you come out of the gate doing something like this.  Do you want to be known as the next Color (who basically did the same thing) for the entire history of the company?  People love to find the next thing or person to pick on, and as a founder it’s not smart to bring this unwanted attention to your already stressful life.

The lesson here is – mo money, mo problems.  If you raise money at all you should raise enough for money for what you need for the next 12-18 months and be strong enough to say no to investors who don’t have your best interests in mind.

That, or sign your company over to the devil.