Funding, equity,
valuations
http://startupmba.foundercentric.com
hello@foundercentric.com
foundercentric.com
@foundercentric
!
Mailing list: http://bit.ly/fc-list
Part I
Types of funding
3 ways to fund a company
1.Revenue
2.Debt
3.Equity
Revenue
Get paid by your customers
Even if it’s not the long-term plan, it
puts you in a stronger position for
eventual fu...
Paul Graham
Ideally you want to be able to
say to investors "We'll succeed
no matter what, but raising
money will help us ...
Debt
Borrow money and promise to pay it
back with interest
If the company fails, you’re usually
personally liable
Almost a...
Equity
Sell a % of your
company for cash
If the company fails,
you owe nothing
There is a “best” funding for you
Revenue - growth is not the most
important factor
Debt - you have guaranteed
income but ...
Question
Which is best for your
business? Revenue,
debt, or equity?
We’re mostly
talking about
equity funding
We’re mainly
talking about
equity funding
Stage at which VC deals happen
5%
25%
60%
10%
Some revenue; still figuring out th...
Remember
Equity funding is
designed around the
needs and desires of
investors, not startups.
Question
What do VCs need
to see in their
investments?
VC investable businesses
1.Big market
2.Defensible moat
3.Ambitious founders
4.10x returns
5.?
Remember
Investors only get paid
if you sell the company,
so you’re promising to try
and do that
Everyone talks about
stock buy-backs;
They don’t happen
The “typical” funding journey
Sweat equity - start!
Accelerator - 20-50k
SEIS Seed - 150k-500k
Series A - 500k-2mm
Series ...
Remember
The Series A funding gap
is real. Plan to survive off
of your seed round until
you can raise a Series B.
You bridge the gaps with sweat equity
Part II
Equity
Question
How much equity do you
give to your cofounders?
What about late
additions?
Rule of thumb
The founder with the most
equity should have
no more than 2x the
founder with the least equity
Sitar Teli (paraphrased)
We can’t invest in a
company where the CTO
has that little equity.
It’s too much of a risk.
Question
How much equity
goes to key early
employees?
Joel Spolsky
The most important principle:
Fairness, and the perception
of fairness, is much more
valuable than owning a l...
Question
What do you give
an advisor? What
do they give you?
Question
Your company is worth $2m and you
raise $500k.
!
How much is it worth after the money?
!
What % do you still own?...
Question
3 co-founders evenly share a
company. They raise 250k on 750k.
!
What % and £ does each of them own
now? What % o...
Run the math!
When investors put cash into
a business, your % ownership
goes down, but your ££££
ownership stays the same
Part III
Valuations
There’s no evidence
of what an early-
stage startup will be
worth.
So you make it up as
a combination of
necessity plus
comparisons
Valuation rule #1
After accelerators,
expect to give up
20-40% per round
Don Dodge
Don't worry about giving up too
much equity at an early stage.
If the company is successful you will
be very ric...
Paul Graham
If you've [already] sold more than
about 40% of your company total,
it starts to get harder to raise an A
roun...
Question
What is the danger of
a sky-high valuation?
(remember the 10x exit rule)
Valuation rule #2
Raise enough
money for
12-24 months
Question
Why raise for so
much time?
The funding timeline
Raising money takes 3 months (full time)
But you don’t want to negotiate with an
empty bank account, ...
So what’s your
valuation?
(Or rather, your
valuation range)
Figuring out your valuation
1.Figure out 12 and 24 month budgets
2.Work out a valuation for each based
on 20% and 40% dilu...
Figuring out your valuation
In other words, if you’re
strong, you can either
negotiate toward the 20%
(less equity) or the...
Paul Graham
One of the things that surprises
founders most about fundraising
is how distracting it is. When you
start fund...
Part IV
Practicalities
Stephen Rapoport
I said, “I’m not raising money
right now. But I will be in 3
months. What are you scared
of and where wou...
London vs. the Valley
In 2012, the valley did $12.5B over
977 rounds and London did $1.75B
over 274 rounds
Source: Dow Jon...
Do your investor Due Dil
• f6s.com (accelerators)
• angel.co (angels & VCs globally)
• capitallist.co (London angels)
• th...
Some final tips
Warning
Employee option pools are a
termsheet trick to dilute you
without diluting investors (not a
deal-breaker, but be a...
Warning
Never pay to pitch. If an
investor wants you to pay
them, they are bad
investors
Warning
Don’t do deals with
investors who propose
“participation preferred”
or “ratchets”
Warning
Be aware that physical business
investors have very different
expectations from tech
investors, and tend to offer ba...
Tip
Keep negotiation simple by
focusing only on pre-
money valuation and the
amount they’re putting in
Tip
Search online for founder-
friendly boilerplate and bring
your own term sheet to
resolve the rest of the terms
Tip
Close a strong lead
investor ASAP (e.g. cash
in bank), and then fill in
the rest as a rolling round
Tip
Cold emails to
investors don’t work.
You need warm intros.
Paul Graham
And read this:
paulgraham.com/fr.html
Thanks!
Questions?
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Startup MBA 3.1 - Funding, equity, valuations

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Startup MBA 3.1 - Funding, equity, valuations

