1. Funding, equity,
valuations
http://startupmba.foundercentric.com

2. hello@foundercentric.com
foundercentric.com
@foundercentric
!
Mailing list: http://bit.ly/fc-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
• f6s.com (accelerators)
• angel.co (angels & VCs globally)
• capitallist.co (London angels)
• thefunded.com (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:
paulgraham.com/fr.html

59. Thanks!
Questions?