Note: The full article on this topic first appeared on Inc. You can read it here.

It is truly an exciting time. The venture capital landscape is changing more now than in the entire history of VC. For early stage VCs, the investing space is much more competitive today, which is good for the startup ecosystem. This means that for entrepreneurs, there’s never been a better time to start something.

I believe that the VCs who see themselves as coaches of a founder’s creative talent will remain valuable in the long-term. However, VCs who try to control companies and rely on a numbers game may soon find themselves replaced by other sources of investing that allow founders to retain more ownership of their company.

Here are five things VCs need to know in the changing industry landscape.

1. There Are Two Kinds of VCs

I’ve encountered two main types of venture capitalists in my more than 20 years of experience:

1. VCs who think that entrepreneurs work for them.
2. VCs who know that they work for the entrepreneur.

At Avalon Ventures, we believe in the latter. We let founding teams lead their company. Taking a “hands in, eyes in” approach, our role is that of coach and mentor, engaging only at strategic points.

2.  People Are The Most Important Ingredient

We focus on the quality of the people in which we are investing over the product itself. We know that truly great entrepreneurs are hard to find since not everyone is cut out for the entrepreneurial journey.

We need three things to be true before investing in our founders:

• Have trust in the founder
• Understand where their idea fits into their overall life story
• Know that they are in it for the long haul

The same is true for those with whom we co-invest. We’ve co-invested with over 80 different firms and place a tremendous amount of value on the relationships we’ve created, many going on 25 years now. We need to know they’re not going to run at the first sight of blood.

3. Your Reputation Matters More Than Ever

Whether you’re a first time entrepreneur or a veteran VC, reputations are earned daily. Especially in today’s interconnected world, your reputation matters more than ever. Every interaction you have is an opportunity to build up or tear down your integrity. Yet people of integrity are rare because it is easy to compromise values or take shortcuts to get ahead – which can be costly. If you are true to who you are, especially when there are tough decisions to be made, your reputation will be well served.

4. Base Executive Compensation On Company Needs

There exists a delicate balance between giving executives incentives to make a company succeed and ensuring that leadership feels valued in the present. Often times, requiring founders to re-vest ownership is effective for the long-term health of both the founder and the company. It solidifies the fact that both parties are continually invested in the company for the long haul.

The best approach is to do what will allow the company to grow to the next stage and to recognize that those needs change over time. This is all to say that it’s best to spend more time on growth metrics and less time on financial metrics to determine compensation, especially in the early stages.

5. Retain Covenants You Will Use, Lose the Others

Instead of overwhelming early-stage companies with options you will likely not utilize, revise traditional provisions and covenants with ones you will actually use. VCs should look to the ways they can be most productive and offer help as the company grows without making the founder feel too controlled. While many VCs stress the importance of protective provisions as standard features of venture capital agreements, entrepreneurs should be wary of VC firms that pile them on. As someone once said, “Working for an investor-backed company isn’t indentured servitude.”

Looking Ahead

With the emergence of new funding options, we don’t know what corporate governance will look like 3, 5 or 10 years from now. However, VCs who realize that their job is to coach founders to success, value relationships, are full of integrity, and cut traditional provisions to give their companies the most room possible will retain their value. At its best, this relationship comes down to entrepreneurs and their mentors, which is why it’s always better to have someone working alongside you, not above you.