fundraising field guide

Fundraising Field Guide by Carlos Eduardo Espinal

Copyright © Carlos Eduardo Espinal. 2015.

Published by Reedsy Ltd., London, UK.

All rights reserved. No part of this publication may be reproduced, stored, or transmitted in any form or by any means,

electronic, mechanical, photocopying, recording, scanning, or otherwise without written permission from the publisher. It is illegal to copy this book, post it to a website, or distribute it by

any others means without permission.

First Edition.

ISBN: 978-1-78613-003-7

Donation Causes

This book was written on a donation model.

I invite you to review the charities I’ve selected, all of which are doing great work, and make a donation that will support their

efforts. I’m counting on your generosity to jointly become a catalyst for change.

You can find the list of charities and the links to donate on the book’s website here:

http://www.fundraisingfieldguide.com/


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Contents

Donation Causes 5

Foreword 10

Introduction 11

Planning for Fundraising 13

Preface: The Tao of Fundraising 14

The Fundraising Mindset 15

Timing Matters 19

Geography Matters 20

Preparing your Company for Fundraising 21

Setting the Right Milestones 22

Fundraising before a key milestone 24

Fundraising after a key milestone 25

Fundraising Challenge: Geography 28

Keeping Milestone Optionality 29

How Much Money Should I Raise? 32

Your Fundraising Materials 43

Keeping Materials Lean 45

Your One-Pager 47

Your Pitch Deck 48

Your Financial Assumptions Model 54

Your Pitch 55

Your Cap Table 56

The Fundraising Equation 57

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The Option Pool 58

The Fundraising Process 61

The Cycle of Fundraising 62

The Human Element 69

The Best Way to Reach Investors 70

Invest in Yourself 72

The Search for an Offer 75

What to Look for in an Investor 76

Creating and Managing Your Pipeline 79

The Typical Institutional VC Investment Process 81

How does an investor review your team? 84

Howdoesaninvestorreviewyourfinancialplan? 100

Understanding your Deal 107

Deal Structuring 108

Deciphering an Equity Term Sheet 109

Deciphering Convertible Notes 111

Deciphering Crowdfunding 121

Syndicates 127

Negotiations 128

The Valuation of Your Company 129

How does an estimated exit value for your company lead to a valuation? 134

Valuation Discrepancies Around the World 138

A Note on Avoiding Tranched Investments 140

Avoiding Toxic Rounds 143

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Managing the Legal Process 149

Where Should I Incorporate? 150

The Importance of Good Legal Counsel 153

Managing the Flow of Documents 155

The Closing & Funds Transfer 159

Conclusion 161

Appendix: How This Book Was Made 162

Donation Causes 164

Acknowledgements 165

About the Author 166

10

Foreword

As founders, we’ve experienced the difficulties of the fundraisingprocessfirst-hand.

As investors, having participated in more than one hundred deals via The Accelerator Group (TAG) and Index Ventures, we have experienced close-up many of the challenges that early-stage founders go through, and observed many of the patterns of what it takes to succeed aswell.

The purpose of this book is to help founders streamline their learning process of how fundraising works, and while fundraising isn’t rocket science, it does involve its own vocabulary, relies heavily on relationships, careful preparation,courageandlotsofpatience.

Through his experience at Seedcamp and his previous role as a venture capitalist (VC), Carlos has highlighted many oftheimportantpointstoconsiderwhilefundraising.

Robin and Saul Klein

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Introduction

Since 2007, I’ve been fortunate to participate and invest in overonehundredandfiftystartupjourneysateverystageofdevelopment,fromgeneratinganideatofindingproductmarketfittoraisinginvestormoney,andfinallytoscalingoperations and exits. Over this same time period, I’vereviewedhundredsofcaptables,countlessfinancialgrowthplans, hiring plans, and lived through some tough emotional discussions with founders ranging from their very personal health & family issues to intra-founder disputes due to the stressofstartuplife.

These cumulative experiences have given me a certain viewpoint on startup life—a perspective on the bravery and courage many founders have when embarking on their entrepreneurialjourneys,andtheseeminglyuncertainandalmost random way growth events can unfold during the lifetimeofacompany.

Many of the chapters in this book are based on real-life stories of founders I’ve worked with, and how they overcame keychallengesinvariousstepsoftheirjourney.Thechaptersoriginally started as posts on my blog, The Drawing Board1, created in an attempt to help new founders avoid the pitfalls Iwitnessedothersstrugglethrough.

Iapproachtheeffortofobservingandreproducingthelessons I’ve learned over the years with the humility of a student.

1 http://www.thedrawingboard.me/

http://thedrawingboard.me/

http://www.thedrawingboard.me/

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I believe the beginner’s mindset is the right one, because I believe it’s important to emphasize the ever-learning nature necessary to tackle startup life due to its constantlyandrapidlyevolvingnature.Idon’tthinkit ispossible for any one way or framework to contain the myriad ofchallengesafounderencountersduringtheirjourney.Assuch, I encourage you to approach what I’ve written in this book with the same mentality: a direction, if you will, but notafixedone.ThereissomuchIhavelearnedfromthefoundersI’veworkedwith;Ihopeyoufindthisbookasusefulandinterestingasmyworkwiththemhasbeen.It’stheirstoriesthatenabledthisbooktohappen.

With that in mind, I also encourage you to review what you get out of this book with other founders, because it is in the spirit of communal discussion that I’ve seen the best ideassurface.

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1

Planning for Fundraising

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Fundraising Field Guide

Preface: The Tao of Fundraising

There is a Taoist story of an old farmer who had worked his cropsformanyyears.

Onedayhisonlyhorseranaway.Uponhearingthenews,hisneighborscametosharehissorrow.“Suchbadluck,”theysaid.Thefarmerreplied,“Goodnews,badnews—justthesame.”

The next morning the horse returned, bringing with it threeotherwildhorses.“Howwonderful,”theneighborsexclaimed.“Goodnews,badnews—justthesame,”repliedtheoldman.

The following day, the farmer’s son tried to ride one of the untamed horses, was thrown, and broke his leg.Theneighborsagaincametooffertheirsympathiesathismisfortune.“Goodnews,badnews—justthesame,”camethefamiliarreply.

Thedayafterthat,militaryofficialscametothevillagetodraftyoungmenintothearmy.Seeingthatthefarmer’sson’slegwasbroken,theypassedhimby.Theneighborscongratulatedthefarmeronhowwellthingshadturnedout.

“Good news, bad news,” said the farmer, “just thesame.”

All fundraising efforts and meetings have an element of good news and bad news. How you deal with them and learn from them is what really matters.

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The Fundraising Mindset

Fundraising is not easy. In fact, it is one of the mostfrustrating and time-draining activities you as a founder will havetodoaspartofyourcompany’sgrowthstrategy.Earlyon,whenyouareasmallteam,fundraisingeffortswilllikelyconsume far more time than you’d like them to, but there is unfortunatelynoshortcuttotheprocess.

Unless you are really lucky and investors come toyou, fundraising will likely involve taking many meetings with investors of all kinds, both good and bad, before you ultimately succeed in finding someone who believes inyou.Youwillmeetmanytypesofinvestorsalongtheway,including:

• Investors who doubt you as a founder/CEO, and your ability to execute

• Investors who are meeting with you because they want to invest in your competitor

• Investors who don’t have the money to invest but want to appear active in the ecosystem

• Investors who will want every inch of detail about what youwillbedoingforthenextfiveyears,whenyoubothknowyourprojectionswillbespeculativeatbestandhogwash at worst

• Investors who don’t get what you do at all, but will have an opinion about your product because their child or spouse has a view

• Investors who are amazing and give you insanely

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poignant advice, but they would want to see more traction before they can consider investing

• Investors who provide you with great feedback and would help you greatly if they were involved, but will only invest if someone else leads the round

And then there is the one investor who ultimately believes inyouandbacksyou.That’sallittakes.Justone.

The earlier the stage your company is in, the more successful fundraising is about your ability to develop personal relationships and articulate your ambitions as a coherentstory.Earlyon,asmuchassomeinvestorswillwanttoknowyourprojectednumbers(revenues,traction,etc.),the conversation will always come back to your inherent abilities and vision as a founder since there’s little else to goon.Assuch,fundraisingmeetingsintheearlyphasesofcompany development have two primary functions: They allow the investor to see how the founders think through their assumptions and if they can work together, and for the founders to assess whether they think the investor will add valuetotheirstartup.

This quirky dynamic of imperfect information early on leads to the frequent use of an apt analogy that describes the fundraisingprocess:dating.Asfunnyasitmayseem,therearemoresimilaritiesthandifferences.

In fundraising as in dating…

• You have to be willing to put yourself out there to meet anyoneinthefirstplace

• It’sanumbersgame.Youhavetomeetmanypeople,

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either in-person at networking events or parties, or online

• Rejectionstendtohurtquiteabitpersonally

• Connections usually happen in the least likely of places and are strongest when they come through a trusted 3rd party

• Being a good storyteller gets people to laugh, open up, and remember you

• Chemistry matters

• Sometimesit’sjustplainluck—beingattherightplaceat the right time

• The better you prepare yourself, the better your odds get

• Being too eager to get back to someone or waiting too long can end things prematurely

• You have to go on several dates with several people before you ultimately feel someone is the right one for you

Case in point: one founder (let’s call him Brino), who I have thepleasureofworkingwithtothisday,wasrejected88timesbeforefinallygettingayesfromaninvestor.Reasonsforno’s ranged fromtheusual“thiswon’teverbeabigthing” to “there’s someone already doing this”. WhenBrino had one month’s worth of cash left in his account, hetookanexpensiveflightandcarridetoanothercountryto meet with an investor who, upon the founder’s arrival, admittedtohavingentirelyforgottenabouttheirmeeting.The investor invited Brino to take a ride with him to his next

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meeting, and it was during this thirty-minute car ride that Brinofinallygothis“yes”.

Developing a fundraising mindset centers around four core ideas:

1. Fundraising is a process that takes time and is rarely quickorpainless.Theearlieryoustartplanningyourprocessanddevelopingrelationships,thebetteroffyouwill be, and the more likely you are to avoid fundraising in“desperationmode”.

2. Youhavetoembracerejectionaspartoftheprocessandnottakeitpersonally.Rejectionwill happen, for good reasons, dumb reasons, and many times, for reasons thatwillremainforeveramystery.

3. Every meeting is a form of practice that makes you better for the next meeting; the success or failure of one meetingisnevertheendofyourstory,justastepalongtheway.

4. Analyzing what was said during your meetings and learning how to improve on your mistakes is the most crucial step in finding the right investormorequickly.Justlikeyouanalyzeyourcompany’smetrics,keep track of how people connected with your pitch; write down all the questions you were asked (a very good way of ascertaining which areas of your pitch are still ambiguous), and make sure you follow up on any informationrequests.

Since you will likely never know where, when or how you will meet your future investor, make sure you are always

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practicing developing relationships and looking for possible connectionsforyourcompany.Opportunitieswillsometimescomefromthemostrandomencounters.Inanotherstoryof unexpected outcomes, a founder was discussing some elements of his business with a colleague while taking a rideintheLondontube.Thepersonnexttothemidentifiedhimselfasaninvestorandsaid,“Pitchmeinonestop,andifit’sgood,I’llgiveyoumycontactdetails”.Thefoundergotafollow-upmeetingoutoftheexchange.

Timing Matters

Because fundraising is intrinsically a process of building the right relationships, and good-quality relationships take time to develop, don’t leave fundraising for the last minute.Theprocessfromwhenyoustarttakingmeetingsuntil close can take up to eight months for an early-stage round, and can take an average of six months for subsequent rounds.Naturally,dependingonhow“frothy”or“exciting”the market you live in is, and how experienced you are at fundraising,thesenumberswillvary.

Keepingyour companyfinanced isn’t somethingyoushouldprocrastinateon.Ifyouwaituntilyou’venearlyrunoutofcashyou’llbein“desperationmode”anditwillmaketheprocessconsiderablymorestressfulandmoredifficult.Don’tdeferkickingoffyourfundraisingprocessonthebasisthatyouarejustwaitingtofinalizewhatyoufeelisgoingtobethekillerfeature.Yourideaisofnousetoyouoryourteamifyourunoutofmoneybeforemakingitareality.Asyou’ll read later in the chapter on milestones, there is a way to address the fear of not having your product at the level you wantittobewhenspeakingtoinvestors.

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Geography Matters

One final point to touch upon before moving onto thefundraising process itself is that geography matters when raisingfunds.

As much as we’d all like for there to be 100 percent mobilityof capitalglobally, there isn’t.Thereareplentyof amazing ideas around the world, and perfectly capable founders as well, but the bulk of the world’s venture and angel capital is still very much aggregated around key hubs such as California, New York, Boston, London, Berlin, Paris, IsraelandaselectfewothersinAsia.

The fact remains that if you are based in an emerging economy, it’ll be harder to fundraise than if you are based in a hub; however, that should not deter you from building somethingmeaningful.It isthejobofcapitaltoseekoutamazingideas—justmakesureyoursisoneworthfinding,andthatyou’rereadywhentheopportunitypresentsitself.

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2

Preparing your Company for Fundraising

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NB: Throughout this book, I will use examples that include numbers/figuresthataren’tdesignedtoberecommendationsor representations of what’s “market” for investors orfounders to expect. As we will cover in the section onmilestones and valuations, so much depends on the type of business you are creating, where you are fundraising, and the current macro-economic climate. Additionally, thisbook does not set out to comprehensively cover all forms of fundraising instruments, which can include traditional debtinstruments—justtonameone.Rather,itfocusesonfinancingstypicalofearly-stage,high-growthcompanies,and as such, covers mainly equity and convertible note financings.

Setting the Right Milestones

Whileyourcompany’sjourneywillbeaseriesofexpectedand unexpected events (hopefully more good than bad) over a period of time, investors will typically want to hear your “projections”asacoherentlinearstrategy.Betterinvestorsknow that early-stage startups are fraught with uncertainty and thus will only use your stated strategy as a starting and discussion point; investors that come from other areas of financing,suchasdebtorreal-estate,willlikelygivemoreweighttoyourstrategythanitdeservesearlyon.

Therefore,thefirststepinbeingabletocommunicateyour fundraising needs to an investor is to determine what yourcashrequirementsareovertime.Theeasiestwaytodothis is by visualizing your company’s cash spend as a series ofprojectedmilestones.

Determining projectedmilestones for your company

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willservebothtodetermineyourfinancingneeds,andtostartaconversationbetweenfounders.Youwillfigureoutwhat should happen when, and how you should use your resources.Tobeprecise, I am defining a milestone as a future “marker” or quantifiable achievement within your company’s stated growth trajectory,notjustamajoraccomplishmentatsomevaguefuturetime.Essentially,youcan think of a milestone as a singular point on the company’s projectedtimeline.Milestonesusuallymarkdefiningpointsin a company’s history, such as a key hire, a product launch, acertainnumberofusers,aretentionrate,firstrevenues,firstprofit,etc.

Unlikethetypicalfinancialgoalofanystartup(i.e.,thecreationofasuccessful,cash-self-sufficientcompanythatprovidestangiblevaluetoitscustomersandisfloatedonthepublicmarket),milestonesarespecificevents—asubsetofthatgoal.

Definingmilestonesisimportantforvariousreasons.By being aware of where milestones exist in your company’s future development, you can be better prepared for future fundraising.Fundraisingoffthetailend(orrightbefore)ameaningful milestone will put you on stronger footing when discussingwithpotentialinvestors.

For example, let’s look at the following milestones during a fictitious company’s first year. You should notassumethesearegoodtimemarkers.Thistimelineispurelyforillustrationpurposes.

• Month3:LaunchMinimumViableProduct(MVP).

• Month5:LaunchPrivateBeta.

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• Month8:KeyHire(marketingperson).

• Month11:PublicProductLaunch.

• Month 12: Achieve x percent daily growth rate in subscribers.

If you know how much money is needed, in aggregate, at each point in the timeline, you’ll also know how much you needtoraisetoachieveeachtarget.Additionally,youcanstart determining which milestone will be most productive for fundraising for which investor (different investors havedifferentviewsonwhatdetermines“progress”inastartup).Forexample,afunctionalprototypecanbeahugelyvalidating achievement for an early-stage investor even if therearen’tany“customers”yet.

The challenge to an early-stage investor is to balance investing in your startup before you are too far along in your progress (and thus merit a higher valuation) and coming in tooearlyinyourjourney(andrisklosingitall).Allinvestorsstrive to minimize risk without losing the opportunity to investinahotcompany.Investorsareconstantlytryingtofindtheleastriskypointatwhichtoinvest.Assuch,someof the best times for a company to fundraise are either right before or right after the completion of a key milestone, but before so much time passes that the recently achieved milestoneisnolongerimpressive.

Fundraising before a key milestone

First, let’s look at the psychology of investing right before a keymilestoneiscompleted.

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Ifan investor feelsconfidentthat thecompany isontrack to hit its milestone, they also know that once the company succeeds, it will inherently be more valuable to the outside market because it has been meaningfully de-risked bysomeamount.Assuch,theinvestorwantstogetinonthedealrightbefore“launch”forexample,sothatshecangetaspecificvaluationwhilethecompanyisstillalittlebitriskier,butnotoverlyso.

While this makes obvious sense, only companies that instillastrongconfidenceand“fearofmissingout”(FOMO)in potential investors regarding the company’s growth post-milestone completion can get investors rushing to get this kindof deal done. If you canmake thishappen for yourcompany, you’re in a great position, because generally, a product-launch milestone is easier to control than say, a specificusergrowthrateafteryourproduct’slaunch.

Fundraising after a key milestone

Now let’s look at the psychology of investing after a key milestoneiscompleted.

If an investor feels like he wants to stall, to see if the milestone is completed or the number of users you acquire hitsaspecifiedfigure,thenheistryingtoeffectivelyde-risktheinvestmentbeforecommittingcash.Aninvestorknowsthat by playing his cards this way, not only will he have de-risked the investment somewhat, but other investors will alsobemorelikelytoco-fundyourcompanyalongsidehim.Ineffect,thepost-milestoneinvestorwantstogetinquicklybefore the company is too expensive for him to invest in, but isonlywillingtomovewhenthe“rightlevel”ofde-risking

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hasoccurred.

The art of selecting the right moment for fundraising is a matter of determining which key milestones to focus on and how to communicate them during your meetings with potentialinvestors.

Let’slookmorecloselyatfourkeytypesofmilestones.Within these four categories, there are a fair number of potentialadditionalmilestones.You’llhavetodeterminewhich milestones are most meaningful to your company, andyourpotentialinvestors.

The Four Types of Milestones

1. Human Resources

Afirstmilestonecouldbehiringkeypeoplethatwillmakeastrong impact on your organization (a super-hot marketing person,forexample).

Examples include: Proof that you can work together as a team (usually historical evidence), or proof that the initial teamisabletoattracttalent.KeyhiresareC-andVP-levelprofessionals whowill drive your growth further. Everystartup will eventually need a functioning management team consisting of CEO, CTO, COO, VP Sales, VP Marketing, and possiblysomeothers,dependingonwhatyou’rebuilding.

2. Product: Product launches vs. incremental version releases

Examples include: Proof that you can build something, i.e. working prototype; launch of a major enabler for a

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step-changeincustomeracquisition.Notethatthereisadifferencebetweenmilestonesthatyoumightarticulatetoan investorandthosethatareonyourproductroadmap.Don’tconfusethetwobecausetheyaren’tthesamething.

3. Market: Market validation (first customers, first paying customers, etc.)

Examples include: Proof that you can talk to audiences (100,000, 1 million or 10 million users); proof that the product orserviceisusefultosomeone(firstusersandclients);proofthat there is market ($1 million revenue annually); proof that you can scale ($10 million revenue annually); proof that the marketisbig!($25millionrevenueannuallyandbeyond).

4. Funding: Money being committed to a round that the investor in question can lead or participate in

Examples include: Proof that you can talk to investors (every financinground,evensmallones);proofthattheecosystemagrees with your ideas (bringing respected industry advisors or partnerships on board); proof that you can manage your finances(cashflowpositiveoperation).

Justkeepinmindthatmilestonesareallaboutmovingfromonestageofrisktothenext.Planyour fundraisingstrategy to ensure you have ample time to control which milestonesyourcompanyreachesandwhen.Besureyourfundraisingstrategyusesthesemilestonestoyourbenefitwithoutgettingcaughtbetweenthem,strandedforcash.

As a general rule, you should try to raise as much money as you can and in any case at least enough money for you to accomplish your next meaningful milestone (with some

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additionalbufferfundstohelpyouspendtimefundraisingafter your milestone and avoid “desperation mode”).This means you should look at a variety of points across your company’s timeline to see which will be meaningful milestonesforfundraisingpurposes.

