Estimated Time

• Reading: ~6 minutes
• Video: ~39 minutes
• Activities: to be completed prior to the next week

Insights

• If you are going to fundraise you should be a Delaware C-Corp
• Having a tight data room raises credibility with investors
• Holding board meetings, even as an early company, builds credibility down the road

• Fundraising is a full-time job and will require a lot of your time as a founder
• There are several steps to take as you prepare to fundraise and we’ll touch on a few of the main ones in this module
• Is your company a Delaware C-Corporation?
• If you are not a Delaware C-Corp that's an immediate non-starter for most venture funding
• Why a Delaware C-Corp?
• It is the corporations that most people are familiar with
• Investors are comfortable because it is what they know and they are confident in what it all entails
• Delaware law is favorable to shareholders
• The process is straight forward which is key in what can be a lengthy process
• There is less liability with a Delaware C-Corp
• There are some tax benefits
• Do you have a clean cap table?
• A messy cap table is a huge red flag for investors and can stop someone from investing
• Having a messy cap table as an early-stage company is one of the biggest red flags for investors
• How much the founders should own at each stage?
• It is will vary from company to company but a general rule is the founders should collectively own:
• Pre-series A: 50-75%
• Series A: 40-50%
• Series B: 30-40%
• Series C: 20-30%
• IPO/Exit: 10-20% ownership
• Do not give away a large percentage of your company to a development shop or consulting firm in the early days
• This is something we see too often that prevents investors from investing
• Investors want to see that you've been capital efficient
• Do you understand dilution?
• What is dilution?
• By definition, dilution is the reduction in equity as new shares are issued
• To put it simply the more of the company you sell via fundraising, the less of it you own
• It is so important to not get too diluted too early
• Capbase provides the following:

• Common shares and preferred shares
• Common shares are what founders, employees, and advisors are issued
• Preferred shares are what investors receive
• Preferred shares mean that the investors get their money out first, before the founders or employees
• They can also include information rights, board rights, and more
• Understanding pre-money and post-money valuations:
• The main difference is the timing of the valuation
• Pre-money is the valuation before the new capital has been accounted for
• Post-money is the valuation after the new capital has been added to it
• For example,
• Company A raises $100M at a $900M valuation
• Their pre-money valuation is $900M
• Their post-money valuation is $1B
• Eliminate any other "surprise red flags" before starting diligence
• Here are some major, "surprise red flags" that investors see:
• Outstanding lawsuits
• Disgruntled former employees (that could potentially sue down the road)
• Cash-based accounting
• Not being intellectually honest about the business
• Build a data room
• What is a data room?
• A place where important documents are saved and easily accessible for the due diligence process
• For example, Google Drive, Dropbox, or similar
• The sooner you can start putting together a data room the better
• If you are on top of this from the early days it will require less to pull together when it is needed
• Ensure that the documents are “Read Only” when sharing them during the fundraising process
• Items you should include in your data room:
• Financial statements
• P&L
• Balance sheet
• Cash flow
• Employee records
• Founders legal names
• Founder and employee emails
• Board and stockholder minutes and consents
• Stock and options ledger
• Tax filings and records
• Federal, state, and local income
• Sales and property taxes
• Secretary of State filings
• Certificate of Incorporation
• Annual filings
• Invoices and contracts
• Bank accounts
• Creditor records
• Other items that are helpful to include (but not necessary):
• App store reviews
• Cohort data
• Retention and churn data
• Number of full-time employees
• Number of part-time employees
• How much money you have raised to date
• From whom
• Do any of them have side letters?
• What is the name of your lawyer?
• What firm are they from?
• Having a tight data room raises credibility with investors
• Ask a founder: https://twitter.com/lolitataub/status/1438165074758176768
• TechStars: https://twitter.com/galeforceVC/status/1435262488388460546

• Understand startup funding documents
• SAFE (Simple Agreement for Future Equity)
• SAFEs were introduced by YC in 2013
• They were not meant to be paid back and typically have a cap and a discount
• This is generally the least expensive way to raise money from a legal perspective
• Convertible Note
• A debt instrument or "loan" that isn't meant to be paid back but can be at the investor’s request
• A convertible note has an interest rate and typically has a cap and a discount
• Convertible Securities
• As explained on Investopedia:
• “A convertible security can be converted from one asset type into another, such as a convertible bond that may be converted into common stock
• The value of the conversion feature of a convertible security is similar to the value of a stock’s call option
• Companies that issue convertible securities will often use call features to maintain some control of the investment
• The performance of convertible securities can be heavily influenced by the underlying stock's price. Compared to investment options that do not have a conversion feature, convertible securities tend to have a lower payout”
• Priced Round
• A priced round is an offering and sale of newly-created stock in your company at an agreed-upon per share price
• It is a great idea to have a plan that gets you 18 to 24 months of runway
• Raising too little will force you to start fundraising again too soon
• Fundraising is a full-time job and you don’t want to start again right after finishing
• Raising too much can hurt you
• Your early-stage valuation can dilute you too much at a larger dollar amount
• Remember with early fundraising you are optimizing for finding product-market-fit, not for an IPO
• Refer back to the financial model you created previously for high growth, average growth, low growth
• The high growth model with 24 months of runway should be the upper limit for your target raise
• Do you know how to value your startup?
• Your valuation is mostly determined by the market
• But, here is how you can think about it:
• If you land a lead investor, then they will set the terms
• If you go the party round route, then you will need to set your own terms
• It's a crazy market (as of late 2021)
• Valuations are 50%-100%+ higher than what they were last year at this time
• The previous formula was roughly... that your valuation was 10x ARR
• So, a company generating $1M of revenue was worth $10M
• In this market, that valuation calculator is out the window.
• David Sacks recently said 100x ARR has become the standard for enterprise SaaS startups
• So that $1M revenue company is now worth $100M instead of $10M
• There will be higher valuations for trendy verticals and serial entrepreneurs with past success
• Finding a valuation is a bit of a negotiation that you should feel comfortable talking about with potential investors
• Start governance early at your company
• Jason recommends that you hold board meetings even if it's just two founders and an advisor
• This gets you comfortable with the process and will build experience for when you are required to have board meetings
• You don't need to meet for 3 hours, but taking the time early on to meet will be a positive signal for downstream investors
• You should meet quarterly and talk about the business
• You are likely already doing this daily so set aside time and schedule a board meeting once every three months
• Use the time to specifically talk about strategy, headwinds, any major developments or issues
• Track the "Board minutes" and add them to your data room
• Even if it's just the founders in the room it is evidence that you are forward-thinking, mature, and serious about growing the business
• It is important to remember that fundraising is absolutely a full-time job
• Between researching, diligence, meetings, follow-ups, reviews, etc
• Do you have team members who can pick up the slack while you fundraise?
• This goes back to the Startup Flywheel
• Hiring a great team is vital
• You need to still build a product and delight customers while the founder(s) are focused on raising money
• Solo founders will have a hard time being successful at this but it is not impossible
• It will be key to prioritize
• Establish a plan and stick to it
• Founders should block off a minimum of six months for fundraising

• How Investors Value Startups: 4 Methodologies Explained
• What is a Data Room
• What do I include in an investor data room?
• Data Room Structure
• How to run an investor data room for you startup
• When should you create a data room
• How to Create and Manage a Board
• How to Run a Startup Board
• Preparing a Board Deck
• Greg Miaskiewicz, CEO of Capbase, Cap Table 101 Presentation: