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Startup MBA 3.1 - Funding, equity, valuations
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Startup MBA 3.1 - Funding, equity, valuations


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  • 1. Funding, equity, valuations
  • 2. @foundercentric ! Mailing list:
  • 3. Part I Types of funding
  • 4. 3 ways to fund a company 1.Revenue 2.Debt 3.Equity
  • 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. 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. 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. Equity Sell a % of your company for cash If the company fails, you owe nothing
  • 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. Question Which is best for your business? Revenue, debt, or equity?
  • 11. We’re mostly talking about equity funding
  • 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. Remember Equity funding is designed around the needs and desires of investors, not startups.
  • 14. Question What do VCs need to see in their investments?
  • 15. VC investable businesses 1.Big market 2.Defensible moat 3.Ambitious founders 4.10x returns 5.?
  • 16. Remember Investors only get paid if you sell the company, so you’re promising to try and do that
  • 17. Everyone talks about stock buy-backs; They don’t happen
  • 18. The “typical” funding journey Sweat equity - start! Accelerator - 20-50k SEIS Seed - 150k-500k Series A - 500k-2mm Series B - 3-5mm
  • 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. You bridge the gaps with sweat equity
  • 21. Part II Equity
  • 22. Question How much equity do you give to your cofounders? What about late additions?
  • 23. Rule of thumb The founder with the most equity should have no more than 2x the founder with the least equity
  • 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. Question How much equity goes to key early employees?
  • 26. Joel Spolsky The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake
  • 27. Question What do you give an advisor? What do they give you?
  • 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. 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. Run the math! When investors put cash into a business, your % ownership goes down, but your ££££ ownership stays the same
  • 31. Part III Valuations
  • 32. There’s no evidence of what an early- stage startup will be worth.
  • 33. So you make it up as a combination of necessity plus comparisons
  • 34. Valuation rule #1 After accelerators, expect to give up 20-40% per round
  • 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. 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. Question What is the danger of a sky-high valuation? (remember the 10x exit rule)
  • 38. Valuation rule #2 Raise enough money for 12-24 months
  • 39. Question Why raise for so much time?
  • 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. So what’s your valuation? (Or rather, your valuation range)
  • 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. 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. 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. Part IV Practicalities
  • 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. 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. Do your investor Due Dil • (accelerators) • (angels & VCs globally) • (London angels) • (investor ratings)

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