Fundraising Challenge: Geography

Anoldparabletellsofamanwhowastraveling.Hecameuponafarmerworkinginhisfieldandaskedhimwhatthepeopleinthenextvillagewerelike.Thefarmerasked,“Whatwere thepeople like in the lastvillageyouvisited?”Themanresponded,“Theywerekind,friendly,generous,greatpeople.”“You’llfindthepeopleinthenextvillagearethesame,”saidthefarmer.

Another man who was traveling to the same village came up to the same farmer later on and asked him what the peopleinthenextvillagewerelike.Againthefarmerasked,“Whatwerethepeoplelikeinthelastvillageyouvisited?”Thesecondmanresponded,“Theywererude,unfriendly,dishonestpeople.”“You’llfindthepeopleinthenextvillagearethesame,”saidthefarmer.

Aswecoveredearlier,youwillhavedifferentfundraisingchallenges depending on the mix of individual and institutionalinvestorsavailableinyourhomecountry.Inacountry where the funding comes mostly from individuals (such as professional angel investors and high-net-worth individuals), you will likely not be able to raise substantially large rounds; in countries where you have access to organized groups of individuals, you’ll have access to larger rounds; and in countries where you have access to many institutional

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investors,youwilllikelybeabletoraisethelargestrounds.If you go to the statistics section of AngelList’s website2, for example, you can compare the average fundraising amounts for companies from different geographies and get someinsightintothisdisparity.

If you want to go for really really big sums, you should go to the geography where you can get that meaningful amount (otherwise you might underfund your company for what you need to achieve), but keep in mind that changing locales isn’t aseasyaspackingupyourbagsandmoving.Inkeyhubs,thecosts of running startups are going to be higher, so you will needtofactorthatintoyourplan.Issuesthatwillincreaseyour costs include immigration challenges (and lawyers), hiringstardevelopmenttalent,andofficerealestate.

Identifying milestones for your company’s development hasamyriadofbenefitsasidefromthoseassociatedwithfundraising.First,planningmilestonesallowsyoutofocusonwhatyouwillbeworkingonanddrivehardtoachieveit.Second, the process of identifying and planning milestones forces you to question when and in what order you and your teamshouldtrytoexecutesomething.Lastly,havingyourmilestones laid out is useful for tying together what you need to accomplish with how much money it will take to get there,andthusfundraiseaccordingly.

Keeping Milestone Optionality

Duringyourmilestonedefinitionexercisewithyourfounders,considerdoingwhatIcall“keepingmilestoneoptionality”.

2 http://www.angel.co

http://www.angel.co

http://www.angel.co

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The principle is very simple: even as you plan your company’s future growth and associated cash needs, you can’t lose sight of the fact that you’re a nimble startup—not a large corporation that has to report to analysts and public market shareholders. Your nimbleness is your strength.As mentioned earlier, a startup’s growth plan isn’t linear (even if sometimes you need to communicate it that way); it’smorelikeaseriesofzig-zagstowardsagoal.Assuch,while it is useful to forecast your milestones so that you have a plan and understand your cash needs, it is also useful to look at that plan with one eye, while the other eye looks out foractionsthatmightbemorebeneficialtoyourcompanythan what you had originally envisaged or agreed to with existingshareholders.

In a later chapter, we will cover in more detail the reasons why you should try to avoid tranched investments (investments broken out into parts and released based on pre-determinedconditions),butlet’sbrieflycoverwhyhere.Ifyouconsideratrancheasaglorifiedmilestone,adheringdogmatically to itearlyoncouldhaveanegative impact.Why? Well, because endeavoring to meet the scheduled conditions may constrain your company’s growth options, even if midway through executing your stated strategy it turns out that it was a bad idea for the company to have the goalagreeduponforthereleaseofthetranche.

Forexample,imagineifyourfinancialplanhadinplacea monetization strategy (and associated revenue stream) kickingoffin“MonthSix”ofyouroperations.“MonthSix”comes along, and well, uptake is poor and your revenues arenotcominginasexpected.Additionally,youhavesomechatswithyourcustomersandfindoutthatactually,the

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value they’re getting from your product is mostly around itsemergingnetworkeffect;because thenetwork is stillsmall,yourearlymonetizationisstiflingthatvaluesincethe barrier for new users to sign up is still high, and thus thosemostlikelytopayarereluctanttodoso.

If you (or your investors) adhere rigidly to your original planjustforthesakeofkeepingtotheplan,you’llkillyourcompany’s potential long-term value quite quickly; but by staying nimble and adapting your milestones to what you think should be the new direction, you might actually be betteroffthanyouwouldhavebeenfollowingthe initialplan.

Naturally, this optionality comes at a cost, but that’s okay,aslongasyouknowhowthingsarechanging.Agoal-shift means your original plan will change, thus your cash burn will change, and your goals and the key performance indicators (KPIs) – the markers that show your company’s success and typically the markers for some tranches – will changeaswell.

Good early-stage investors (particularly those who invest in pre-product-market fit companies) know thatthis kind of change midway through their funding is a possibility and should be backing you in your ability to makethesedifficultcalls,evenifitmeansadeviationfromthe original plan. However, you should bemindful thatthere are many investors out there who, for some reason, stillbelievefirmlyintheadherencetoastatedplan(likelybecause in other industries, CEOs are held accountable far moreforthese).Ifyoucan,avoidtakingmoneyfromthesekindsofinvestors.Attheveryearlystagesinacompany’s

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development, particularly during the pre-product-market fitphase,backersshould invest inyouforyourabilitytoadapt to changing and evolving circumstances, not in your ability to predict the future eighteen months in advance or sticktoaplanthatclearlyisn’tworking.

Of course, this isn’t a recommendation to throw out all forms of planning; it still helps to create a milestone plan based around your hypothesis of growth (and relevant KPIs) and cash needs, because of course you can’t be changing strategies every month and you need to keep an eye on cash burn. At the same time, you should constantlymonitorwhetheranothermilestoneoptionalityplayiscomingup.Ifyoudofind,however,thatyouareconstantlyquestioningyour original hypothesis for growth, perhaps there is a bigger problemyouarefacing(suchasgoodinternalprocesses).By keeping an eye open for milestone optionality events, you might fare better than you would if you exercised uber-discipline to a rigid plan that was built before you learned many new things about your customers and how they interactwithyourproduct.

As a general rule, plan for the future and identify key milestones to grow towards, but seek to keep milestone optionality,particularlyatapre-product-marketfitstage.

How Much Money Should I Raise?

As mentioned earlier, raising money for your startup takes time, distracts you from developing your product, is fraught with emotional ups and downs, and unfortunately doesn’t have a guaranteed outcome to compensate for these negatives.Frankly,manyfounderswouldrathergo jump

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into an icy lake than take another fundraising meeting wheretheyaren’tsurewhattheyshouldsayto“convince”analready-hesitantinvestortoopentheirpursestrings.

Part of that anxiety comes from not knowing exactly what investors have in mind when evaluating the company, particularlywhenitcomestocashneeds.

So naturally, the question becomes: How much money should I raise?

Theshortversionoftheansweris:“asmuchasyoucan”.Butjusttosaywe’vecoveredallourbases,let’slookattheextremes.Whenis“raisingasmuchasyoucan”potentiallyharmful?

While raising as much money as possible all at once sounds great, you can’t operate under the assumption that more money means fewer problems to worry about early on.Withalargeamountofmoneyearlyoncomesseveralpotential problems:

1. More investment terms and more due diligence.Itisprobably a fair statement to say that the more money involved, the more control provisions an investor will want, as well as more diligence to make sure their money isn’tgoingtobemisused.

2. A high implied post-money valuation3 or alternatively, higherdilutionupfront.Inordertoaccommodatealargeround,investorsneedtoadjustyourvaluationaccordinglyiftheydon’twanttowashyouandyourfoundersout.Forexample,ifyourbusinessisobjectivelyworth$1million,

3 http://en.wikipedia.org/wiki/Post-money_valuation

http://en.wikipedia.org/wiki/Post-money_valuation

http://en.wikipedia.org/wiki/Post-money_valuation

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but you are raising $2 million, unless the investor plans on owning 66 percent of the company after investment, theyneed toadjust thevaluationupward.Havinganartificiallyhighervaluationprematurelycanputalotof strain on your startup: if things don’t go well and another round of fundraising is needed later on, it is very likely that the subsequent round will be a down-round (when you take a negative hit to your valuation), or other new investors passing on the deal in the future because itis“tooexpensive”.

3. A propensity to misuse “easy money”.Youcouldarguethis point from a psychological perspective if you wanted to,butsufficetosay,IknowmanyVCswhobelieveover-fundingacompanyleadstofinanciallaxity,lackoffocus,andoverspendingbythemanagementteam.Perhapsitis lingering fear over the hey-days of the late 90s, when parties were rampant and everyone got an Aeron chair.But the general fear with overfunding a company is that its founders will be tempted to expand faster than they can absorb employees into the culture, integrate new systems, or meet real-estate needs without substantially disruptingefficientoperations.

4. A last one is the media’s reaction (positive or negative) to how much money you’ve raised relative to what youhaveachieved.Thisoneishardtoreallyquantifyandhappensonlytoveryfewstartups.In2012,aserialentrepreneur raised $41 million out of the starting blocks for a company called “Color”.Unfortunately,the app went nowhere and didn’t satisfy the promise expected of it for that kind of money, making it, at the time,thesourceofmanyjokesabouttheperilsofraising

http://en.wikipedia.org/wiki/Aeron_chair

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too much money early on (Color eventually shut down ayearafteritsre-launch).Althoughclearlyaveryrarecase,itdemonstrateswhatthe“toomuch”effectcancause.In2015,thecaseofthestartupcalled“Secret”shutting down after having raised $35 million and the founders having cashed out a portion of that, also left investorswithabadtaste.

Now let’s review the opposite extreme: under-funding yourcompany.Oneoftherisksyourunwhenbeingwillingtotakeanamountofcashyouknowisinsufficientforyoutoachieve any one of your meaningful milestones is that you will likely not be able to demonstrate any substantial progress before you need to go out fundraising again, then fundraising in“desperationmode”.Whilethereareexceptions(you’refirststartingoutandjusttryingtovalidatehypothesis,oryou’re bridging your company’s fundraising by raising a little cashtogetyoutothenextmajormilestone),youshouldavoidraising too little money: you will very likely put yourself in a weakfundraisingposition.

Okay,Igetit—toomuchortoolittlemoneycanbebad.So how much money is the right amount of money?

Let’s look at this question from a different point ofview.Aswewillcoverlateronduringthesectiononhowaninvestorevaluatesyourfinancialplan,aninvestormaynotnecessarilyknowtheexactfiguresyourbusinesswillneedtogrowtoitsnextmajormilestone.Instead,tosomeextent, an investor will rely on your ability to communicate yourfinancialplanandreviewyourcashneedsrelativetoyourstatedgoals.

Thus, it should start to become apparent why it is so

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important for you to have a solid understanding of your cash needs.Yourhypotheseswillbecomethefoundationsforyourdiscussionswithinvestors.

Alongside the timeline of milestones you and your co-founders will establish, you’ll develop a parallel schedule of cash milestones.The“cashmilestonetimeline”representshow much money, in aggregate, you will have spent to achieve each milestone you set out to accomplish in your strategicplan.

Referring back to my examples of milestones in a company’sfirstyear,wemightfindacash timeline thatlookssomethinglikethis(I’vepurposelyputinfictitiousnumbers; do not assume these are recommendations or actual numbers):

• Month 6 – $60,000

• Month 8 – $80,000

• Month 10 – $100,000

• Month 11 – $110,000

• Month 12 – $120,000

• Month 18 – $240,000

I’ve used a $10,000 cash burn on this example up to the end of Year 1, then starting in Year 2, I’ve used a $20,000 monthlycashburn.Thinkingthispartthroughiscritical;ifyouraiselessmoneythannecessaryforamajormilestone,you’ll likely fall short in cash at a time when your company doesn’t have anything outstanding to show for an investor tobeimpressed.

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Monthly Cash Burn, or the amount of money you “burn” through each month in aggregate, is a key figure to know before meeting any investor.Ifyoudon’tknowwhatyourmonthly cash burn is, you’re in trouble, as you will likely struggle to have a good dialogue about cash needs and representativeaccomplishments.

Let’s assume you’ve calculated your ideal cash needs and the amount seems a bit higher than what your local investorsarewillingtooffer.You’relikelyaskingyourselfthe following questions:

• If I ask for the amount I truly need, but that is above what investors are willing to give, doesn’t it automatically set me up for a “no”?

• If I ask for a smaller amount, won’t investors know that I need more money than what I’m asking for?

• If I ask for too little, will I sound like I don’t know what I’m doing?

• What’s the best way to kick off the conversation with an investor in a non-hub market about my desire to raise more capital if available, but my willingness to take less cash and make the best of it?

• How do I avoid getting pigeon-holed into not being a big enough thinker nor pricing myself out of the local market?

This is where understanding your milestones and cash timelinecomesinhandy.Inmarketswhereyouarenotgoingto be able to raise the ideal amount you need upfront, one way of“hedging”thebeginningofthefundraisingconversationisbyarticulatingyourrequestedamountthisway:“Thisis

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what I need: [ideal number based on what you think will be key milestones], but this is what I can accomplish [one or two other meaningful milestones behind the big one] with this[smallernumber]capital.”

By phrasing the cash request conversation this way, you’ve avoided sounding like you’re asking for too much too early, and have demonstrated you understand that you need to achieve things before you can likely go fundraising again.Ineffect,you’retryingtoarticulateconfidencetoaninvestor based on your knowledge of what it will take for you tobesuccessful.

Investors: who’s who and how much can each provide?

Investors come in different sizes and styles. The mostobvious ones are friends and family, but shortly after them come angels, or people of high net worth who are willing to investinyourstartupinexchangeforequity.Therearemanyvariants of business angels (angels). Some are just simpleindividuals investing out of their own pockets, others are aggregations of business angels –angel clubs- or syndicates like those possible online via crowdfunding platforms such as AngelList, Seedrs, Crowdcube, etc (which we will cover in alaterchapter).

An angel investor (someone who usually invests his own money) typically invests in the tens or hundreds of thousands, but less so in the millions (particularly if you’re not living inamajorhubofangelinvesting;intheUS,however,thesesumsgoup).Anangel,asopposedtoyourfriendsandfamily,

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will also typically want to see more progress in your company beforecommittingtoaninvestment.Itislikelythatangelswill want to come in early enough to give you cash to achieve something plus a little extra to help you fundraise after (so they can get more equity for their capital than they would from coming in later), but these angels may also hold back some additional cash for a follow-on round when they can see how you achieve your milestones before committing further.While this is not unusual, it is different from atranched investment, when typically a larger amount of cash iscommittedupfrontwithspecificconditionsandatgreaterdilutiontoyou.

Following from the previous example earlier in this book, an angel may opt to fund you through Month 10 with your requirement of $100,000, plus a little extra for more fundraising(perhapsanadditional$50,000).Thiswouldgetyou through your product launch and give you a couple of months to see how it goes in terms of market traction (all the while, you will be speaking to new potential investors), so you can have something stronger to talk about for fundraisingpurposes.

Moving on from angels, institutional investors are ones whoinvestotherpeople’smoneyaswellastheirown.Forexample, a seed-stage venture capital (VC) fund -a type of institutional investormay see that your company has some real potential and that you have a plan that requires $100,000 tolaunchbeforeyoustarttryingtomonetize.Butwiththeirexperience of seeing your kind of business having to do a few pivots before getting the launch product 100 percent right, the seed fund’s partners might think that perhaps the best quantity to give you based on your calculations is $500,000

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foraboutayeartoayearandahalf.Thislargeramountwouldalso give you some breathing room to work on achieving your various milestones rather than having to focus on having to beconstantlyinfundraisingmode.

Considering the two examples above, how is it that two typesof investors canhavedifferentperceptionsofhowmuchmoneyyouneed?Effectively,howcanyoudeterminehow much money an investor actually thinks you need vis-a-vis what you ask for?

Recall the following sentence we talked about earlier: “ThisiswhatIneed:[idealnumberbasedonwhatyouthinkwill be key milestones], but this is what I can accomplish [one or two other meaningful milestones behind the big one] withthis[smallernumber]capital.”

A request like this leaves the possibility for various things to be fluid, and frankly as crazy as it sounds forthis to be so non-exact, that’s an inherent part of early-stagestartups.Ambiguityisbothyourfriendandasourceof frustration aswell. Your exact calculationsmay havesaid that you needed $500,000 to launch your product, but an experienced investor might know that for companies such as yours, there are usually issues along the way that consumecashwithouttherequisitequantifiableprogresstoward theagreedmilestones.Becauseof this, investorsmaysometimesinclude“cashbuffers”inthenumbertheyofferyouinadeal,eveniftheydon’tarticulateitthatway.Thisbuffercouldcomefromthevarioussensitivityanalysestheinvestorevaluates.(Forexample:whatifthecompanyisdelayed in launching their product by two months; or what ifthecompanycan’tfindthatkeyemployee;orwhatifthe

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company can’t start charging for their product for an extra few months; or what if the product needs a pivot; or what if people aren’t willing to pay what the company expected?) All ofthesethingswillaffectthecashflowofthecompany,andif the investor assumes some or all will occur, the company may need more money than the founder planned for.Effectively,your$500,000inaperfectmilestoneexecutiontimeline may actually end up being more like 1M after some delays and mistakes, and with the extra cash the investor in my example above gave you, you now may have enough cash to go fundraise without having to panic about getting cash in“yesterday”.Onceagain,you’reavoiding“desperationmode”–oneof yourmajorgoalsduring the fundraisingprocess.

Keep in mind that this larger amount an investor may bewillingtogiveyouwillaffectyourvaluationrange.Toomuchmoneyupfrontwill“inflate”thevaluationrangeyourcompany sits in (unless the investor takes more equity), so aninvestorwon’twanttogiveyouanexcessivecashbufferthat would force the company to be overpriced for them and forthecompany’sfundraisingfuture.Inversely,youcanalsoseewhereaninvestormaydeemacompany“underfunded”if it doesn’t have enough money to get to where it can achieve meaningfulmilestonesandattractfutureinvestors.

Differentinvestorswillcomeupwithdifferentnumbersfor your company’s ideal fundraising strategy based on their experienceandwhattheycanoffer.Withthisknowledge,beopentothewisdomgainedfrommultipleperspectives.

If you meet an investor who wants to invest a lot quickly, great; if you meet with various investors who are more risk-

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averse, at least you won’t get caught out not understanding yourownexecutionplan.Asageneralruleofthumb,manyearly-stage VCs will consider your cash needs over a twelve-to-eighteen-month period when trying to determine what youshouldraisebeforeyouneedtogofundraisingagain.

In conclusion, the most important thing is to be keenly aware of your cash needs on a month-to-month basis, so that if the question comes up during a discussion with an investor, you know how much you plan to spend and by when.Intheend,embracingtheambiguityandfluidityofthis process is the best way to avoid frustration with the contrastingconversationsyouwilllikelyhavewithinvestors.As long as you know your monthly cash burn across various milestones and/or when you run out of money, you’ll be armed with the knowledge you need to have meaningful conversationswithinvestors.

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3

Your Fundraising Materials

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Ifyoutellme,it’sanessay.Ifyoushowme,it’sastory.

—Barbara Greene

Iwantedaperfectending.NowI’velearned,the hard way, that some poems don’t rhyme, and some stories don’t have a clear beginning, middle,andend.Lifeisaboutnotknowing,having to change, taking the moment and making the best of it, without knowing what’s goingtohappennext.DeliciousAmbiguity.

—Gilda Radner

Why was Solomon recognized as the wisest man in the world? Because he knew more stories(proverbs)thananyoneelse.Scratchthe surface in a typical boardroom and we’re alljustcavemenwithbriefcases,hungryforawisepersontotellusstories.

—Alan Kay, Vice-President The Walt Disney Company.

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Keeping Materials Lean

In order to go fundraising, you will need communication materials: materials others will use to introduce you to potential investors, materials for you to send investors thatshowmoredetailsaboutyourstrategyfinanciallyandexecution-wise, and lastly, materials that show the current equitystructurebetweenfounders.Asyouwilllikelyhavesomany things to do as an early-stage founder, the best way to think of these materials is not as a burden, but as the leanest formofcommunicationonyourcompany’sbehalf.