  1. 1. Funding, equity, valuations http://startupmba.foundercentric.com
  2. 2. hello@foundercentric.com foundercentric.com @foundercentric ! Mailing list: http://bit.ly/fc-list
  3. 3. Part I Types of funding
  4. 4. 3 ways to fund a company 1.Revenue 2.Debt 3.Equity
  5. 5. Revenue Get paid by your customers Even if it’s not the long-term plan, it puts you in a stronger position for eventual fund-raising You don’t depend on anyone else’s approval to build your business
  6. 6. Paul Graham Ideally you want to be able to say to investors "We'll succeed no matter what, but raising money will help us do it faster."
  7. 7. Debt Borrow money and promise to pay it back with interest If the company fails, you’re usually personally liable Almost always a bad fit (and dangerous) for startups which deal with uncertainty
  8. 8. Equity Sell a % of your company for cash If the company fails, you owe nothing
  9. 9. There is a “best” funding for you Revenue - growth is not the most important factor Debt - you have guaranteed income but uncertain cashflow Equity - high growth potential with a moat and large market
  10. 10. Question Which is best for your business? Revenue, debt, or equity?
  11. 11. We’re mostly talking about equity funding
  12. 12. We’re mainly talking about equity funding Stage at which VC deals happen 5% 25% 60% 10% Some revenue; still figuring out the rest →
  13. 13. Remember Equity funding is designed around the needs and desires of investors, not startups.
  14. 14. Question What do VCs need to see in their investments?
  15. 15. VC investable businesses 1.Big market 2.Defensible moat 3.Ambitious founders 4.10x returns 5.?
  16. 16. Remember Investors only get paid if you sell the company, so you’re promising to try and do that
  17. 17. Everyone talks about stock buy-backs; They don’t happen
  18. 18. The “typical” funding journey Sweat equity - start! Accelerator - 20-50k SEIS Seed - 150k-500k Series A - 500k-2mm Series B - 3-5mm
  19. 19. Remember The Series A funding gap is real. Plan to survive off of your seed round until you can raise a Series B.
  20. 20. You bridge the gaps with sweat equity
  21. 21. Part II Equity
  22. 22. Question How much equity do you give to your cofounders? What about late additions?
  23. 23. Rule of thumb The founder with the most equity should have no more than 2x the founder with the least equity
  24. 24. Sitar Teli (paraphrased) We can’t invest in a company where the CTO has that little equity. It’s too much of a risk.
  25. 25. Question How much equity goes to key early employees?
  26. 26. Joel Spolsky The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake
  27. 27. Question What do you give an advisor? What do they give you?
  28. 28. Question Your company is worth $2m and you raise $500k. ! How much is it worth after the money? ! What % do you still own? The investors?
  29. 29. Question 3 co-founders evenly share a company. They raise 250k on 750k. ! What % and £ does each of them own now? What % of the company have they “given up”?
  30. 30. Run the math! When investors put cash into a business, your % ownership goes down, but your ££££ ownership stays the same
  31. 31. Part III Valuations
  32. 32. There’s no evidence of what an early- stage startup will be worth.
  33. 33. So you make it up as a combination of necessity plus comparisons
  34. 34. Valuation rule #1 After accelerators, expect to give up 20-40% per round
  35. 35. Don Dodge Don't worry about giving up too much equity at an early stage. If the company is successful you will be very rich. If it isn't successful then holding 60% versus 30% won't matter.
  36. 36. Paul Graham If you've [already] sold more than about 40% of your company total, it starts to get harder to raise an A round, because VCs worry there will not be enough stock left to keep the founders motivated.
  37. 37. Question What is the danger of a sky-high valuation? (remember the 10x exit rule)
  38. 38. Valuation rule #2 Raise enough money for 12-24 months
  39. 39. Question Why raise for so much time?
  40. 40. The funding timeline Raising money takes 3 months (full time) But you don’t want to negotiate with an empty bank account, so you leave a safety buffer of 3 months at the end Which gives you 6-18 months to actually build your company
  41. 41. So what’s your valuation? (Or rather, your valuation range)
  42. 42. Figuring out your valuation 1.Figure out 12 and 24 month budgets 2.Work out a valuation for each based on 20% and 40% dilution 3.You’ve now got the four “corners” of your valuation range 4.Negotiate inside those ranges based on your strength vs. peers
  43. 43. Figuring out your valuation In other words, if you’re strong, you can either negotiate toward the 20% (less equity) or the 24 months (more runway)
  44. 44. Paul Graham One of the things that surprises founders most about fundraising is how distracting it is. When you start fundraising, everything else grinds to a halt.
  45. 45. Part IV Practicalities
  46. 46. Stephen Rapoport I said, “I’m not raising money right now. But I will be in 3 months. What are you scared of and where would we need to be for you to be excited?”
  47. 47. London vs. the Valley In 2012, the valley did $12.5B over 977 rounds and London did $1.75B over 274 rounds Source: Dow Jones VentureSource, 2012 So the valley has 4x the deals and 2x valuations (but also more startups)
  48. 48. Do your investor Due Dil • f6s.com (accelerators) • angel.co (angels & VCs globally) • capitallist.co (London angels) • thefunded.com (investor ratings)
 
 
 

  49. 49. Some final tips
  50. 50. Warning Employee option pools are a termsheet trick to dilute you without diluting investors (not a deal-breaker, but be aware)
  51. 51. Warning Never pay to pitch. If an investor wants you to pay them, they are bad investors
  52. 52. Warning Don’t do deals with investors who propose “participation preferred” or “ratchets”
  53. 53. Warning Be aware that physical business investors have very different expectations from tech investors, and tend to offer bad deals when they shift into tech
  54. 54. Tip Keep negotiation simple by focusing only on pre- money valuation and the amount they’re putting in
  55. 55. Tip Search online for founder- friendly boilerplate and bring your own term sheet to resolve the rest of the terms
  56. 56. Tip Close a strong lead investor ASAP (e.g. cash in bank), and then fill in the rest as a rolling round
  57. 57. Tip Cold emails to investors don’t work. You need warm intros.
  58. 58. Paul Graham And read this: paulgraham.com/fr.html
  59. 59. Thanks! Questions?
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