As part of his book, Thinking, Fast and Slow4, author Daniel Kahneman mentions some research that highlights the importancenot justofhowyounameyourcompany,but how much detailed thinking you need to give many “trivial”aspectsofyourpresentation.Inhiswords:“Astudyconducted in Switzerland found that investors believe that stockswithfluentnameslikeEmmi,Swissfirst,andCometwill earn higher returns than those with clunky labels like GeberitandYpsomed.”Themoralofthestoryisthatyoumust sweat the details, and it all begins with your startup’s name and investor materials, as they are the foundation of thecrucial“firstimpression”you’llmakeonprospectiveinvestors.

Luckily for you, though, the days of long business plans arelong-gone(orshouldbeanyway).Investorsrarelyhavethetimetoreadthemanymore.Optimizeyourmaterialsto be concise and address key issues to communicate your story,andnomore.

While there aremany different opinions as to what

4 http://www.amazon.co.uk/dp/0141033576

http://www.amazon.co.uk/dp/0141033576

http://www.amazon.co.uk/dp/0141033576

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constitutes the ideal set of materials for fundraising, I’m proposing the list below as the absolute minimum (you’ll see why shortly):

1. A one-pager, in a mobile-device friendly format (most investorswilllikelyseeyourplanforthefirsttimeonaphone), that contains the absolutely critical facts about yourcompany.

2. The pitch deck youwillusewhenpresentingverbally.Naturally, you’ll have to develop the verbal pitch that accompaniesthisdeck.

3. The pitch deck that will have more detail and is based on #2 above, but that will still make sense to an investor evenwithoutyourverbalpresentation.

4. Your financial assumptions model, to showcase how you arethinkingthroughcashuse.

5. Your cap table, to show the equity distribution between yourteammembers.

6. YouronlineprofileonAngelList,Twitter,F6S,andothermeaningful platforms that are typically used to learn moreaboutyourcompany.

Let’s now explore each of these communication materials individually.

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Your One-Pager

When you go to the movies and see an epic trailer, you’re naturallydrawntowanttoseethemoviewhenitlaunches.Similarly, the purpose of your one-pager is to entice the recipient to want to learn more about what you’re doing with theleastamountofeffortandinformationpossible,asaninvestor’s attention is at a premium early on with the many dealoptionsavailabletothem.

The one-pager should be a work of art that represents you,yourbrand,yourtone,andyourpersonality.Itwillbeyourfundraisingcallingcard.Itistheattachmentthatwilllikely follow the introductory email that got you into the investor’sinbox.

The one-pager should be:

• Highquality.Uglywillnotcutittoreallystandout.

• Readable from a phone email client, as most people will beonthego.

• Bothinformativeandreductionistatthesametime.

One way of thinking about the one-pager format is to startoffwithallthekeyinformationaboutyourbusiness,a few images and your contact information. Remember,this document will likely be your calling card when others introduceyou.Assumetheone-pagerwillgofarandwide,including into the hands of your competitors; while you want it to be informative, make it a trailer instead of a feature presentation.

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Your Pitch Deck

As mentioned earlier, most investors that are good and in-demand don’t have time to read anything more than the executivesummaryofanythingsenttothem.Soshouldyoueven bother creating a pitch deck? What should one look like? And what may it say about you?

Firstlet’sstartbydefiningwhatamodernday“bizplan”pitchdeckcouldlooklike.I’dsaythatifyoucantakeyourpitch deck and add to it the necessary text so that anyone readingitcanfigureoutwhatyourbusinessisaboutwithoutyouhavingtospeaktoit,thenyou’vegottenitright.Forthe deck you’ll present verbally, you’ll likely use a subset of this more detailed one, but with the text removed for you to speaktothekeypoints.

A modern deck doesn’t need to be as complicated as you think, as early-stage plans are clearly simpler (versus later stage ones, where the company has scaled operations and profits).Thepurposeofanyplan/deckistohelpyoucrafthow you communicate your business as well as provide those investors who do take an interest with the extra information they need to evaluate your company aftermeeting you.However, the days of the lengthy formal business plan have longsincepassed.Noonehasthetimetoreadthemanymore, and for those investors who demand them… well, perhaps ask them which areas they’d like more information onandyoucandealwiththemonacase-by-casebasis.

If you need inspiration, there are plenty of examples out there, from Guy Kawasaki‘s5“Art of the Start6”toBusiness

5 http://www.guykawasaki.com/6 http://amzn.com/1591840562

http://www.guykawasaki.com/

http://www.amazon.com/Art-Start-Time-Tested-Battle-Hardened-Starting/dp/1591840562

http://www.amazon.com/Business-Plans-Dummies-Paul-Tiffany/dp/0764576526/ref=sr_1_11?s=books&ie=UTF8&qid=1302211428&sr=1-11

http://www.guykawasaki.com/

http://amzn.com/1591840562

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Plans for Dummies7. Additionally, TechCrunch recentlypublished an article8 that captures amazing stats about what worksandwhatdoesn’tintermsofdecks.

Any plan/deck should, at the bare minimum, include:

1. An overview of who you are and what you’ve done (basically,whyyouandyourteamcanmakethishappen).

2. A succinct explanation of what your product/service does.Usescreenshots ifpossible; run itpastanon-techiefriendandseeiftheycanexplainitbacktoyou.

3. A market overview section.Themarket sizeofyouropportunity, key players, competitors, partnerships, target market9,etc.

4. A snapshot of your financials.Effectively,howyouwilluse your cash, which in an early-stage startup will be yourexpectationsofcashusage.Thissectionwilllikelyrequire you to also highlight how you think you will likelymakemoney. If yourbusiness is about growthfirst,clearlyshowyourpotentialinvestorshowmuchmoney you will need to grow the company to where it hitsthetippingpoint.

5. Competitive differentiation. How you bring value to your customers (the pain points) as well as how you differentiatefromcompetitorsinyourmarket.

All plans typically cover some baseline information, such asidentifyingyourmarketandcompetitors.Nomatterhow

7 http://amzn.com/07645765268 http://tcrn.ch/1BaFZfI9 http://en.wikipedia.org/wiki/Target_market

http://www.amazon.com/Business-Plans-Dummies-Paul-Tiffany/dp/0764576526/ref=sr_1_11?s=books&ie=UTF8&qid=1302211428&sr=1-11

http://tcrn.ch/1BaFZfI

http://en.wikipedia.org/wiki/Target_market


http://tcrn.ch/1BaFZfI

http://en.wikipedia.org/wiki/Target_market

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short it is (10 slides), a business plan is useful for investors evaluatinganopportunity,and italsooffersvalueto thefounders preparing it because it helps them articulate the core concepts of product, market, opportunity, the team, and theinvestmentproposal.

Remember, a plan is about organizing your thoughts and conveying them clearly to someone else, not about meeting some magical quota of pages with graphs and charts, although depending on the complexity of your proposition, thismaybenecessary.

Generally speaking, I have found a company’s plan has allowed me to determine:

1. The company’s communication style and ability to articulate what they (their product or service) do, clearly and succinctly. Does the company rely toomuch onbuzzwords and/or comparisons to get the point across, or areobjectivesandvisionclearlydiscernible?Istheplanwell written and free of grammatical errors? Do I walk away from reading it able to describe the opportunity in simple terms to others? How do they use visuals? What kind of style does the company have?

2. The company’s ability to research their market size, competitors, key industry players, distribution channels, etc. If a company has not adequatelyresearched the size of their market, this can be a real deal-killer. I remember meeting with founders fora new company; while I was originally really excited about the potential for their product, pointed questions during our meeting revealed that the market size wasonlya fewmilliondollarsworldwide.Asyoucan

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imagine, realizing the size of your market during an investor meeting is probably not the best way to makeanimpression.Makesureyoutrulyunderstandyour target market, and the key players within it. Theidentificationofkeycompetitorsisanimportantdetail to include and can actually play in your favor if you canclearlyarticulatehowyoudifferentiateyourself.Inthe case of some companies, where distribution channels and key partnerships are important, identifying these and discussing them is important to provide potential investorswithconfidencethatyourteamunderstandsthechallengesinherenttoitsindustry.

3. The company’s ability to analyze their cash needs and expectations for growth. Nothing is scarier than acompany whose ambitions are huge, but whose idea of cashmanagementisnotinline.Aswecoveredduringthe milestones section, you don’t need a CFO, but you do need to have thought out what key costs grow with your ambitious growth and when the crucial cash-points are foryourcompany.Generallyspeaking,investorsdon’thavefinancialdiscussionsontheveryfirstmeeting,butif you have an understanding of your cash uses, this will makeyouseemfarmorecompetent.

4. The completeness and experience of the company’s team.Suffice it to say that if youhaveagreat team,highlighttheiraccomplishments.Ifyouknowyouneedto hire someone to round out the team, it’s okay to put that down as a future hire—at least the investor will know that you know there is a weak point in the team, and that you plan on solving it as soon as the investment comesin.

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On the subject of your team, don’t under-estimate theimportanceofyourteam’sslide.

When an investor considers your company at the earliest stages, who you are (effectively your team) is just as important as your idea, if not more so.Yourteamisacrucial part of your company’s success, yet many teams omit their team slide or bludgeon it because they don’t feel they have anything interesting to add other than team photos and jobdescriptions.

What’sworseiswhenfoundersjustpointtotheteamslideduringapitch,andsaysomething like“Here isourteam,wehavelotsofrockstars”—orsomethinggenericlikethat.Let’slookatwhatthemajorsellingpointsofateamslide should be:

1. To show a team’s capability to deliver.Basically,doesyour team know anything about what you are doing? If you are a healthcare company, do you have a healthcare background? If you are making something for the financial industry, have any of your teammembersworked there? What companies have your team members worked in that can validate you? If you’ve worked at Google before, for example, it would be worthwhile to put that company logo up on your team slide because the image of the brand would speak faster to your audience than any number of words you could say in the sametimeframe.

2. To show a team’s capacity to deliver.Areyoueffectivelycomplete or incomplete as a team? Is your team mostly business people but lacking the technical capabilities to deliver, or is your team well rounded and able to

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execute? If your company industry requires an amazing specialist, do you have that specialist? By the way, do not assume that it is a bad thing to admit you are looking tohireforspecificfunctionsyoudon’tcurrentlyhaveinternally; doing so shows maturity and your team’s self-awareness, although you don’t have to state it as partofyourpitch.

3. To show a team’s culture & communication style.Whatis your company like? Is it a fun place to work or is the tonemoreserious?What“titles”dopeoplehave?Howmany of your team are outward facing and how many inward facing?

In terms of where your team slide should be, there is not a hard and fast rule, but I’ve found that if you are building something born out of a personal experience at your prior job,it makes for a decent early slide to explain the background to your story/pitch. If you are building something thatisn’t part of your background story, then where the slide sitsismoreaboutflow.Focusontellingagoodstorythatis complemented by your team slide rather than the other wayaround.

Articulating the four points covered above allows founders to justify the components of a businessmodelto themselves before really investing further in an idea.During the writing of your plan/deck, you may identify risks that compel you to change the business model or even the industryfocus.

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Now, a couple of tips before moving on to the next section:

• Avoid putting a valuation on your deck/plan (unless you arefinalizingaround).Investorsmayaskforthisfigurein person, but you are likely to prevent a future dialogue if you put the valuation on paper and it is either too big ortoosmallfortheinvestor.Byomittingit,theinvestorfocusesonwhatmatters:whatyouaretryingtobuild.

• The second tip is that a cap table, which we will cover shortly, is a handy thing to include in your plan/deck (but perhaps you won’t have space to include it in a verbal presentation). This is useful mostly for subsequentdiscussions, but can greatly help the investor to understandeveryone’smotivations.

Remember, one of the best things you and your team members can do very early on is co-draft a pitch deck/plan, no matter how simple, that you feel can represent your company without requiring your physical presence to get thevalueofyouropportunityacross.

Your Financial Assumptions Model

In addition to the above materials, you will likely be asked for aquantificationofyourcashmilestoneassumptionstoseehow you think through your costs and revenue generating activities.

The reason why I chose to call it the “financialassumptionsmodel”isbecausecallingitthefinancial“plan”thisearlyinyourcompany’sdevelopmentismisleading.Aswe’ve covered in the milestones section, very rarely do your projections forDay63orDay105 trulyhappen.Standing

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atDay1(orbefore),youcan’tknowwhatthefutureholds.Thinkofthefinancialassumptionsmodelasarepresentationofhowyourcashneedsareaffectedthroughyourgrowthassumptions.

Later on in this book, we will cover how an investor reviewsyourfinancialplan,butfornow,startthinkingabouthow to represent your company’s expenses and revenue expectations, andhow they affect your cash burn, in aneasilyreadablespreadsheet.

For some templates to jog your thinking about howto visually represent the financial models, search for “ChristophJanzSAASDashboard”forastartingpoint,andcheck out IA Ventures Resources10 page as well; it has some greatmaterials, includingdecktemplates.Foradditionalresources and those listed here, check out this book’s accompanying website11.

Your Pitch

As mentioned before, storytelling is a key part of the fundraising process. The human mind was designed toprocess stories as a way of recalling important information regardingmeaningfulandimportantthingsfromthepast.Refiningyourverbal storytellingartistry is aworthwhileinvestment, as you’ll be able to channel your pitch more effectively.

When thinking about your company, think about the underlyingstorybehindit.Whyareyoudoingthis?Whyyou?

10 http://resources.iaventures.com/11 http://www.fundraisingfieldguide.com/

http://resources.iaventures.com/


http://resources.iaventures.com

http://www.fundraisingfieldguide.com

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Why now? Why your team?

There aremany ways to tell stories.While pitchingfor fundraising will have many elements of traditional storytelling, it isn’t entirely about dramatics; storytelling isalsoaboutefficiency.Somestartupsaretemptedbyusingcertainstorytellingclichéssuchas“thelongbuild-upwithasurpriseending”,butwhenitcomestofundraising,you’rebetteroffkeepingyourtechniquesimple.

Specifically,youshouldbeabletoquicklyexplainwhatit is you do, why you do it, for whom (your customer) and whynow.

If you want to read other resources on the art of story telling, check out some of the resources listed on this book’s website12.

Your Cap Table

One quick way an investor can get a feel for how founders see each other’s roles within an organization is by reviewing yourcompany’sequitydistributionforeachshareholder.Thisiscalledyourcaptable.

In order to read some of the terms on this cap table model,belowaresomedefinitionsyoumightfinduseful:

Fully diluted amounts: Whenever an investor says they want 5percentofyourcompanyona“fullydilutedbasis”,thismeans that all promised equity (employee options included) areincludedinthecalculationssothatthey’reeffectivelygetting5percentattheendoftheday.

12 http://www.fundraisingfieldguide.com/

http://fundraisingfieldguide.com/



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Pre-money valuation: When people generally talk about the “valuation”ofacompany,they’reusuallytalkingaboutthePre-moneyvaluation—effectively,theworthofthecompanypriortothenewinvestmentcomingin.Inalaterchapter,wewilldiscusshowcompaniescanbevaluedingreaterdetail.

Round size: The amount of money being raised as part of your currentcashneedstoachieveyourstatedmilestones.

Post-money valuation: The sum of the pre-money plus the roundsize.Ifthepre-moneyvaluationofacompanyis$20million and the founders raise $5 million from investors, theirpost-moneyvaluationwouldbe$25million.Investorswould therefore own 20 percent ($5 million / $25 million) onafully-dilutedbasis.Yourpost-moneyvaluation“setsthe bar” for your future activities. If your post-moneyafteryourfirstroundoffinancingis$4million,youknowthat to achieve success in the eyes of your investors, any futurevaluationswillhavetobein-excessofthatamount.If subsequent rounds are valued at exactly $4 million, that’s calleda“flatround”;valuationsbelowthepost-moneyofthelastroundarecalleda“down-round”.Noonelikesadown-round.

The Fundraising Equation

If you take the values from the above calculations, you get a functional equation to determine what percentage of your company an investor will own (assuming they are the only investorintheround).Theequationisquitesimple:Roundsize / Post-money valuation = percent of ownership by the investor(s).

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The Option Pool

As part of creating a cap table, you’ll likely have to create an employee option pool (I’m avoiding the technicalities betweenthedifferentvariantsofthese,suchasRestrictedStock Units, for simplicity’s sake). Unfortunately, the option pool is one of the most complicated parts of your company’s cap table and, from the founder’s point of view, can be very confusing because of how investors expect it to be treated.

In simple terms, an option pool is merely a carving out of your existing shareholder’s shares to accommodate new and futureemployees,directorsandadvisors.Asageneralrule,employees inthesamerolewho joinyourstartupearlierwill receive a greater percentage of the option pool than employeeswhojoinlater.

Where it gets confusing is in how you calculate the pool andthesizeitshouldbe.Intermsofhowlargethetypicaloptionpoolis,well,itvaries.I’veseenitrangefromaslowas5percent to as high as 20 percent depending on the company’s stage andupcominghiringneeds. Typicallyhowever,nomatter how large the option pool is, it is generally spoken ofandcalculatedona“fullydilutedbasis”.Thismeansthatinvestors are expecting a 10 percent option pool after their moneyhas come in. In order to do this, theoptionpoolneedstobecalculatedbeforetheirmoney–effectivelyonapre-moneybasis.Ifyouwanttogodeeperintohowthisiscalculatedandwhy,searchforthe“OptionPoolShuffle”.Insummary, the norm is for investors to expect your option pool tocomeoutofthepre-moneyvaluationofyourcompany.

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Onefinalnoteoncaptables:therearemanygreatonlinetoolstohelpyoubuildyourcaptable.Asusefulasthesecanbe to get started, nothing compares to you building your own cap table to get a feel for how future rounds, including those with convertibles, warrants, options for future employees, etccanaffectyourandyourinvestors’economics.Bydoingcap tables manually, much like driving stick shift, you can get abetterfeelfortheimpactdifferentdealswillhaveonyourcompany.Onceyouareabletointernalizethis,you’llbefarquickerandmoreeffectivewhennegotiatingwithpotentialinvestors, as you will be able to visualize the impact of their suggestionsonyoureconomics.Ifyouwanttoseewhatacap table looks like and use one for a starting point, visit the website13 for this book or go to: http://bit.ly/1ayKk8p.




http://bit.ly/1ayKk8p


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4

The Fundraising Process

The Investment Materials Cycle

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The Cycle of Fundraising

The fundraising process is highly iterative. It’s almostimpossible to understand what to say and how to say it for maximumpositiveeffectwithoutgoingthroughseveralfailcyclesfirst.Assumptionsthatmadesensebetweenjustyouand your team members all of a sudden aren’t as clear to strangerswhohaveneverheardyour ideabefore.Demosfail,jokesbomb,andpeoplegetdistractedbymaterialsyouthoughtwerecrystalclear.

Thus, like the Taoist farmer whose story serves to introduce this book by not judging any one situation aseither good or bad, you have to view every interaction with investors as a learning opportunity without coloring those experiencesas“good”or“bad”.Observereactionsandlearnfromyourencounterswithinvestors;constantlyfine-tuneyour materials, including your pitch, to achieve better results eachtime.Asacaveat,“fine-tune”doesnotmean“catertoyouraudience”.Forsuresticktothecoreofwhatyoubelieveyour business is about, but learn to decouple what the core ofyourbusinessisfromhowyoupresentit.Manytimes,whatotherpeoplerejectisn’ttheideaitself,buthowitisrepresented.Additionally,itisimportanttokeepanopenmindwhenreceivingrejectionstoseewhethertherejectionandreasonsforrejectionmadesenseasyouiterateandevolveyourpitch.Rememberthataperson’smood–afactoroverwhichyouhaveverylittleornocontrol–mightaffecttheirinterpretation of your pitch as much as the quality of the pitchitself.Thinking, Fast & Slow provides insight into how eventhingslikehungercannegativelyaffecttheoutcomeofadecision.InastudydoneinIsraelonverdictsbyjudges,it turned out that approaching meal-time, approval verdicts

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were close to zero, yet after meal-time, approval rates would spikeupto65percent!Thestudysuggestsasignificantlinkbetween external – and often personal – conditions and decision-basedoutcomes.

Before going further, let’s take a look at how to stop the cycle offundraisinginitstracks.Inotherwords,whatNOTtodowhenfundraising.Belowisthetoptenlistoffundraisingfails.

10. Presenting with a style that doesn’t capture the right attention.

Yes, being over the top and dropping f-bombs might get you attention, but is it the right attention? Are you focusing attentiononyourmessage,orjustyourself?Ontheotherhand, what about a boring slide deck? Or a deck that is missing product shots? Do these represent you well? What if you say your product is simple, but then your deck is really over-complicated.Doesthatsoundright?

9. Not having a proper fundraising plan.

Fundraising requires research. Findout if yourpotentialinvestors are even interested in your sector. Have theyinvested in your competitor? What amount do they typically invest? Going to someone who is typically a late-stage investor when you are raising a little bit of money is like putting in a minimum order of 10 pizzas when you can only eatone.

8. Not understanding your customer or how to reach them.

When presenting or speaking about your customer, do you demonstrate a masterful grasp of their issues and identity?

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Do you understand what makes them tick and why your solution is the one that will likely best serve their needs? Do you also understand how to reach them? Where do they shop? What media do they consume?

7. Inability to demonstrate a real pain for your customer (and how your solution fixes it).

It is always tempting to create something that is useful to you, but is the solution you’ve created really a necessity orjustanice-to-have?Demonstratingarealpain,usuallythrough some form of real customer validation, is crucial tomakinga convincing argument for your startup.Notethat you should avoid asking someone an obvious question wheretheansweris“yes”butdoesn’tvalidateanything.Ifyouaren’tsureabouthowtoaskthe“right”questionstoascertain whether there is real customer pain, the best book onthesubjectiswrittenbyafriend,RobFitzpatrick,andiscalled The Mom Test14.Ihighlyrecommendit.

6. Assuming that a general market size study applies to your startup.

One of the things you can do to quickly show that you don’t have a full grasp of your market is to show a much larger segmentthantheoneyouoperatein.Forexample,I’veseenpitches where an iOS app for sports tracking mentions all mobile users worldwide as their market size, when actually, themarketisasub-segmentofthatbiggerpie.Understandthe difference between target/addressable market and the generalmarketyourcompanyoperatesin.

14 http://momtestbook.com/

http://momtestbook.com/

http://momtestbook.com

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5. Not truly understanding who your competitors are.

Thisoneiseasy.Ifyouthinkyoudon’thavecompetitors,you probably haven’t researched hard enough. Rarelyarethereideasthatnoonehasthoughtaboutbefore.Butmore importantly, sometimes there are “good enough”substitutesforyourproductthatyouneedtobeawareof.Show how your solution overcomes the momentum that thoseexistingsolutionsalreadyhave.

4. Not knowing your cash needs and cash burn.

If you’re going fundraising and you don’t know how much money you need, how long it will take you to achieve what, and how you will spend the money you receive… well, don’t fault investors if they aren’t impressed with your request forinvestment.

3. Not explaining why your team is the team that will make this happen.

Your team is 99 percent of the reason why your company succeeds,and the idea isprobably 1percent. Ifyouskimthroughthe“why”ofwhyyourteamistherightoneforthis investment, you’ll likely miss an opportunity to impress aninvestor.Laterinthisbook,we’llcoverhowaninvestorreviews your team, for you to understand what VCs and angelsarelookingfor.

2. Your existing investor shareholders own more equity than the founders.

Toxic rounds that are unfairly skewed to a few shareholders (typically external investors) that precede the round you are raisingforcanreallynegativelyaffectyourfundraisingplan.

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In general, try to make sure you take investments that don’t jeopardizeyourfutureabilitytoraisefollow-on funds.

1. Not reaching out to an investor through an introduction.

Lastly, the best thing you can do for yourself is secure a personal introduction to investors you want to meet.Introductionsaregreatwaystohaveimmediatevalidation.

BONUS: Not learning from your mistakes.

Learnfromyourmistakes.Youwillmakemany,andthat’sokay–aslongasyoudon’tbeatyourselfup.Understandwhatwentwrong,theniterateonit.InthewordsofAlbertEinstein,“Insanityisdoingthesamethingoverandoverandexpectingdifferentresults.”

Conventional wisdom maintains that if you had to boil downtheroleofaCEOintojusttwoactivities,theywouldbe fundraising (communicating the vision to investors to get cashtokeepthecompanygoing)andhiring(staffuptogetstuffdone).

Fundraising can easily become a cycle that companies start and never really get out of until they choose to stop (typicallyatanexit).Soithelpstojustputyourselfintotheframe of mind that you are always fundraising; even right after closing a round, you should know who you will need to makerelationshipswithforthenextround.

In summary, the fundraising cycle starts with:

• Creatingyourfundraisingmaterialsandnetworking.

• “Shoppingaround”andbuildingrelationships.

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• Receivinginitialoffers.

• Choosinganoffer(s)andnegotiating.

• Ifyoufeelconfidentaboutoneofyouroffers,signatermsheetbeforedrafting&managingthelegalprocess.

• Closing&transferoffunds.

When completed, simply rinse and repeat until you are either cash-flowpositiveandcanfinancegrowthinternallyornolongerneedtofinanceforotherreasons.

Now that we’ve looked at the basics for the start of the fundraising cycle, it’s time to move on to the most important elementinyourfundraisingefforts:buildingrelationships.

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5

The Human Element

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The Best Way to Reach Investors

Getting in touch with an investor in a way that increases the likelihood that they’ll reply is one of the most challenging things you’ll have to learn quickly, but those interactions can also be one of the most rewarding parts of the fundraising process.

You’ll develop fairly deep relationships with investors that become shareholders in your company, so the worst thing you can do is de-personalize your introduction by sending a vague, nondescript template email to info@investordomain,thatgoestonoone.Rememberourdatinganalogy? Well sending an email like that is the equivalent ofwalkingintoasinglesbarandannouncingloudly,“HI,SINGLES.HEREANDREADYTOMINGLE.I’LLBEATTHEBAR.”Notagreatwaytopromotethekindofintimacyyou’relookingforineitherscenario.Instead…

1. Research the investor and his or her firm. It’s a huge waste of time for you (and them) to reach out to someone who invests in the wrong sector or stage of your business.Reviewtheirwebsite.Readaboutwhattheyare interested in,professionallyandpersonally.Thiswill make your interaction with the investor far more relevant.

2. Rely on a 3rd party for an introduction.Ifyoucanfindsomeone who knows the person you’re trying to reach, a personal introduction will serve you far better than trying toreachtheinvestorinquestiondirectly.LinkedInisausefultooltofindoutwhowithinyournetworkknowsthepersonyou’dliketogetintouchwith.Thismakestheintroductionprocessfarmorerelevant.

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The Human Element

3. Keep your initial email short and to the point.Don’toverdo it content-wise and length-wise, you don’t want to have the investor gloss over the sheer mass of your emailandrelegateittothe“toread”bucket.

4. Think of your initial email as merely a “preview” or elevator pitch with a call to action, such as emailing or calling for more information if they are interested in the idea.

5. Don’t forget to thank the person who introduced you.Ifyouwantto,feelfreetokeepthemupdatedonthe conversation, but remove them from the cc of the initial intro email (move them to bcc).Youdon’twanttooverburden their inbox either!

6. Twitter is increasinglybecominganefficient tool forcontacting people for quick things, if used sparingly and in a very specific, non-generic way. You can@reply someone you are interested in to engage in a conversationorcommentonwhattheysaidasastarter.Avoidsweet-talkingthough.

7. Get out of the office. Go to events and make new friends! Whenthere,findpeopletointroduceyoutoothers;avoidinterrupting ongoing conversations but don’t be afraid to work your way into the conversation if they are open to it andyoufeelthatyoucanmakeavaluablecontribution.Ifthe person you want to meet seems engaged, back away andcomebacklater.Remember,youmightbea“relief”to the conversation they are having, but you don’t want tobethe“distraction”either.Feelitout,butdon’tbeafraid to take the risk of speaking up—and when you do,gettothepointquickly.Youhaveabout30seconds

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to make your conversation with someone –anyone – relevant to them. If an investor gives you feedbackduring this conversation, the worst thing you can do is comeacrossasdefensive.Thatwillmakeyoustandoutforallthewrongreasons.

Remember, it’s the job of investors to find amazingcompanies. Ifyou’reamazing,they’re likelytobe justaseagertomeetyouasyouaretomeetthem.However,theyare also very time-starved and don’t want to waste time on opportunitiesthatdon’tpiquetheirinterests.Forfurtherreading on how to get a meeting with investors, read Robin Klein’s post on the matter here: http://bit.ly/1HP65Gx.

Invest in Yourself

Because building relationships is so crucial to the fundraising process, I have consistently seen good relational skills makeabigdifference for founders,notonly in termsoffundraising,butalsointermsoffindingemployees,clients,andpartnersfortheircompany.Theoldadage,“It’snotwhatyouknow,butwhoyouknow,”isverymuchconsistentwithwhatI’veobservedovertheyears.Keepinginmindthatyou are the biggest factor in your ability to build relationships, asubstantialinvestmentinyourselfisneededtofine-tunethisessentialaspectoffundraising.

If you are the kind of person who is panicked by the idea of meeting and speaking with lots of new people at startup events, there are many ways to practice that can hopefully easeyourpain.Let’stakealookatafew:

http://bit.ly/1HP65Gx

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The Human Element

1. The easiest place to start is the self-learning route, with two books I rank very highly in this space: Never Eat Alone by Keith Ferazzi and The Charisma Myth by Olivia Fox Cabane.Thesebookswillhelpyouunderstandmanyofthesocialcuesnecessaryforyoutoeffectivelynetwork,andtheydoagoodjobatexplainingthe“why”ofallthings social, which is necessary for you to understand and internalize before going out and practicing your skills.Thesearemust-reads.

2. Next, if you want to step it up a bit, engaging with a professional coach can help you understand how to overcome some of the challenges you may have that prevent you from networking effectively. A coachdoesn’t necessarily set goals for you, but instead helps you understand what steps to take to achieve what you set out to achieve, considering all the variables you may haveinplay.Coachingworks.

3. Lastly, the most extreme step would be to enroll in an improvisational comedy course. I did it and triedout imprology.comhereinLondon.BoywasIinforasurprise.Itwaslikeshocktherapy,butitgavemeacrashcourse in some of the social dynamics that connect us to others that we frequently forget about or ignore when out socializing.Oh, and if you think improvisationalcomedyisallabouttellingjokes,youcouldn’tbefurtherfromthetruth;Idon’tthinkwetoldasinglejokeduringtheentireprogram.Itwasmoreaboutlearningtoreadothersandreacttotheirsignals.

A key concept that arose during the improvisation course was how to amplify other people’s emotional offers.Manytimes we are too closed in the way we converse and don’t pay

http://www.amazon.co.uk/Never-Eat-Alone-Secrets-Relationship/dp/0385512058

http://www.amazon.co.uk/Never-Eat-Alone-Secrets-Relationship/dp/0385512058

http://www.amazon.co.uk/Charisma-Myth-Master-Personal-Magnetism/dp/0670922870/ref=sr_1_1?s=books&ie=UTF8&qid=1389716127&sr=1-1&keywords=charisma+myth

http://www.amazon.co.uk/Charisma-Myth-Master-Personal-Magnetism/dp/0670922870/ref=sr_1_1?s=books&ie=UTF8&qid=1389716127&sr=1-1&keywords=charisma+myth

http://www.imprology.com/

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attention to how others are reacting (perhaps because we are toobusythinkingaboutwhattosaynext!).Improvisationteachesushowtointerpretpeople’semotions.Anotherkeyconcept in improvisation is understanding the inherent social status we all have relative to each other and how that canchangeindifferentcircumstances,andhowviolatingstatushierarchiescandrasticallyaffecthowothersperceiveyou.Lastly,bypracticingtheseconceptsanddealingwiththeanxiety you will naturally feel as you experiment, you start to learn to identify social offers that others give you to engage withthem.TheclosestexperienceIcanlikentotakinganimprovisationcourseisjumpingintoafreezingpoolofwateronhumansocialinteractions.It’sabitradical,butitcanhelptievariousconceptstogether.Thebookaccompanyingthecourse I took, ImprovbyKeithJohnstone, is also an amazing read—andamust-readifyoutakeacourse.

Intheend,allofthistakespractice,timeandpatience.Therearenoshortcuts.You’llspendalotoftimetryingtocultivate relationships, and you won’t always achieve the outcomeyouanticipated.Onethingthatwasconstantlysaidduringimprovisationclasswas“Don’tbeatyourselfup”;weareallourownbestcritics.Butifyouaregoingtoworkonthese skills and they don’t come naturally to you, it will take perseverance and patience with yourself to overcome the naturalanxietiesyoufeel.

http://www.amazon.co.uk/Impro-Performance-Books-Improvisation-Theatre/dp/0713687010/ref=sr_1_1?s=books&ie=UTF8&qid=1389716609&sr=1-1&keywords=impro+keith+johnstone

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6

The Search for an Offer

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What to Look for in an Investor

I am often asked by founders to identify what tier a prospective investorisin.Asin,whatdifferentiatestheirprospectiveinvestorasbetterorworsethananother,andonwhatbasis.

Just to clarify, although there is no formal “rankingsystem”forthetiersofinvestors,generallyspeaking,everyinvestor sort of knows where they rank relative to others, or atleastrelativetotopinvestors.Thebestfunds,generallyknown as tier 1 investors, are the most in-demand, and the tierorganizationthereafterislargelysubjective.Thereisn’tahugebenefittospendingtoomuchofyourtimefrettingovera“categorical”rankofinvestorsyouarespeakingto,as there are many variables to consider and no formal list anywhere (unless you count historical returns as one metric, but then you rule out some amazing new funds with excellent partnersthatdon’tyethavearealizedtrackrecord).

That said, what isworthexploringiswhatdifferentiatesthebetter-tierinvestorsfromothers.BelowarethesevenattributesthatIbelievedifferentiatethebestfromtherest.As you seek out potential investors, keep an eye out for these variables; the more of these your prospective investor has, thebetteroffyouwilllikelybeasafounder.

1. Has a great network. Thebiggest value-add that aninvestor canbring to the table is theirnetwork. Thelarger their network, the more doors they can open for you.Nothingbeatsadirectintrotosomeoneyouneedtomeet.

2. Has a great brand name. This helps with introductions, but having an investor with a great brand name either

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as an individual (usually is the case for new funds but also older funds) or fund (usually the case for more established funds), can not only help open doors indirectly (as in, not requiring an introduction), but also provide your startup with instant validation to potential customers,partners,andnewinvestors.

3. Has sufficient levels of capital to support you.Althoughdifferent investors have different strategies aroundthis(i.e.anangelcanrarelyfollow-onasmuchasaninstitutional fund), it is generally a good thing to have an investor who can invest in your company throughout itslifecycle.Theageofthefundhasalargeparttoplayinthis.Theolderthefund,thelesslikelyitistohaveasmuchcapitalavailable.

4. Has sector expertise. One way that investors candifferentiatethemselvesasatop-tierinvestorfromtheusual suspects is by having focused experience in your sector.Forexample,aninvestorcouldbeageneralisttier2fund(rememberthatthisissubjective),butasane-commerce investor they may be tier 1—great if you areane-commercecompany,butjustokayifyou’reafin-techcompany.Thisisbecausetheywilllikelyhavealargenetworkintheirsectorofexpertise.

5. Has deal experience. You will go through a lot ofuniqueandstressfulsituationsduringafundraise.Itreally helps to have someone who has gone through the process before and can help smooth things out between allpartiesinvolvedifneeded.

6. Isn’t burdensome. An excellent investor does not burden the founder during the investment process with

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unnecessary or unusual diligence requirements for thestageyourcompanyisin.Forexample,acompanythat is very early stage will likely not have much to be “diligenced”.Ifaninvestorisrequiringyoutohaveanaccurate version of what will happen in your company five years from now and you started your companythree months ago, question whether they truly think the information you will give them has any likelihood of being true (and whether you think they’d make a good investorforyou).

7. (Lastly, and most importantly) Has a big vision.Goodinvestors on your board will help you by working with you on best practices for company building, but great investors will help you set the right vision for your company.Betterinvestorshelpyouthinkbigbecausetheythinkbigthemselves.Thismeansnotonlyhavingan attitude of can-do vs can-not, but also having the experiencetocoachyouthroughthistypeofthinking.

With this list of key investor qualities in mind, consider:

• There are many new investment funds and/or individual angels that come to the ecosystem and therefore may not have an established brand name, but have great networks and experience. Don’t dismiss themprematurely; however, do ask others they’ve worked withwhatit’sliketoworkwiththem.

• Although founders that have done well and gone on to joinafundcanbeawesomepeopletohaveonyourboard,investors don’t have to have been founders themselves tobegreatinvestors(e.g.FredWilsonofUnionSquareVentures).Experienceasaninvestor—havingdonemany

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deals and knowing how the best companies operate—can count for a lot, so look for a blend of all attributes in your investorandnotjustafounder-turned-investorthatcanempatheticallyrelatetowhatyou’regoingthrough.

• If you’re ever stuck between two potential investors, really consider that the person who will be working with youontheboardwillhelpyoudefinemanythingsaboutyourcompanyoverthecomingyears.Choosewiselyandaskyourselfwhoyouwouldratherworkwithlongterm.You wouldn’t want to chose someone based on a brand name alone, who causes you hair loss, heart burn, and emotionalstressonaregularbasis.

Asalways,doyourduediligenceonyourinvestor.Ifpossibleand the opportunity presents itself to request it, ask to speak to their portfolio company CEOs and see what value that investorbroughttothetableforthem.

Creating and Managing Your Pipeline

Onceyou’veidentifiedwhoyouwanttotalkto,organizingtheprocessissimple.Yourlistforreachingouttoinvestorsand managing those relationships is no different than creatingasimplesalespipeline.

Ineffect,youshouldhavealistofpeopleyou’dliketospeak to, a log of how many meetings you’ve had and how many you think you need to have until a potential close (more on this later), and the probability of the deal closing based on how the previous conversation went, and next steps for each.Thebetteryoumanagetheprocessofmeetingpeople,themoreeffectivelyyou’llbeabletogettoaclosequickly.

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Regarding how to reach out to investors, there are many strategiesoutthereandit’snotalwaysclearwhichisbest.Thereisnosilverbullet,buteachhasprosandcons.Hereare a few (with my names for each):

1. The One and Only.Youspeaktooneinvestorthatyoulike a lot and have a good relationship with because of personalreasons.Ifyoucanlockthisonedown,that’sgreatforyou.Butthisisriskyformanyfoundersasitgreatly limits their options and makes them reliant on someoneelse’stimelineandwillingnesstofund.

2. The Cluster Bomb. Effectively,youstartwithyourtopfive,thenthenextfive,andsoforth.Thatway,youdon’tdiluteyoureffortsandspreadyourselfthinreplyingtoemails from investors you are less keen on before you havefinishedmeetingswiththoseyouprefer.

3. The Spray and Pray. Basically, you contact them all atthesametime.Thiscancreatemanagementissuesfor you, but on the plus side, you have many investors talking about you, which can increase your potential buzz…providedtheydon’tallstartrejectingyouatthesametime,thusacceleratingyourdownfall.Investorswill likely second-guess themselves if everyone they knowisrejectingyou.

4. The Preview. Although you should always treat every meetingasarealmeeting,a“preview”meetingdiffersfrom a proper fundraising meeting in that it’s a more friendly discussion about your business in the pre-fundraisingstage.Thislowersthepressureoneveryone,butdoesn’tdoawaywithaninvestor’stendencytojudgeyou as a founder, your team and the market size your

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company operates in, so be mindful that previews can stillbedamagingifyou’reunpreparedforthem.

When considering any of these strategies, keep in mind that competitive dynamics between investors are a really strongsourceofnegotiatingpower,arguablythebestone.Withmore thanonedeal offer, you canbetternegotiateterms for your investment by leveraging one deal against another, and being able to walk away from a deal you don’t like.

An additional point to keep in mind during these discussions is that investors talk amongst themselves, even iftheyareindifferentfirms.Itjusthappens,eitherviasocialeventsor throughestablished friendships. It happens. Sobe mindful that if you say you have spoken with Bob while you’re speaking with Bill, don’t be surprised if Bill calls Bob and discusses your company and is swayed positively or negativelybythatconversation.Myrecommendationistokeep your cards close to your chest until later in the process whenyouareconsideringsyndicates(moreonthatlater).

There are many different ways of reaching out to investors;pickonethatworksforyouandstickwithit.Forthe record, my preference is the Cluster Bomb strategy, as it optimizesyourtimebest.

The Typical Institutional VC Investment Process

VCfirms’investmentprocessesvarytoomuchtothinkofthem as standardized. There are Corporate funds, fundsbackedbyprofessionalinvestorscalled“LimitedPartners”,

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Evergreen funds (that typically invest from their balance sheet),andFamilyfunds—justtonameafew.Additionally,there are deal-champion partnerships, unanimous decision partnerships, and investment committee-heavy partnerships,andnaturallyallsortsofvariantsin-between.Thus, with so much variance between investors, what is the best way to know where you stand in a VC’s process?

Firstandforemost,doyourresearch.Youcandoalotofit online, but there are other things you can do as well:

• Ask.Yes…it’sthatsimple.Whenyourfirstmeetingisover and the investor asks if you have any questions, simplyask.“What’syourusualprocess?”“Whatarethenextsteps?”

• Historical Research—onCrunchBase,AngelList, etc.Find out what they’ve done, who they’ve done it with, andhowthey’vedoneit.

• Portfolio. Research their portfolio of companies and see if you know any of the CEOs of those companies; if you do, or know someone who does, have a chat with them to understand how the fund works and how their investmentdecisionprocessworks.

• People. Research the partner and associate that you will betalkingto.Themoreyouknowaboutthem,thebetteryou can tailor your message to their area of investment interest.Youalsowantgetafeelforwhetheryouwanttoworkwiththeminthefirstplace!

• Competitor. Find out if they have invested in your competitors.

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• Find out how old their fund is, as older funds will likely be less willing to take very high risk investments or mightbeoutofcashentirely.

Once you know who you’re dealing with and have secured afirstmeeting,askquestionstoclarifythisparticularfirm’sprocess:What’syourfirm’sinvestmentprocess?Howdoyouusually work with companies? What’s our next step; how should I follow up?

Let’s imagine a typical venture capital fund might have various steps prior to an investment decision (assume the example below begins with an Associate rather than a Partner; if meeting with a Partner, the process might be faster, but don’t dismiss Associates):

• First Meeting.Mostlykickingthetiresandtryingtogetafeelforthefounders,butalsosizeoftheopportunity.

• Second Meeting.Afollow-uponinformationrequestedfromthefirstmeeting.

• Meeting with a Partner.Inthecaseswheretheabovetwo have been done by an Associate or Analyst at a fund where only Partners can close deals (not always the case),thismightbewheretheAssociatefeelsconfidentenough about the opportunity to present it to the Partner theybelievewillchampionthedealinternally.

• Meeting with all the Partners. IfaPartnerhasbeeninvolved from the beginning, you might cut straight to this phase if all is going well, but either way, meeting with everyone at the same time signals a key moment for the Partnershiptomakeadecisionabouttheinvestment.

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• Investment Committee.SomefundsneedInvestmentCommittee (the supervisors of the Partnership, if you will)approvalondealsasasecondarylayer.Thismightbe a very light or heavy process, and may potentially blockadealthataPartnershipmightwanttodo.

In the end, the best thing to do is to inform yourself about theprocessasmuchasyoucanbeforeandduringyourfirstmeeting, so that you have more certainty about how to navigatetherestoftheprocessgoingforward.

How does an investor review your team?

Earlier, we discussed the importance of your team to an investor. A startup’smanagement team is a company’slifeblood; no amount of awesome ideas will ever overcome a fundamentallyflawedmanagementteam.Intheearlystagesofanystartup,successisallaboutthepeople.

But what makes up a good team? How do you know if you have a good team, if you are a good team member, and if an investor will perceive you the way you perceive yourself?

A good team is comprised of people whose personality attributesincludeacombinationofconfidence,stubbornness,individuality and a sense of self without arrogance; curiosity, humility, energy, maturity and an eagerness to learn.I have found that founders who possess many of these characteristics tend to fare better over the long term than thosewhodon’t.

Butagoodteamismorethanjustacollectionofstarpersonalities.Investorswillanalyzeyourwholeteamtofind:

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1. Technical or commercial competency. This can either mean the founder(s) have relevant experience from having done a startup before or performed well in their role previously, or they have developed the appropriate skills necessary to execute on the stated vision of the company.

2. Quick, constructive conflict resolution.Roadblocksareinevitablealongthestartupjourney,andknowinghowtocopeimprovestheforecastofyourteam’slongevity.Knowingwhentocrackajokeordivideaproblemintopartsortakeabreakcanmeanthedifferencebetweenstayingtogetherorfallingapart.AlthoughIhaveheardof some investors doing an artificial “stress test”duringinvestmentreviews,it isn’tstandardpractice.Aseasonedinvestorcanusuallytelljustfromspendingtimewithateamwhetherinternalpersonalityconflictsareatplay.

3. Intuition about when to persevere or quit. Some people quit too early; others keep going beyond the point at whichastrategystopsworking.Thisqualityishardertoevaluate than some others, but if you can demonstrate awareness of this—perhaps by citing a time when your team abandoned one strategy for another—you’ll be able to show your potential investor that you’ll use his time andmoneywisely.

4. An understanding of the assumptions and metrics about the market they wish to operate in, or at least anunderstandingofhowtoresearchthisinformation.Every great team I’ve ever met has understood the dynamics of their market, known what information they needed to gather and analyze, and how to measure that

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datatodetermineiftheyweregoingdowntherightpath.

5. If the team or founder can articulate their thoughts and plans. Communication both internally and externally is the most important thing to get right within an organization.Youmayhaveanawesomecoderonyourteam, but if he doesn’t understand what management is looking for, he can’t produce something great.Externally, founders with an awesome product who can’t communicate their vision to the outside world won’t be abletointerestothersinjoiningtheirventure.

6. A positive spirit of collaboration.Ibelieveyoucouldargue that collaboration can be summarized as a combination of both conflict resolution skills and communicationskills.A team’sability tocollaborateboth internally (with team members) and externally (with biz partners, investors, and the media) greatly increasesthechancesthattheywillsucceed.

7. The geographical spread of a team.Yes,Skypehasdonemarvels to revolutionize the way we communicate, but forthenecessary“collisionofideas”(borrowingfromSteven Johnson’s book on Where Good Ideas Come From15) to occur repeatedly, close physical proximity is anasset.

8. The equity spread among founders. Although generally speaking most founding teams have an equal equity spread(50/50,33/33/33,etc.)aninvestorwilltakenoteif there is an equity imbalance that may potentially make akeyhireorco-founderfeelunmotivated.

15 http://www.ted.com/talks/steven_johnson_where_good_ideas_come_from

http://www.ted.com/talks/steven_johnson_where_good_ideas_come_from.html

http://www.ted.com/talks/steven_johnson_where_good_ideas_come_from.html

http://www.ted.com/talks/steven_johnson_where_good_ideas_come_from

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When I meet a startup’s management team, I look at the eight attributes listed above and ask myself three questions:

• Does this team have the necessary experience it takes to deliver what they have set out to do? (Teams with technicalfoundersareofparticularinteresttome.)

• Does this team have the insight to identify their own weaknesses and hire good people to complement them?

• Can this team constructively deal with all the challenges that have and will occur during the lifecycle of a company?

If you’re considering creating a company or are already fundraising, think about what skills you and your team members have and make sure you can articulate when andhowyouwillhireforthedeficiencies.Additionally,ifyou’reasinglefounder,ithelpstofindaco-founderwithcomplementaryskills.

In my experience, the more subjective a question’sansweris,thebetteroffyouaregettingvariousopinionsinordertotriangulatetheanswer.Tothatend,Iaskedsomeindustrycolleagueswhattheylookforinateam.Below,youcanfindsomeoftheiranswers.

Sitar Teli (@sitar), Connect Ventures

I look at founding teams through two lenses: skill set and founder/market fit. For skillset, I look for a balance of skills amongst the founders in the following three areas: 1) design /UX,2)marketing/distributionand3)tech.They’re all important, but relative importance

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dependsontheindustrytheteamistackling.Asforfounder/marketfit, Ipreferfoundersthat have a deep understanding or experience withthemarkettheyarebuildingfor.

Ivan Farneti (@ivanfarneti), ex-Doughty Hanson Technology Ventures

Thefirstattempttoanswercomesoutoftheobservationoftheteamduringthefirsthourofmeeting(itthenneedsmoretimetoconfirmit,butifthefirstimpressionisnegative,thereistheendofthejourney).Aretheypassionate?Competent? Ambitious? Do they come across ashonestanddedicated?Isthis“aproject”,oris this the thing they will be doing twenty-two hours a day for the next [several] years? How is the team dynamic? Do they complement each other or are they a duplication of the same guy? Is there a decision making process, or is it one guy that decides? Do they argue against each other (a no-no during the pitch), or have they built a good delivery of the pitch that shows maturity and collaboration?

Robin Klein (@robinklein), Index Seed & TAG

• Balance: product, technology, market /commercial.

• ALeaderintheteam.

• Goodmutualrespectforoneanother.

http://twitter.com/#!/ivanfarneti

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Alliott Cole (@alliott), Octopus Ventures

In my view, I look for three things:

• Leadership: a CEO who can articulate a vision that excites and imbues a sense ofmissioninhisteamisveryimportant.This is often evidenced by the caliber of team he is able to recruit around him [whenhehasnothingelsetooffer].

• SelfAwareness:Businessesneed“flourto balance the yeast”. Great teamshave a balanced breadth of expertise andexperience,not justonehero.Asabusinessgrows,sotheteammustevolve.A willingness to embrace this change is critical.

• Openness: We look for teams who are willing to consult and collaborate. Wewish to work closely with and assist teams whereverpossible.

Ben Tompkins (@b_tompkins), Eden Ventures

Edenlikestoinvestinateam.ThatisNOTonefounder who has hired a group of employees but still holds all the equity him/herself.To us, a team is a group of like-minded people who have come together to pursue a commonvision.Theyareall“atrisk”intheopportunityandsoarelookingforsignificantwealth creation. They regard each other as

http://twitter.com/#!/alliott

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peers in the business and have comparable equitystakes.

Theyhavetobesmart.Andpersistent.Onegood sign is where the team worked together before, it didn’t work out but here theyareagainonthenextgig. Let’scall it“stickability”.

It’s easy to build a team once you’ve raised money.Weoftenhearthat“theteamwillcomeoncethemoneyisin.”Thisisnotwhatwearelooking for; we are looking for a team that has been built on a common vision through the toughtimesofstartingacompany.Wherethefounders have got behind the opportunity, as ateam,beforethecashcamein.

Sean Seton-Rogers (@setonrog), Profounders Capital

Metrics, knowing your numbers cold, measuringeverything.I’malloverthatstuff.Seriously.Don’tknowwhat’sgoingrightorwrongifyou’renotmeasuringit.

Christoph Janz (@chrija), Point Nine Capital

Therearelotsof“obvious”qualitiesafounder/management team should have: they must know their market, they must me smart, they must be extremely dedicated, etc. This hasbeen said a million times already of course,

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butthatdoesn’tmeanit’swrong.

To pick one quality which is particularly important from our point of view, the founders need to be able to build a kick-ass product that solves a real problem. As early-stageinvestors, we can and love to help in many areaslikesales,marketing,hiring,financing,etc.,buttheabilitytocreateagreatproductwithaclearproduct/marketfitissomethingwe believe needs to be in the founder team DNA.

Jason Ball (@jasonball), Qualcomm Ventures

I look for teams that innovatevsoptimize.Innovation means a step change that can create an entire new category (and produce outsizereturnsforaninvestor).Optimizationonly improves an existing process or service through incremental gains (and subsequently producesmediocreinvestmentreturns).Mostteams are only improving on what’s already available,andcallingit“innovation”wheninreality it’s only optimization…

Vincent Jacobs (@vincejaco), Kima Ventures

When we invest in teams at seed stage, we are looking for founders that have a unique insight into the market. Often this comesfrom direct experience, from their personal

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or professional lives, of the problem they’re workingtosolve.Fortheteamasawhole,welook for a balance of all the skills required to build the initial product and to get to market quicklywithoutneedingsignificantexternalhelp.

Christian Hernandez (@christianhern), White Star Capital

So much of the bet we place on a company in theearlystageisbasedonthefoundingteam.We know there will be pivots from the glossy deck, challenges as the tech scales, but also opportunities for personal growth. Whenlooking at the team I am naturally attracted to founders who combine a sense of delusion that their idea will win, with the technical chops to pullitoffbutmostcriticallythehumilitytoknow that they cannot do it themselves and will need a team and investment partners to achievetheirvision.

A founder who believes that he or she should continue to do everything will likely fail (or burnout).TheCEOhastobeheadcheerleader,head sales person, head visionary, head Board manager and must therefore learn to trust and delegate the team he or she builds around them.

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Nic Brisbourne (@brisbourne), Forward Partners

Being a founder is a tough thing. There’sa bunch of characteristics that every good founder displays, and the more the better, e.g. smarts, charisma, resilience, energy,rapidlearning.Oneofthemostchallengingthings though is getting the evolving balance right between listening to others (including investors) and doggedly pursuing a path or strategy.

In the early days, almost nobody except the founder believes in the vision, and stubbornly sticking to it in the face of nay saying advice iscriticaltosuccess.Fastforwardacoupleofyearsandthegamechanges.Thebusinessismore complex and success becomes at least in part about executing well on disciplines like sales, marketing, and recruitment that have been mastered by other people in other contexts.Whilegeneric“bestpractice”isn’tbest for many startups, there’s still a lot to learn; when founders reach this stage, they shouldlearntolisten.

Notalldo.

Reshma Sohoni (@rsohoni), Seedcamp

Ireallylookforthe“3Ds”intermsofskill-set in a founding team - The Developer (the builder), The Designer (the product visionary), The Distributor (the hustler) - whether that’s

https://twitter.com/#!/brisbourne

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all in 1 person or 2, 3, or 4 people doesn’t matter. In terms of attitude it’s all aboutthat can-do hustle, the positive frame of mind, being helpful and giving to others, and showingconfidenceandgravitas.

Philipp Moehring (@pmoe), AngelList

Team means team

People who work together on a startup should have some experience of spending time together before, ideally in a work setting where they were productive and successful together-atwhicheverlevel.Likeinasportsteam, they should play different positionsandsubstitutedeficiencies ineachother tobecomeabetterwhole.

Founder Market Fit

Founders need to understand the problem they’re solving better than anyone else.This is because of a long personal passion, professional experience in a market or industry, or simply because they have solved thisproblemmanytimesbeforeinadifferentway.Thefoundersshouldreallybetheonesknowing the problem and product in and out, and find a solution to previously unsolvedproblems because of that deep and wide reachingunderstanding.

Together that results in a team that works well together and can solve real problems because

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ofadeepunderstandingofaproblem.

Andy Chung (@andychung), Angel Investor & Founder

Founding teams are the essence of a startup, they create the culture, the product and the vision.

As a founder and investor I look for a few things:

• Passion for the problem - when things are toughthisisallyouhaveleft.

• One tech co-founder - someone needs to beresponsibleforbuildingtheproduct.

• History of creating value together, demonstrates compatibility and complimentaryskills.

Sherry Coutu (@scoutu), Angel Investor

I look for an entrepreneur who can attract and retain a diverse team hungry to learn in order to do everything possible to solve a BIG problemthatis(tome)worthsolving:-).

Jon Bradford (@jd), RSS Addict, Co-founder of F6S and Tech.eu and seed investor in 100+ startups

What do I look for in a seed investment? I have five simple criteria - Team, Team,

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Team,Opportunity andTeam.While it is athrowaway soundbite and it clearly highlights the importance of team - each of those criteria related to the team can be broken down into greaterdetail.

I want to see a diverse but balanced team with complementary functional skills and personalities types. I want to see a teamthat is passionate and obsessive about their businessandproduct.Iwanttoseeateamthatis exceptional, super smart and not willing to compromiseonhiringevensmarterpeople.And finally, I want to see a team that hasdoggeddetermination.

Ordinarily seed investors need to work on gut instinct, that is supported by an aggregate of data points from multiple investments and even more meetings with prospective investments.A good seed investment is like pornography, it is hard to define but you know it when you see it.Ialsohaveapersonal“noa$$hole” rule.Nomatterhowexcitingan investment opportunity might be - if the foundersarea$$holes-Isimplywon’tinvest.Lifeistooshort.

Jeff Lynn (@jeffseedrs), Chief Executive Officer at Seedrs

When I look at teams that want to raise capital for their businesses through Seedrs, there are

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three key things I really focus on:

1. Product-Team Fit.We talk a lot in thestartupworldaboutproduct-marketfit,butIthinkunderstandingthefitbetweenthe team and the type of company they’re building is just as important.Are these the right people to build this particular type of company? Do they have the right experience and orientation for this particular field? Someone whocould create an amazing SaaS enterprise play might not be the right person for a fashion-led e-commerce site, and vice-versa. Ievenusemyselfasanexample:as a former lawyer and investor, there wasagoodfitformetobuildSeedrsasaregulatedfinancialservicesbusiness;buthad I set out to build a games business, when I haven’t been a gamer since I was teenager,thefit(andthusthelikelihoodofsuccess)wouldn’thavebeenthere.

2. Hustle. I want to see teams who willget out there and do everything legal andethicalthatittakestobeasuccess.Building a business is hard work, and while innate talent and intelligence are key, they’ll get you nowhere unless you’re willing to fight day-in and day-out tofind customers, generate sales, form partnerships, ship product, raise funds anddoeverythingelse.It’samazinghowmany smart people there are, even hard-

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working smart people, who expect success to come to them rather than realising that theyneedtopushforeverybitofit.Thisisespecially important in the crowdfunding world–wherethedifferencebetweenasuccessful and an unsuccessful campaign is often about how well the team has activated their networks and created interest among their communities – but it applies to all aspects of building a successfulbusiness.

3. TheRightLevelofInsanity.ThefinalthingIreallycareaboutisthattheteambejustinsane enough to think they can take over the world without being so detached from reality that they won’t do the hard work tobuildtheirbusiness.Ifthebusinessisrun by people who are completely focused on a narrow niche or a highly conservative growth strategy, it’s unlikely to ever produce the kinds of returns that will be interesting to me; meanwhile, if the team is such a group of dreamers that they’re going to navel-gaze all day and can’t focus on the nitty-gritty of gaining traction and raising funds, that’s no good either.Thereisobviouslyaveryfineline,and I’ve gotten it wrong on both sides in thepast,butIthinkthis“insanitytest”a good way of thinking about the balance between ambition and practicality: I want a team that really wants to shoot for the

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stars but knows that to get there you have topassthemoonfirst.

Scott Sage (@scott_sage), Angel Investor

I invest into teams who are able to defineand build their vision all with a strong bias foraction.Theyhavenoshortageofhumilitygiven they’ve peered over the edge more than once.

Nick Verkroost (@nick_verkroost), Principal at DC Thomson Ventures

I want to see a well rounded team with skills distributed between the founders:

1. A commercial genius who brings a deep understanding of the customer problem and the dynamics of how to enter the market.

2. A technical wizard who has the expertise tobuildthesolutionyouneedtobuild.

3. The operational guru who is obsessed by the metrics and how activity drives results.

4. But most importantly, I love it when founders tell me what they think is missing from their team in terms of expertise,knowledgeandexperience.

https://twitter.com/#!/scott_sage

https://twitter.com/#!/nick_verkroost

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Howdoesaninvestorreviewyourfinancialplan?

The financial plan, for most tech-focused early-stage founders, is probably one of the most dreaded bits of the investment pack to send your prospective early-stage investors.

As much as we’d like to think we can predict the future with all sorts of fancy extrapolations on growth rates like we didwithmilestones,thetruthiswegenerallycan’t.Studies have shown16 that people are just crap at predicting thefuture.Theyhighlightsuccesscasesandburyfailures,thusgiving a skewed view of their ability to accurately predict outcomes.Considering thatmostpeople createfinancialprojectionsbasedonassumptionsofwhatneedstohappenfor an upcoming month’s worth of operating events and thenprojectfromthereforxnumberofmonthsoryears,youeffectivelycreateaseriesof increasingly improbablechronological events with the last event (month) in the series being a function of the compounded set of decreasing probabilities, all of which are asymptotically approaching zeropercentintheirlikelihoodofhappening“accordingtotheplan”.

What’smypoint?Well, thatyourfinancialplan isn’tworthmuchfromanaccuracyperspective.Soifthat’strue,you wonder, do I even bother?

Inshort,yes.

16 http://freakonomics.com/2011/06/30/freakonomics-radio-hour-long-episode-4-“the-folly-of-prediction”-2/

http://freakonomics.com/2011/06/30/freakonomics-radio-hour-long-episode-4-%E2%80%9Cthe-folly-of-prediction%E2%80%9D-2/

http://freakonomics.com/2011/06/30/freakonomics-radio-hour-long-episode-4-%E2%80%9Cthe-folly-of-prediction%E2%80%9D-2/

http://freakonomics.com/2011/06/30/freakonomics-radio-hour-long-episode-4-�the-folly-of-prediction�-2/

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It’s the forensic analysis of your thinking behind the model that gives an early-stage investor a feel for how you think and how you want to direct your company in the near future. Secondtothat,howefficientlyyouuseandplanto use cash to accomplish mutually agreed-upon goals will revealmuchaboutyouandyourteam.

I’m not going to discuss how you should format your financials,orexplainbasicaccountingprinciples,orhowfinancial statementswork.Thereareplentyof resourcesonlinethatcanhelpyouwiththat.RatherIwanttoexplorehow an early-stage investor forensically reviews the financialplanofanearly-stagestartup(vs.a later-stagestartup, where there is a historical performance record with multipleyearsofbudgetsandactualfigures).Effectively,I’mlookingforthecausesandeffectsofeachnumber,andthekeyassumptionsbehindthosefigures—withemphasisontheword“assumptions”.Mydiscussionoffinancialswithafounder or team will focus entirely on their assumptions and thereasoningbehindthem.

When an investor is discussing numbers with an entrepreneur, demonstrating a solid understanding on why the numbers are there, a clear view of the market dynamics in which their company operates, realistic customer acquisitionassumptionsandhiringplans,effectiveuseofmarketing budgets, and an understanding of the appropriate expensesforagrowingcompany,canhaveaHUGEimpacton establishing the necessary credibility of competence an entrepreneurneedstoinspireconfidence.Theopposite—seeing a financial plan with current month revenues/expensesprojectedfiveyearsintothefuture,assuminglinearor exponential growth in all aspects of the organization and

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presentedwithaconfidenceof“thisiswhatwerealisticallyexpecttohappen”—canbedemoralizingforaninvestorifnotoutrighthumorous.

Let me share with you a little secret: With a few exceptions, you will always know your industry and its numbers better thananyinvestorwill.However,anexperiencedinvestorwill ask you the right questions to ascertain whether or not you know your industry well enough to increase the probabilityofyourowncompany’ssuccess.Assuch,really do your homework.AndbythatImean,don’tjustgooutandbuildaproductandhopetherewillbecustomers.Assoonasyouhave customervalidation,makeaneffort tounderstand the market dynamics of that customer: How many of them are there? What is their concentration? How do you reach them? Are they locked in with a competitor with some sort of monthly or annual contract? Do they buy in a cyclical pattern? Do they prefer to buy online or only from salespeople? Do they need help setting up your product or can they use it as-is? What are they generally willing to pay for other similar services? How is the market growing? Mindyouthatinsomecircumstances,theabilityto“charge”customers may not be deemed the real potential for revenues atfirst(thinkaboutTwitterwhentheywerestarting).Butagain,it’showyouarticulatethefuturevaluethatmatters.

If you take all those questions and research them, what youwillfindarekeycomponentsofwhatwillmakeuptheassumptions on your future revenues (or value creation objective).Perhapsyourcustomersareonlywillingtobuyyour product during the holiday season, so you will have a hard time with cash coming into your company during the off-season.Financialsthatdon’ttakethatintoconsideration

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would look somewhat unrealistic to an investor, not in the numbers,butinthemarketdynamicsofyourproduct.

The more you can explain the reasons why a number in yourfinancialmodelisbasedonarealisticsetofassumptions,thebetteroffyouwillbe.Butlookatitanotherway:whileyou are doing this exercise, you will realize whether yours is actually a business that can make money (or some other methodofvaluecreation).Forexample,ifyoudotheanalysisandfindthatinthesectoryouareexploring,peoplearen’twilling to pay and that many other competitors are giving theproductawayforfree,youmayhavejustsavedyourselfa serious amount of wasted energy!

Which brings us to the next part of the homework: understanding your company’s expenses. If you have found a market where your product is actually capable of generating somesortof value, thenext step is tofigureouthow tospendyourmoneytomatchthatcustomergrowth.Whendo you hire new sales people and how many sales people do you need? When do you bring new servers online, spend on marketing,spendonnewoffices,laptops,etc.?Obviouslythe types and amounts of expenses vary from company to company, but what matters here is how they map to what you are trying to do and whether that mapping is realistic (whatisyourcustomeracquisitioncost?).Forexample,ifyouhave a marketing charge of $500 one month, is it realistic to expect that next month your customer sign-ups will increase by500percent?Well,asIsaidbeforeaboutthe“dirtylittlesecret”…an investormayhavean idea,butperhapsnotthe exact details, but for sure will expect you to explain how the$500willequal500percentgrowth.Theinvestorwillevaluate your credibility based on the credibility of your

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answer.Forexample,ifyouanswer,“Iwillbuy$500worthofflyersandpassthemout”,youcanrestassuredthatIwillnotbelieveyour500percentgrowthfigure;butifyourteam’sbackground has a track record of low-cost viral marketing campaigns, and your answer is basically a version of that… well, Imight justfinditplausible. Imaybeexaggeratingthebitaboutaninvestorhaving“noflippin’idea”,asmostinvestors will have seen enough of what works and doesn’t tocallyououtonit.Butagain,ifyoucanwalkaninvestorcredibly through your assumptions, it will do wonders for theconfidenceyoucreate,particularlywhenyourbusinessmaybetryingtodothingsinaverydifferentwaythantheinvestormaybeusedto.

Last and most importantly is the review of how the expensesmap to the revenues as far as cashflow isconcerned.Thelifelineofacompanyishowmuchcashithasbeforeiteitherdiesorneedstogofundraisingagain.Assuch, investors not only want to know how much a company needs in terms of cash to execute its vision, but also how thatcashisbeingused.Ifthereisahugemismatchhere,orthere isn’t enough time for you to reach your company’s next milestone,thismaybeapointworthdiscussing.

As you may have heard in the rumor mill, not all investorstakeprojectionsseriouslyduetotheinherentlyinaccurate nature of assumptions with little-to-no history behind them. One method investors sometimes use tofigureouthowmuchcashyouneedistocutanyrevenueexpectations you have anywhere from 50 percent to zero, in order to see how long your company can survive without anycashwhatsoever.Thisiswhyitissoimportantforyoutoknow what your monthly cash burn is and what your cash-out

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dateis(whenyourunout).Withtheseshortcutsnumbersinmind,andamodelbuilttoallowaninvestortotestdifferentscenarios (sensitivity analysis), you’ll be further along in being able to come to an agreement as to how much cash yourcompanymayneedtoachieveyourkeymilestones.

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7

Understanding your Deal

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Deal Structuring

Deal structures can come in all shapes and sizes ranging from straight-up equity (including ordinary and preferred shares) to convertible notes, warrants, and newer structures suchasSAFEsand“convertibleequity”tonameafew.WhileI won’t go into the exotic variants in depth (plenty of that on theweb),we’llcoverconvertiblenotesandequitybrieflyasthey tend to be the most commonly used structures in early-stagerounds.However,beforeyouengageinconversationswith investors about deal structures, let’s cover a few basics:

1. Don’t focus on the deal structure at the start of a discussion with an investor; focus on what amount of money you need to build your company, and when you needtogetitby.Foundersfrequentlyhearthatitisenvogue to close deals with a convertible, or equity, or whatever.Andtheymayhavereadablogpostwithalistofreasonswhyoneisbetterthantheother.Myadviceisthat you should understand your personal circumstances and those of your potential investors to determine the bestapproach.Forexample, in somecases investorsmay be more incentivized to give you more cash if the dealisdoneinaspecificcountryorinaspecificstructurebecauseoftaxbenefitstheymayreceive.Whileinsomecases this may make things a little trickier for you, it may beworthitfortheadditionalmoney.

2. Don’tbehungupononetypeofdealstructure.Thereare many ways for you and an investor to come to an agreementaboutstructuringtoclosearound.Beforeentering into discussions about deal details with an investor, decide what you are willing to compromise on in order to receive funds, rather than dogmatically

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dismissing some options you might be presented with ifotherdealsdon’tmaterialize.

3. With that in mind, don’t get over-complicated or deviate toofarfromwhat’smarketnormal.Anythingthatisneworvastlydifferentintermsofdealstructuringwilleitherhave unforeseen loopholes at worst, or at best, additional legal costs from lawyers having to draft something they don’talreadyhavetemplatesfor.

Deciphering an Equity Term Sheet

This may seem obvious to some, but to be on the safe side, I want to clarify that when you’ve received a term sheet for an equity investment, the term sheet is not where the deal ends.Rather,thetermsheetmerelysummarizesthekeyterms of the deal; more documents will follow before the finaldealclosing.Atypicalequitydealcanbelikenedtoaniceberg, documentation-wise: the tip is merely the term sheet,theheavystuffisunderthewater.

Another thing to consider when it comes to equity termsheets is that theyvaryamong jurisdictions.As in,a term sheet thatworks in theUnited Kingdomdoesn’tnecessarily work for a company whose legal headquarters areinGermany.Assuch,youneedtomakesureyougetlegalcounsel, particularly if you’re not sure about the terms and howtheyapplytoyourjurisdiction.

That said, there is a lot of learning you can do to prepare yourselfwiththe“language”ofatypicaltermsheet.IntheUS,theSeries Seed documents17 are the most well known,

17 http://www.seriesseed.com

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and as such, it would behoove you to familiarize yourself withthemforanearly-stagedealbasedintheUS.IntheUKandcertainpartsofEurope,Seedsummit.org aggregates termsheetsthatmirrorthoseoftheUS-centricSeriesSeeddocuments,butrepurposedfortheUK,Ireland,France,andGermany tonamea few.Again, review thesedocumentsas a way of helping yourself become familiar with real-life terms.OtherresourcesincludetheNVCA,BVCA,andEVCAwebsites, each of which includes links to model documents fordifferentstages.

While I won’t go into the legal nitty gritty of a term sheet, I will quickly summarize the sections so that you familiarize yourselfwiththebasicstructure.Thereareseveralsectionsthat comprise an average term sheet, but they generally fall into the following buckets:

• Economics of your deal (valuation, round size, etc), includingyouroptionpoolsize.

• Structure of deal,whichspecifiestypicallywhatkindof share type (preferred or common/ordinary) as well as anykindoftranching.

• Control Provisions, which investors will want in order to make sure that they feel involved (which control provisions should be included are a topic of much debate).

• Treatment of Founder’s Shares when a founder leaves.Thisisusuallydoneintheformof“reversevesting”.In summary it is a mechanism that allows you to fairly preserve your equity when another founder leaves prior toapre-allottedtime.

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• Board & Governance structure.Therearemanyvariantsonthe“idealboard”,soIwon’tcoverthesubjecthere,but typically there is a desire by investors to be involved at the board level in some capacity (again, another topic of debate, particularly on whether early-stage investors should have director seats, but alas, a topic for another day).

• Deal Fees.Effectivelywhowillpayforwhat,intermsofthelegalsforcompletion.

• Exclusivity & Legal Binding. This is another one ofthosemisunderstoodsections.Whileitisveryclearonmost term sheets that the document is non-binding, it is generally seen as very very very bad form to sign a term sheet without the intention of taking the deal once the necessary paperwork (bottom of the iceberg) and due diligence are complete. Naturally there arealways extenuating circumstances, but generally, it is ill-advisedtoplaygameswithwhatyousign.

Deciphering Convertible Notes

Moving on from simple equity and onto convertible notes, I want to share with you an excerpt from a blog post I wrote on the matter with the editorial and legal help of Dale Huxford18, who was then working for Orrick,Herrington&SutcliffeLLP: “Theconvertible note gets lots of attention in the blogosphere asanalternativetotraditionalequityfinancing;someofthisattentionisgoodandsomeofitbad.Someinvestorsrefuseto use convertible notes, while others love them as a quick

18 http://www.orrick.com/Lawyers/Dale-Huxford/Pages/default.aspx

http://www.orrick.com/Lawyers/Dale-Huxford/Pages/default.aspx

http://www.orrick.com/Pages/default.aspx



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wayofgettingacompanythecapitalitneeds.”

Convertible notes are sometimes viewed as a “thebestofbothworlds”frombothacompanyandinvestor’sperspective: on the one hand, a note is a loan, so the investorenjoysmoredownsideprotectionthanwouldanequity holder in the event the company is forced to wind up or dissolve for whatever reason; on the other hand, if the company eventually raises money by selling shares to laterinvestorsinatypicalearly-stagefinancinground,thenrather than pay back the outstanding amount in cash, the principalandinterestare“converted”intosharesofstockin the company (usually at some sort of discountoffthepriceofferedtonewinvestors–I’lldiscussthatbelow).Inotherwords,theinvestorenjoysthedownsideprotectiontypicallyassociatedwithdebtlenders,butisalsopositionedtoenjoytheupsideopportunitytypicallyenjoyedbyequityholders.

As with any tool, it’s best to have a thorough understanding of the pros and cons of each of the convertible note’s features and how they can be used for your individual circumstances. Fortunately, convertible notes typicallyhave fewer moving pieces than do equity instruments.This explains, in part, why they’re sometimes favored by early-stage companies and investors; the negotiation and documentation for a convertible note round is likely to be farlesstime-consumingandcostlythanforanequityround.Before we proceed any further, let’s look at the basics of a convertiblenote.

1. Total Amount Raised by the Note.Thisamountdoeshaveanaturallimit.Thinkaboutitthisway:youhaveanamount“outstandingonyourcaptable” thatwill

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bepartofanupcoming round. Ifanewround in thefuture isn’t particularly big, having too much money outstanding can create a problem with your convertible noteholderstakinguptoolargeaportionofthatround.Example: a $300,000 convertible which converts as part of a total $600,000 seed round would loosely mean that the convertible note holders would have 50 percent of theround.Iftheroundwassupposedtobefor20percentof your equity, that means your new investor will only get 10 percent, an amount that may not excite him that much, and you only get 50 percent new money in the door. To limit the extreme cases of this being done,investorsusuallycreatea“qualifiedround”definitionwithin the Note’s terms for conversion (see bullet #5 below), which reduces the likelihood of this amount being disproportionately larger than a new investor’s amountaspartofanewround.

2. Discount Percentage.Simplyput,ifsharesareworth$1, a 20 percent discount percentage would mean that an investor would get the shares for 80 cents. Forcases where the next round’s valuation is below your convertible note holder’s cap (as set in point #3 below), a discount factor will yield the convertible note holder a marginallycheaperpriceforhavingtakenariskonyou.Typically this discount percentage is likely to be between 15-25percent.Anotherexample:Aroundclosesat$3million.Yourcapisat$5million.Yourconvertiblenoteholders have a 20 percent discount, so they get to convert intothenextroundatavaluationof$2.4million.

3. Limit On Company Valuation At Conversion (the so-called Valuation Cap).Inordertocalculatethenumber

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of shares into which the outstanding balance on a convertible note will convert, you must know the price at whichthenextround’sequitysecuritiesarebeingsold.Price per share is calculated by taking the company’s pre-money valuation19 (negotiated at the time of the equityfinancingbetweenthecompanyandtheinvestors)and dividing that number by the total number of outstanding shares in the company (the company’s fully diluted capital).Recall,however,thatconvertiblenotesare typically entered into in anticipation of an equity financinground;thus,atthetimeaconvertiblenoteisissued, no one knows what the negotiated pre-money valuation will be if/when the company undertakes equity financing.Consequently,nooneknowsexactlywhatthepricepersharewillbeatthetimethenotesareissued.This creates uncertainty and is a cause of anxiety for some investors, particularly for those investors concerned that the number of shares into which their note may convert may be insignificant relative to the other shareholders, particularly in the event the pre-money valuationatthetimeofconversionisespeciallyhigh. The valuation cap is intended to ease investor concerns by placing a maximum pre-money valuation on the company at the time of conversion.With the use ofa cap, an investor can effectively set theminimumamount of equity he is willing to own as part of having participated in your convertible note round. Forexample, if you have a $200,000 note on a valuation that has a $5 million cap, the worst case scenario for that convertible note holder would be 4 percent equity

19 http://en.wikipedia.org/wiki/Pre-money_valuation

http://en.wikipedia.org/wiki/Pre-money_valuation

http://en.wikipedia.org/wiki/Pre-money_valuation

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(0.2/5=4percent)afterthenewroundisover.Accordingto statistics gathered in 2014, the typical valuation cap for very early-stage companies was around $4 million to $6 million, with most companies at the Series A level settling on $10million valuation cap ormore. One thing to note is a rising prevalence of uncapped notes.Clearlythisisafounder-friendlyoutcome,andif possible, always nice to get. The flip-side is thatan investormay feel a bit “unprotected” should thecompany do exceedingly well and their amount thus converts to a much smaller percentage than originally hoped.Formorestatisticsoncapsandothercomponentsof a convertible note, check this book’s website20.

4. The Interest Rate on a Note.Aconvertiblenote isaformofdebt,orloan.Assuch,itusuallyaccumulatesinterest, usually between 4-8 percent between the point when you sign it and when it converts. Thisamount is usually converted as part of the overall amount at the next round. For example, if you havean annual interest rate of 8 percent and you have a LoanNoteof100,thenyou’dconvert108afterayear. Note: In the US, it’s highly advisable to include aninterest rate, even if it’s simply a nominal amount equal to the applicable federal rate (most recently at less than 1 percent). If you don’t include an interest rate, anyamount that could have been earned via interest is taxed tothecompanyasgain.Soit’snotreallyanoptiontoexclude it intheUS. IntheUK,youdon’tnecessarily




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need to include an interest rate should you wish to omit it.

5. Conversion Triggers. Thepoint of a convertible noteis for it to convert at some point in the future, not for it to stayoutstanding indefinitely.As such, thenotewill likely specify a seriesof triggers for conversion.OneImentionedearlieristhenext“qualifiedround”.Basically this means that the round is big enough to accommodate the amount in the note (without washing outnewinvestors).Itisthetypeofroundthatistypicalfor the next step in the company’s growth, and will give the note holders the types of rights they’d expect for theirsharesonceconvertedfromloantoequity.Anotherconversion trigger is an expiration maturity date, whereby the note holder typically can either ask for their money back (although this rarely happens) or basically seek to converttheoutstandingamountatthatpoint.Uponachange-of-control event in the future and before the convertible is converted, investors can sometimes ask for a multiple of their loan back as payment in lieu of converting to ordinary shares prior to the completion ofthechangeofcontrolevent.Therearemoretypesofconversion triggers that note-makers can add to a note, butthesearethebasicones.Youcanseesomeexamplesof this in the wording of the examples available on this book’s website21.

Again, these are the headline terms of a convertible note, andnotrepresentativeofalltheterms.However,forearlydiscussions with potential investors, you’ll rarely have to talk about anythingmore than items 1-4 above.Beyond





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that, you’ll likely have to involve lawyers (or experienced dealdrafters)tohelpyoufinalizethedocument.

Now that we’ve reviewed the basics of a convertible note, on this book’s website22you’llfindalinktosomestatisticsof what common terms have been given to Valley-based companies.IfyouarenotintheValley,youwilllikelyhaveadifferentsetofaverages,sobemindfulofthat.

Nowlet’srecaptheprosandconsofusingaconvertiblenote.

Pros

• Typically less involved and therefore requires less paperwork than equity rounds; can cut down on time andlegalfees.

• Investors enjoy downside protection as debt holdersduring the earliest and critical growth stages of the company.

• Company can defer the negotiations surrounding valuation until later in the company’s lifecycle (i.e.,for companies at the earliest stages of planning and preparation,valuationscanbemoredifficulttodefine).

• At conversion, note holders typically receive discounts or valuation caps on converting balance, thereby rewarding the earliest investors appropriately without causing valuationissues.

Cons

• If a convertible note is made to be too large, it can




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negatively impact your next round because it’ll convert to a disproportionately large portion of that round, effectively crowding-out yournext round’spotentialinvestorsfromhavingtheequitystaketheymaydesire.

• If a convertible note’s cap is too low, the founders may need to take the additional dilution that would happen if they exceeded the convertible’s cap in order to accommodatealargerroundlater.

• Because a convertible note can be quite versatile, sometimes investors can add clauses in there that have greater implications down the road, such as being able to take up more of a future round than the actual amount they’veputin.

• If not careful, you can accumulate too much convertible debt,whichmayburdenyouataconversionpoint.

• Doesn’tgiveyourinvestorsSEIStaxrelief(intheUK),thusmaking it less attractive than an equity round.There may be some workarounds, but generally SEIS and convertiblenotesarenotseenascompatible.

• Convertible note holders receive the same investor rightsasfutureinvestors.Ifthefutureroundincludespreferred shares, this may confer more rights than what an equity investor would have received had they simply doneanequitydealonOrdinaryshareswithyou.

• If the convertible note automatically converts at the next equityraise(i.e.,theinvestorhasnochoice),investorsmay wind up being forced to convert into securities shares despite not being happy with the terms of the

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equityfinancing.Thenoteholdersmayunfortunatelyhavelessinfluenceinnegotiatingthetermsoftheequityfinancing,whichpartiallyexplainswhysomeinvestorsarereluctanttoinvestwithconvertiblenotes.

• Finally, while convertible notes allow the company to defer the valuation conversation until a later time, any inclusion of a conversion cap will raise a similar conversation, which defeats some of the purpose for why companies and investors alike originally favored the convertiblenoteasaquick-and-easyfinancingsolutiontobeginwith.

Nowlet’sexploreafewmorecoreconcepts.

Seniority. A convertible note is a form of debt or loan.Although it’s not too common to hear about investors askingfortheirmoneyback,theyinfactdohavethatright.Additionally, one of the privileges of having the Note act like debtisthatitactsseniortoequityinthecaseofaliquidation.What this means in practice is that note holders will get their moneybackfirst.

Subscription Rights. Some investors like to havemoreequity than their invested amount would likely yield them uponconversion.Soonethingtolookoutforishowmuchthey want to take up of the next round as part of having been intheconvertiblenote.Example:An investorgivesyou $50,000, which converts at your next round of some large-ishvaluation.Thismightyieldthatinvestornexttonothingintermsofequitypercentageownership.However,that investor had a Subscription Right for up to 30 percent of the new round, so that allows him to participate on the new roundwithmoremoney,thusaffordinghimalarger“seatat

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thetable”inexcessofthesmallpercentagehewouldhavehadwithoutthisright.

To conclude and to provide you with some practical examples, I have provided an Excel spreadsheet with an example cap table aswell as simple term sheets for theUK andUSAbasedontemplatesprovidedbythelawfirmOrrick.Theseare available for download from this book’s website23. Acomment on the example cap table: these examples are provided for reference; your cap table will vary based on the terms of founders and shareholders and number of rounds before a convertible comes in, but it serves well for you to play with the variables that make up a convertible note so youcanseehowtheyaffectyourfully-dilutedstakeafteraround.

Regarding the convertible note documents, a disclaimer from Orrick: The linked documents have been prepared for informational purposes, and are not intended to (a) constitute legal advice, (b) create an attorney-client relationship, or (c) beadvertisingorasolicitationofanytype.Eachsituationishighlyfact-specificandrequiresaknowledgeofbothstateand federal laws, and anyone electing to use some or all of the forms should, prior to doing so, seek legal advice from a licensedattorneyintherelevantjurisdictionswithrespecttotheirspecificcircumstances.Orrickexpresslydisclaimsany and all liability with respect to actions or omissions based on the forms linked to or referenced in this section, and assumes no responsibility for any consequences of use ormisuseofthedocuments.




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Deciphering Crowdfunding

One of the funding sources that founders are increasingly being exposed to above and beyond VC and angel funding is Crowdfunding via online platforms such as Kickstarter24, AngelList25, and Seedrs26, tonamea few.However,theseplatformsarenotallthesame.

Tohelpbettercategorizetheusecasesforthedifferenttypesof crowdfunding platforms, let’s split them into two:

1. Cash for Product Pre-Orders: Kickstarter, IndieGogo27, etc.

2. Cash for Equity: AngelList (US and UK), Seedrs(UK),Crowdcube28(UK),etc.

We won’t delve too deeply into the first category, but in summary, it is used primarily as a way to help fund the pre-order of tech product inventory, while other sources of cash will be needed to fund the operational aspects of your company.Thisdoesn’tmean,ofcourse,thatthisistheonlyway people use cash raised on these types of platforms, but thisishowitisgenerallyused.

To highlight the above concept, let’s take a look at the stats on Kickstarter’s site (data from October 2014, for updated date visit https://www.kickstarter.com/help/stats) to help highlight some conclusions. With somenumber crunching, what you can see is an interesting set

24 https://www.kickstarter.com/25 https://angel.co/26 https://www.seedrs.com/27 https://www.indiegogo.com/28 https://www.crowdcube.com/

https://www.kickstarter.com/

https://angel.co/

https://www.seedrs.com/

https://www.indiegogo.com/

https://www.crowdcube.com/

https://www.kickstarter.com/help/stats

https://www.kickstarter.com/help/stats

https://www.kickstarter.com

https://angel.co

https://www.seedrs.com

https://www.indiegogo.com

https://www.crowdcube.com

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ofconclusions.

1. Thebulkofsuccessfulprojectsareraisingaround$1,000to $10,000 on Kickstarter, with only a relative minority (2.2percent)ofsuccessfullycompletedprojectsraisinginexcessof$100,000.

2. Technologyprojectsasawhole,nomatterwhatthesize,onlyrepresent2.73percentofthesuccessfullycompletedprojects on Kickstarter. The highest success ratesaremusicprojectsat25percent,eveniftheamountsrequestedforthoseprojectsarerelativelysmall.

3. Thehighestsuccessbracketsfortechnologyprojectsare$20,000-$100,000 and $1,000-$10,000 each at roughly 30percentofthetotalTechnologysuccesses.

4. The success rate overall for technology projectsraising $100,000-1 million is a low 2.09 percent. Raising over $1 million on Kickstarter for technology projectsisjustnotreallygoingtoplayinyourfavorwithanoverallsuccessrateoflessthan1percent.

That said, the largest outlier and most well known tech Kickstarter fundraise was that of one of my favorite products, the Pebble Smartwatch29,withover$10millionpledged.ThePebbleteamstillraisedcapitalfromVCsandangels.I’llletyoudrawyourownconclusionsfromthat.

For the second category of crowdfunding platforms (those enabling investors to invest cash in exchange for equity)youstartseeingadifferenttrend,oneoffundraisingdesigned to help you build and scale your company rather

29 https://getpebble.com/

https://getpebble.com/

https://getpebble.com

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thanjusttohelpyoubuildaproduct.

On these platforms, however, rather than having your contributors provide cash in exchange for a promise or a pre-purchase of a product, your contributors are getting a share of your company. Literally, they are becoming investorsandshareholders,withalltheprosandconsthatentails.Whatdifferentiatesallthemajorplatformsinthiscategoryare factors about how they structure the investment into yourcompanyandwheretheycanoperate.

AngelList,thedominantplatformintheUS,forexample,allows startups to raise funding in two ways (in the words of AngelList’s Philipp Moehring30):

• “Offline fundraising”. This option is open to allcompanies and allows startups to use AngelList’s network and introduction features to connect with investorswhomightbeinterestedinthecompany.

• “Online fundraising”. AngelList syndicates allow investors to invest in startups alongside an experienced Leadinvestor.Thecompanycanleveragethenetwork,experience and reputation of the Lead investor to raise fundsfortheirbusiness.

Fundraising on AngelList works better if the Startup’s profileiscomplete,thefundingroundhasmomentum,andthe founder is responsive to answering intro requests and questions.Thousandsofcompanieshaveraisedfundingthisway, or have augmented their existing round with additional investorsfoundonAngelList.Thesuccessrateissimilartowhatacompanywouldexperienceoffline.

30 https://www.linkedin.com/in/moehring

https://angel.co/

https://www.linkedin.com/in/moehring

https://www.linkedin.com/in/moehring

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Since the launch of syndicates, however, more than 250 companieshaveraisedmoneyonlinethroughAngelList.Theclosest analogy for a founder is to think of a syndicate as a one-timefundpulledtogetherbythesyndicateLead.

AngelList has closed about $90 million through syndicates, and it is closing about a company per day now. They’ve had some European companies raise fromsyndicates as well, including Patients Know Best (Elad Gil), Spatch (Andy McLoughlin), Holidog (Ed Roman), and Enevo (Scott Banister)

Investment amounts

Sinceeverysyndicateisbackedbydifferentinvestorsandis variably active, total investment amounts vary from syndicate to syndicate. Founders should work with theleadinvestortounderstandwhattheyusuallyclose.AcrossAngelList, syndicates have closed up to $1 million, with most companiesraisingbetween$200,000and$500,000.

AngelList’s statistics can be found online here31.

Success rates

Companies that have a lead investor with an active syndicate have a more than 90 percent success rate from start to finalization.Afteradealisannounced,investorscanmakereservations to invest, and closing is started after the allocationminimumismet.Onceinclosing,about99percentofalldealswillbe“finalized”andcompleted.Thereason

31 https://angel.co/valuations

https://angel.co/valuations

https://angel.co/valuations

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for these high numbers is the preexisting commitment of backerstoinvestinthelead’ssyndicatedinvestments.

Now, moving across the Atlantic… Let’s look at the rangeoffiguresofleadingEuropeancrowdfundingplatformssuch as Seedrs, Crowdcube and Crowdbnk32 during the Fall of2014.

Average Round Size of Funds Raised

£160,000 - £537,000

With these amounts, as a founder fundraising, you should expecttoraisesumstypicalofearly-stagefinancings,butnotmoregrowth-orientedroundssuchasyourSeriesA+.

Percentage successful closing (number of deals that close as a percentage of total)

36 percent - 42 percent

With less than half of rounds closing successfully, don’t assumeyourroundisguaranteedtoclose.

Average time to round close on platform (eg. # of days)

29-51

Planatleastonemonthifnottwo,fromstarttofinishtoraisemoneyonplatforms.

32 https://www.crowdbnk.com/

https://www.seedrs.com/

https://www.crowdcube.com/

http://www.crowdbnk.com/

https://www.crowdbnk.com

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Rounds closed by sector distribution

54 percent - 80 percent tech

20 percent - 46 percent non-tech

As you can see, there is a larger amount of focus on tech deals, but an increasing amount of non-tech deals are being financedaswell,whichbodeswellforyouifyouarenotatechcompany.

Things to consider

In general, when considering a platform, make sure your research explores:

• Howdoestheinvestmentsizefitwithyourneeds?

• How much would you like to raise on a platform vs outside via an investor not on the platform (and how to intermingle the two within a reasonable time-frame to a close)?

• What are the fees associated with going through the platform?

• What have been the success rates for your type of company (industry) and product?

• How does the platform structure the investment coming intoyourcompany(lestyoufindyourselfwithacaptableladen with investors and a tricky governance structure)?

In conclusion, crowdfunding as a way of either funding your product or your company’s growth is increasingly going to

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be a trend that will supplement, and in some cases entirely replace, early-stage investment capital from institutional sourcessuchasVCs.Attheveryleastyoushouldconsiderbuildingprofilesontherelevantplatformsforyourlocationandindustry.Formoreinformationoncrowdfundingandother links, check this book’s website33.

Syndicates

Whether your raise your money via an equity round, convertible or other, you’ll likely have a few investors gathertogethertoraisethetotalamountyoudesire.Thisgatheringiscalledasyndicate.Effectively,asyndicateisafancy term for when various investors come together to form aninvestmentround.

Beforewegetstarted,let’slookatafewhandydefinitions:

• Lead Investor.Usuallysetstheterms,anddealswithmanagingtheflowofcommunicationsamonginvestors.

• Co-Lead.Whentwoinvestors(ormore)decidetoequallysplit the work of lead investor and usually take the same amountofequityforcash.

• Follow Investor.Usuallyintheroundonwhatevertermsaresetbytheleadinvestor(s).

Ideally,yourleadinvestorwilltakethe“lead”inorganizingand managing the information and negotiations on behalf ofthesyndicate.Generallyspeaking,agoodleadinvestorwill, as the name implies, help lead the communication and negotiation of the terms among all parties interested in




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investingintheround.However,insomecases,particularlyif you see that communications are not going well between allparties,youwillneedtostepinandlead.Inallcasesyoushouldbeinvolved,butjustkeepaneyeouttoseeiftheleadinvestor is managing the process well; if they aren’t, other investorswillusuallycomplain.Regardless,youwilllikelyhave to manage various people’s questions and expectations around timing of a round’s closing and other concerns, which might be repeated across the various shareholders evenifyourLeadisdoingagoodjob.Sometimespeoplejustwant to talk to you!

This is where having a good lawyer can really help you in terms of managing the legal process, which I’ll cover in alatersection.

Negotiations

In summary: pick your battles!

Negotiation is a bit of a weird subject because yourstrategy is very relative to your negotiation power. Insituationswhereyouhaveonlyoneoffer,verylimitedcashrunway, and a huge gap between what you wanted and what yougotoffered,yourabilitytoget“theperfectoffer”willbequitelow.Ontheotherendofthespectrum,ifyouhavecompetingtermsheetsfromdifferentinvestors,youhaveabetter chance of relying on one term sheet to negotiate the other, on the basis that you can walk away from at least one deal.

The best thing you can do to improve your chances of closing a round on the terms you want is to create competitive

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dynamicsbetweeninterestedparties.

Regardlessofthenumberofoffersavailable,eventuallyyouwillfindyourselfintheprocessofactuallygoingthroughthepointsyouwanttonegotiate.ThefirstthingIrecommendistotakeastepbackandlookattheoveralloffer.Isitveryfarawayfromwhatyouexpected?Ifso,whatcouldthisoffersay about your investor? Is he giving you economics that imply he doesn’t think you’re far along enough, or perhaps yourvaluationismisaligned?Ishegivingyouanofferthatincludes heavier than normal governance?

If these kinds of questions come up, consider having a conversationaroundthembeforemakingacounter-offer.It is very easy to get carried away with wanting to negotiate away everything you think is unfair about a prospective deal, butyouruntheriskofmakingitunlikelytocloseatall.Bymaking your concerns into a conversation, and a level-headed one at that, you have a higher likelihood of coming to an amicable agreement that comes closer to each party’s interests.

The Valuation of Your Company

One of the most frequently asked questions at any startup event or investor panel is: how do investors value a startup? Theunfortunateansweris:itdepends.

As frustrating as it may be, startup valuation is a relative science,notanexactone.

The biggest determinants of your startup’s value are the market forces of the industry and sector it plays in, which include the balance (or imbalance) between demand

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and supply of money, the size and recent occurrence of similar exits, the willingness for an investor to pay a premium to get into a deal, and the level of desperation of the entrepreneur looking for money.

While the statement above may capture the bulk of how most early-stage startups are valued, I appreciate that it lacksthespecificityyou’relookingfor,andwe’llbemovingon to explore the details of valuation methods in the hope of shedding some light on how you can determine the value ofyourstartup.

As any newly minted MBA graduate will tell you, there aremanyvaluationtoolsandmethodsoutthere.Theyrangein purpose from valuing small companies to large, and they vary in the number of assumptions you need to make about a company’s future relative to its past performance inordertogeta“meaningful”valuation.Knowingwhichmethods of value determination are the best to use for your circumstancesisjustasimportantasknowinghowtousethesetoolsinthefirstplace.

Some of the valuation methods you may have heard about include:

• The DCF (Discounted Cash Flow34).

• The First Chicago method35.

• Market & Transaction Comparables36.

34 https://en.wikipedia.org/wiki/Discounted_cash_flow35 https://en.wikipedia.org/wiki/First_Chicago_Method36 https://en.wikipedia.org/wiki/Comparable_transactions

http://en.wikipedia.org/wiki/Discounted_cash_flow

http://en.wikipedia.org/wiki/First_Chicago_Method

http://en.wikipedia.org/wiki/Comparable_transactions

https://en.wikipedia.org/wiki/Discounted_cash_flow

https://en.wikipedia.org/wiki/First_Chicago_Method

https://en.wikipedia.org/wiki/Comparable_transactions

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• Asset-Based Valuations such as the Book Value37 or the Liquidation value38.

While going into the details of how these methods work is outside the scope of this book, we can instead start tackling the issue of valuation by investigating what investors are looking for and which methods provide the best proxy for currentvalue.

A startup company’s value is largely dictated by themarket forces in the industry in which it operates.Specifically, the current value is dictated by themarketforces in play today, and today’s perception of what the future willbring.

On the downside, this means that if your company is operating in a space where the market for your industry is depressed and the outlook for the future isn’t any good, then clearly what an investor is willing to pay for the company’s equity is going to be substantially reduced even though your companymayalreadybesuccessful.Thereareexceptionsthough: when the investor is privy to information about a potentialmarketshiftinthefuture,orisjustwillingtotaketheriskthatthecompanywillbeabletoshiftthemarket.Iwillexplorethe latterpointonwhatcaninfluenceyourattainment of a better (or worse) valuation in greater detail later.Obviously, ifyourcompany is inahotmarket, theinversewillbethecase.

Therefore, when an early-stage investor is trying to determine whether to make an investment in a company (and as a result what the appropriate valuation should be),

37 https://en.wikipedia.org/wiki/Book_value38 https://en.wikipedia.org/wiki/Liquidation_value

http://en.wikipedia.org/wiki/Book_value

http://en.wikipedia.org/wiki/Liquidation_value

https://en.wikipedia.org/wiki/Book_value

https://en.wikipedia.org/wiki/Liquidation_value

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what he basically does is gauge what the likely exit size will be for a company of your type within the industry in which itplays.Thenhewilljudgehowmuchequityhisfundshouldhave in the company to reach his return on investment goal relative to the amount of money he put into the company throughoutthecompany’slifetime.

This may sound quite hard to do when you don’t know how long it will take the company to exit, how many rounds of cash it will need, and how much equity the founders will letyouhaveinordertomeetyourgoals.However,throughthe variety of deals that investors hear about and see in seed, theyhaveamentalpictureofwhatconstitutes“average”for the size of a round, price and the amount of money your companywilldo relative toothers in thesamespace. Inaddition to having a pulse of what is going on in the market, VCs effectively have financialmodels that assumewhatwill likely happen to any company they are considering for investment. Based on these assumptions, investorswilldecidehowmuchequitytheyeffectivelyneednow,knowingthat they may have to invest along the way (if they can) so that when your company reaches its point of most likely going to an exit, they will hit their return-on-investment goal.Iftheycan’tmakethenumbersworkforaninvestmenteither relative to what a founder is asking for or relative to what the markets are telling them via their assumptions, an investor will either pass, or wait around to see what happens (iftheycan).

The next logical question is: how does an investor size the “likely” maximum value (at exit) of my company in order to do their calculations?

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There are several methods to help investors arrive at this number,allofwhichareeither“instinctual”orquantitative.The instinctual methods are used more in early-stage deals; as the maturity of the company grows, along with its financialinformation,quantitativemethodsareincreasinglyapplicable.Instinctualanalysesarenotentirelydevoidofquantitativeconsiderations,however—it’sjustthatthesemethods of valuation are driven mostly by an investor’s sectorexperienceof averagedeals at entryandexit.Thequantitativemethodsarenotthatdifferent,butincorporatemore figures to extrapolate a series of potential exit scenariosforyourcompany.Forthesetypesofcalculations,the market and transaction comparables method is the favoredapproach.Comparablestellaninvestorhowothercompanies in the market are being valued on some basis, figureswhichinturncanbeappliedtoyourcompanyasaproxyforyourvaluetoday.Thisiswhy,inamarketwherethere are more and more privately funded companies with billion dollar valuations (and/or acquisitions), you see an effectiveriseinvaluationsoverall(andifthosevaluationsgetcorrectedinadownturn,thenitalsoaffectstheentiremarket).Ifyouwanttoseewhataprofessionallypreparedcomps table looks like, visit this book’s website39.

Mostvaluationtoolsincludeamarketinfluencefactor,meaning a part of the calculation is determined by how the market(s) are doing, be it the market/industry your company operates in, or the larger S&P 500 stock index.This makes it hard to use tools (such as the DCF) that try and use the past performance of a startup as a means by whichtoextrapolatefutureperformance.Comparables—



http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--


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and particularly transaction comparables—are favored for early-stage startups, as they are better indicators of what the market is willing to pay for startups that are similar to theoneaninvestorisconsidering.

How does an estimated exit value for your company lead to a valuation?

Again, knowing what the exit price will be, or having an idea of what it will be, means that a calculation-minded investor can calculate what their returns will be on any valuation relative to the amount of money they put in, or alternatively what their percentage will be in an exit (money they put in / the post-money valuation of your company = theirpercentage).

Beforeweproceed,justaquickreviewofsometerms:

• Pre-money=thevalueofyourcompanynow.

• Post-money = the value of your company after the investorsputthemoneyin.

• Cash-on-Cash Multiple = the multiple of money returned to an investor on exit, divided by the amount they put in throughoutthelifetimeofthecompany.

If an investor knows what percentage they own after they put their money in, and they can guess the exit value of your company, they can divide the latter by the former and get a cash-on-cash multiple of what their investment will give them (some investors use IRR values as well of course, but most investors tend to think in terms of cash-on-cashreturnsbecauseofthenatureofhowVCfundswork).

http://www.investopedia.com/terms/i/irr.asp

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Assuming a 10x multiple for cash-on-cash returns is what every investor wants from an early-stage venture deal, we’ll usethatasanexample.Keepinmind,thisisanincompletedemonstration because investors know it’s a rare case when they put money in and there is no requirement for a follow-on investment. As such, investors need to incorporateassumptions about how much more money your company will require, and thus how much dilution they (and you) will take provided they do (or don’t) follow their money up to a point.Notethatnoteveryinvestorcanfollow-onineveryround until the very end, as they often reach a maximum investmentdeterminedbythestructureoftheirfund.

Now, armed with assumptions about the value of your company at exit, how much money it may require along the way, and what the founding team (and current investors) may be willing to accept in terms of dilution, an investor will determine a range of acceptable valuations (or equity-stake ranges) that will allow them to meet their returns expectations (or not, in which case they will pass on the investmentfor“economics”reasons).This isamethodIcall the top-down approach.

Naturally, if there is a top-down, there must be a bottom-up as well; while it’s based on the top-down assumptions, the bottom-up approach basically takes the average entry valuation (or percentage equity taken for cash) for companies of a certain type and stage an investor typically sees, and valuesacompanyrelativetothatentryaverage.Theentryaverageusedbythebottom-upapproachisbasedonafigurethat will likely give investors a meaningful return on an exit fortheindustryinquestion.Thisvaluationmethodmightleadaninvestortorespondtoyourtermsheetlikethis:“A

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company of your stage will probably require x millions to grow for the next eighteen months, and therefore based on your current stage, you are worth the following pre-money: [(money to be raised) divided by (percent ownership the investorwants)–moneytoberaised]”.Oneofthebestwaysto visualize the bottom-up approach is by reading an article onFortune.comtitled“Behind the VC Numbers40”.Hereyoucan see what the typical ranges are that investors are taking, and as a consequence, how your numbers will align (or not) withwhat’sexpected.Althoughthearticlewaspennedin2013 and will naturally age as a reference point, it does a greatjobofhighlightinghowmarketconditionsaffectaninvestor’s tolerance for risk (and their reaction in terms of whattheyrequestequity-wisetocompensate).

Now that we’ve established how much the market and industry in which your company plays can dictate the ultimate value of your company, let’s look at what other factors can contribute to an investor asking for a discount in value or an investor being willing to pay a premium over theaverageentrypriceforyourcompany’sstageandsector.An investor is willing to pay more for your company if:

• It is in a hot sector.

• Your management team is hot.Serialentrepreneurscan command a better valuation. A good team givesinvestorsfaiththatyoucanexecute.

• You have a functioning product.

• You have traction.Nothingshowsvaluelikecustomers

40 http://fortune.com/2013/10/17/behind-the-vc-numbers-higher-prices-less-control/

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tellingtheinvestoryouhavevalue.

• You have created a competitive dynamic between investors during your fundraise.

An investor is less likely to pay a premium over the average for your company (or may even pass on the investment) if:

• Itisinasectorthathasshownpoorperformance.

• It is in a sector that is highly commoditized, with little marginstobemade.

• It is in a sector that has a large set of competitors and littledifferentiationamongthem.

• Your management team has no track record and/or may be missing key people for you to execute the plan (and youhavenoonelinedup).

• Your product is not working and/or you have no customer validation.

• Youaregoingtoshortlyrunoutofcash.

In summary, market forces right now, today, greatly affectthevalueofyourcompany. Investorswillconsiderwhere similar deals are being priced (bottom-up) and the amounts of recent exits (top-down), both of which can affectthevalueofacompanyinyourspecificsector.Thebest thing you can do to arm yourself with a feeling of what values are in the market before you speak to an investor is speaktootherstartupslikeyours(effectivelymakingyourownmental comparables table) thathave raisedmoney.See if they’ll share with you what valuation they were given andhowmuchtheyraisedatyourstage.Additionally,stay

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current on tech news, which will occasionally give you the informationyouneedtobacktrackvaluations.Remember,nothing increases your company’s value more than showing an investor that people out there want your product and are evenwillingtopayforit.

Asafinalthought,ifyoufeelbullishaboutyourabilityto raise capital (as in, you have leverage over investors in raising capital because your business is trending) and you have early investor interest, it will always be better for you toagree(ifyoucan)withyourleadinvestoronafixedequitypercentage thanafixedvaluation. The reason is simple:byagreeingtoafixedpercentage,youcaneasilyincreasethe size of cash in your round with no additional dilutive effect.Ifyouagreetoafixedvaluationasastartingpoint,with every additional dollar you take, you will be increasing thedilutiveeffectoftheround,thusreducingyourincentiveto raise more capital if the opportunity to do so presents itself.However,keepinmindthatinamarket/industrythatis highly competed, regardless of whether you can achieve afixedpercentagewithaleadinvestor,itmightstillbenefityou to take as much capital as you can, as your competitors arelikelydoingthesame.

Valuation Discrepancies Around the World

There’s one more issue to address regarding valuation: Why are there valuation discrepancies for comparable companies across the world (more specifically at investment stage rather than exit stage)?

The answer has to do with liquidity of deals, the localized risksforinvestors,andthesupplyofinvestors.

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Asyoujustlearned,variousfactorscanplayintohowan investor values a startup, but using market comparables fromdealsdoneintheUSdoesn’talwaysincorporatealltherisksthatareprevalentinthespecificgeographywherethecompanyandinvestorinquestionoperate.Furthermore,theavailabilityofcapitalinanygivengeographywillalsoaffecthow an investor gauges his own risk/reward ratio when pricingdeals.

I’m going to talk about this point abstractly and without incorporating the argument of the global nature of internet-based businesses (they do have some localization risk still, butlessso).So,forexample,startupexitsforinvestorsincertain developing economies will happen less often than, say,inSiliconValley.Thishastodonotonlywiththenumberof companies coming out of the country, but also with the universe of potential buyers for these companies in that geography.

Thisaffectstheriskaninvestortakes,asheislesslikelytogetthe10xreturnwediscussedpreviously.Therefore,theinvestorwillseeka“discount”totakeonadealinordertohave a portfolio of deals wherein there is the possibility of exitinginspiteofwhatevermarketconditionsexistlocally.Add to that the fact that the investor may be one of very few investors, and therefore can command this discount more forcefully than if more competition existed (once enough investors exist, market pricing becomes more stable and in paritywithotherlargermarkets).

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A Note on Avoiding Tranched Investments

Investments, like the ocean, can come in waves, but that doesn’tmeantheyshould.

As mentioned during the section on term sheets, a tranched investment is an investment split into one or more parts.Inorderforthecompanytoreceivethelatterpartsof a tranched investment, it usually has to achieve goals orobjectivessetaspartof theconditionsof investment.A typical example of a tranche: the investors give you half the investment amount right now, and half the investment when your revenues reach x.

Generally speaking, the current thinking around tranches by most investors is that they are a good tool to motivate founders to reach a milestone or alternatively, to reducetheirexposuretorisk.However,tranchesaremoredamaging to the long-term success of a company than investors may typically consider, particularly if milestones arenotmetorthecompanycomesdangerouslyclosetojustmeetingthem.

Specifically,Ithinktranchescan:

• De-motivate founders and potentially reduce a founder’s drive (according to DanielH.Pink’sview41 of extrinsic motivation42—seebelowformoreonthis).

• Reduce a founding team’s creativity around how to grow the business in a way that might be better long-term, but short-term fails to achieve the next pre-determined milestone.(Thinkofacompanystickingtoaproductin

41 http://www.danpink.com/about42 https://en.wikipedia.org/wiki/Motivation

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the hope of hitting a deadline rather than pivoting, then ultimately sticking with a product that will not yield maximumreturnsinthelongrun.)

• Potentially reduce good behavior (read: cheating to hit numbers).Ifsomeonereallyneedsthecash,temptationtocutcornerscanbestrong.

• Promote“sandbagging”bytheinvestorratherthanfullcommitment.

• Createaself-fulfillingprophecy.InthewordsoftheCEOof Zemanta,BostjanSpetic:“Thecashyouareraisingisusuallywhatyouneedtogettoasignificantmilestone,likebreak-even.Tyingthatbudgettosub-milestonesimplicitly reduces the chances of actually hitting the big milestone, because it increases the risk of running out ofcashprematurely.”

• Create an accelerated cash burn to achieve the goal, which leaves the company in a vulnerable position for subsequentfundraising.

• Make the company toxic for an external investor that would be interested in investing, if the company doesn’t receivethetranchefromitsexistinginvestors.

As a founder, what do you say to an investor who’s hell-bent on implementing tranches in your term sheet?

The best solution is to get a dialogue going to agree on one of the following three potential alternatives:

1. Reduce the amount of money and target a closer-term milestone for the startup to achieve.Yes,thisimplies

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that if the startup hits its milestone, it may command a higher valuation and the investor will not have been able to secure the economics of a tranched investment, but in exchange, the investor is getting a higher probability of overall success for their investment. Note: This should not constitute an opportunity for predatory investors to under-fund a company by picking a too-early milestone for founders to accomplish, as this not only hurts the company’s likelihood of achieving it, but also the likelihood of the company being able to secure follow-on capital.

2. If an investor really needs to have tranches, implement “binary” milestones that are simple and clear.Whatyou want to avoid are tranches that have partial or subjectiveachievement,suchaswhenacompanycomesprettyclosetohittingitsrevenuefigureornumberofusers.Anexampleofanidealbinarymilestonewouldbe: You will get a sum of money unlocked equaling the salaryofanewCFOwhenyouhirethatCFO.Thetargetisclear(hireCFO);youeitherhiretheCFOoryoudon’t.

3. If you can’t agree on either of the above, that implies either the company is overvalued or the investor may be overly cautious. If the latter is true, the founder might want to reconsider taking them on as investor (assumingheorshehasachoice).

One more thought on why the carrot/stick theory behind tranches doesn’t work: In his book Drive43,authorDanielH.Pink walks through classical motivation models and compares themtohisobservationsonactualmotivation.Hemakesa

43 http://amzn.com/1594488843

http://www.amazon.com/Drive-Surprising-Truth-About-Motivates/dp/1594488843?SubscriptionId=0G81C5DAZ03ZR9WH9X82&tag=zemanta-20&linkCode=xm2&camp=2025&creative=165953&creativeASIN=1594488843


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very compelling case for companies, managers, parents, and justabouteveryonetorethinktheirpreconceivednotionsonmotivation,particularlyaroundoldcarrot/stickmethods.

Pink argues that form of old school motivation fails for one of three reasons:

1. It doesn’t mesh with the way many new business models are organizing what we do. We are intrinsically motivatedtomaximizepurpose,notprofit.

2. It doesn’t comport with the way 21st-century economics thinks about what we do.Economistsarefinallyrealizingthatwe’refull-fledgedhumanbeings,notsingle-mindedeconomicrobots.

3. It’s hard to reconcile with much of what we actually do at work. For a growing number of people, work is often creative, interesting, and self-directed rather than unrelentinglyroutine,boring,andother-directed.

This topicmayyieldcontrastingviewson theefficacyoftranches by investors, but I sit squarely on the side that tranches, as they are generally used, are more value dilutive thanvalueaccretiveforallpartiesinvolved.

Avoiding Toxic Rounds

Along with tranched investment, there is another type of investmenttoavoid:toxicrounds.

What do all the following company circumstances have in common? (Note: all these companies are anonymized, real early-stagecompanies.)

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• A founder who gave away > 60 percent of his company for $100,000intranchedfunding.

• A founder who gave away > 75 percent of his company to his“investors”inapre-SeriesAround.

• A company that gave away > 70 percent of their equity for < $100,000 to investors, but still wanted to gothroughanaccelerator.

• Another company with 51 percent ownership to existing investors.

• Another company where the investor offered the founders a sub €30,000 investment but it came over tranchesacrosstheyear(asinnocashrightnow).

These circumstances might seem very normal to you, or you mightbereelinginshock.Eitherway,Iwanttohighlightthe concept of a toxic round or a toxic cap table in an early-stage startup to help founders navigate potential investment offersandavoidgettingthemselvesintoadifficultsituationinthefuture.

What is a toxic round?

Toxic rounds are my non-technical term for fundraising rounds that can pre-dispose a company to struggle to find subsequent financing because newer investors shy away fromapotential investmentoncetheyfindoutwhatthestate of the company’s current cap table and/or governance is.

Whileitisveryhardtomakeanyjudgmentsaboutthequality of investors because each company’s financing

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history is unique, a common view is that investors who ask for terms such as those highlighted above are usually not of the sort one wants to take investment from.Myfocushereisn’t to highlight the qualities of ideal investors (if you want to read more about the ideal qualities of a new investor, check out this text44), but rather why subsequent new investors might shy away from investing in your company if you have takenonthiskindofroundinthepast.AlsonotethatI’monly focusing on founder dilution and not on other potential aspects of a company’s shareholdership that could make it difficultfornewinvestorstoinvest.

New investors may avoid companies that have experienced a toxic round because:

1. The company will likely require more capital in the future should it prove successful, and potential new investors feel that the founders will be less motivated to stick with the company as the value of their equity declines overtimethroughprematureexcessivedilution.

2. They feel that current investors own too much of the company and perhaps the company has governance issuesasaconsequence.

3. The investors have a large stake, which brings up a lot of questions about how the company got itself into this situation.Didithappenthroughadown-round?Wasitduetoothernegativecircumstancesthatcouldaffectthefuture of a new investment?

4. Theymayobjecttohavingthemoneytheyareputtingin

44 http://www.seedcamp.com/resources/what-tier-is-your-investor-or-what-to-look-for-in-an-investor

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as part of a new round be used for anything other than expanding the growth of a company.Existinginvestorseager to dump their shares as part of the financingtransaction or companies that have too much debt outstanding repayable as part of an upcoming round will beunattractivetonewinvestors.

Withallthisinmind,howcanwemorepreciselydefineatoxicround?Well,atoxicroundisoneinwhicheither“toomuchmoney”comesintooearlyattoolowavaluation,oracompanyistoounder-valued,orboth.Allofthesecasesleadto founders being greatly diluted too early in their company’s life.

To help you visualize these potential scenarios, let’s look at the following equations:

• Money Raised / Post Money = percent dilution to founders

• Money Raised / (Pre Money + Money Raised ) = percent owned by the new investors

These two equations represent the same thing; the only thingthatchangesisthedefinitions,butthenumbersareallthesame.

Knowing the above, it would seem the solution for toxic rounds would include both raising the right amount of money (helpful with milestones) and setting the right valuation for the company early on, so that as the company grows, itdoesn’tfinditself inatoxicsituation.Aswe’vementioned before, there are many methods one can take toarguably“price”acompany.However,thelargerpointis that no matter what method you use, it will always be

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subject to current market dynamics—meaning that nomatter what “quantitative” method you think you areusing,yourvaluationissubjecttothevariabilityofhowtheoverallmarketistrending.If we are in a boom, the pricing will likely be higher; if we are in a bust, it will likely be lower.It’sassimpleasthat.

Taking these market dynamics into consideration, recall the“Behind the VC Numbers”Fortune.comarticleI mentioned earlier—and specifically, what the averagedilutionperroundisintheUSforSeriesSeed,A,BandCrounds. In the Fortune article, you can see the averagedilution per round for the typical rounds and you can see the market dynamics over the years (check out what the 2008 recessiondidtopercentdilutionperround).Whatyourealizeis that none of these rounds, no matter how big, take as much equity as the real life toxic examples I noted above at the start of this section.

All of this begs the question: what if you’re already in a tricky situation similar to the examples I noted above? The available solutions aren’t always easy and straightforward; in fact, the single best solution is to have a tough talk with existing investors about how to rectify the situation before new investors either walk away or make it conditional as partoftheirnewinvestment.Therecanbemanycreativesolutions to solving the problem with your investors, such as investors giving back equity if founders hit milestones, buttheywillallseem“creative”toanewinvestorratherthan“clean”ifnotcompletedbeforetheyinvest.Thisiswhythe ideal solution is to work through toxicity with existing investors and help them understand that by not helping you overcomethesituation,theyverywellmaybejeopardizing

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the long-term value of their own investment. Perhapscounter-intuitive,but true. In theend,anyprogressyoumakewithexistinginvestorstofixatoxicsituationisbetterthannoprogress,nomatterhowtoughthediscussions.

I leave you with the following thought for you to discuss withyourpotentialnewinvestorsiftheyofferyouaharddeal: Yes, they are taking a huge risk by investing in your early-stage startup, but by taking too much equity or debt tooearly,aretheyreallyjustpre-disposingyourcompanyto failure?

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8

Managing the Legal Process

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Where Should I Incorporate?

An important decision that founders often have to make whenstartingacompanyoutsideoftheUSis:WhereshouldI incorporate?

The reason why this question comes up is often because thereareaseriesofbenefitspullingfoundersindifferentdirections,andmanytimesfounderscanreceiveconflictedadvicefromwell-intendingadvisors.Someoftheissuesthatfounders may be balancing as part of a decision about where to incorporate include things like tax breaks or penalties, localgrants,andpaperwork.This isparticularly thecasewhentheyarealsothinkingthattheUSmightbewheretheywillendupinthefuture.

In this chapter, we’ll look at what issues you should consider when making a decision about incorporation; I am notrecommendingaspecificjurisdictionforincorporation.

Let’s start by stating that, for the most part, incorporation decisions aren’t necessarily permanent.Certaincircumstancescanmakeitdifficultforyoutoflip your company(takeyourcompanyfromonelegaljurisdictiontoanother),butforthemostpart,youcanalmostalwaysfindawaytomoveyourcompanylaterifitbenefitsyoutodoso.Generally, the cost of doing this will be proportional to the complexityandlegaljujitsuyourlawyerswillhavetoexecuteinordertomakethishappen.Sowhileincorporationinaparticular place doesn’t have to be permanent, changing this can be a headache and you should carefully consider your optionsbeforetakingtheeasiestormostobviousroute.

Nowthatyouperhapsfeelabitmore“relieved”about

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the not-so-permanent nature of your decision, let’s look at some key factors to consider:

1. Tax implications and tax treaties.Onemajor factorin your and your investors’ returns, now and in the future, is whether there will be a tax impact to you, your employeesandco-founders.Considerthingssuchastaxreliefonreturnsasafounderorifyoufliptoadifferentgeographyinthefuture.Considerincome tax45 liabilities as well as capital gains46liabilities(NB:linksaretoUKsite,butthedefinitionsarenotgeographicallyspecific).Considerwhetheryourlocal jurisdictionhasnegativetaximpactsforyourpotentialfutureinvestors.Thesequestions can sometimes be answered by tax specialists fromwithinyourlawyer’sfirm,oryouraccountants.

2. Investor implications. As mentioned above, onereasonwhythejurisdictionofchoicemattersisbecauseinvestors are optimizing based on what their tax implicationsare.Additionally,thereareothermattersin thefinal legaldocswhichtheymaypreferdealingwithintheirlocaljurisdictionratherthaninnew,lessfamiliarones.Investorsmayalsohaveanincorporationpreference due to tax relief they may receive as part of investing in your company. Company governancemay also be affected bywhere you are incorporated.Certain company governance structures are enforced on your company depending on where you incorporate and investors may have an opinion on that one way or another.

45 https://www.gov.uk/topic/personal-tax/income-tax46 https://www.gov.uk/capital-gains-tax

http://www.hmrc.gov.uk/incometax/intro-income-tax.htm

http://www.hmrc.gov.uk/cgt/intro/basics.htm

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3. Paperwork. Paperwork is clearly one of the biggestheadachesofmakingthisdecision.This includes theinterval in which you need to report, as well as other requirements,suchascompanyfilings.

4. Residency. Some geographiesmay have a residencyrequirement for founders. Keep this in mind, inparticular if you don’t have the appropriate immigration statusorobtainingitisdifficult.

5. Human Resources.Itmaybeharderforyouremployeesto move, if necessary, in certain countries, and/or hiring mightalsobeproblematicduetolackofhumancapital.Additionally, there may be restrictions on how you can hire/fireemployeesthatmightaffecthowyouupscale/downscale your company’s employees. João AbiulMenano47 of CrowdProcess48alsosuggests:“Oneshouldalsoconsidertaxonlabor.Insomecases,ataxincentivegiven to an early-stage startup can help to keep the burn rate low (more important even for companies in which labor costs account between 70 percent and 90 percent ofmonthlyexpenses).”

6. Governance.Corporate Governance49 requirements tend tovary fromcountry tocountry.Sinceyou’llhave toabide by some of these requirements, you might as well familiarize yourself with these variables before making yourdecision.

7. M&A. Your company will eventually get sold ormergedorfloated; insomecountries, thisprocess is

47 https://angel.co/jo-o-abiul-menano48 https://crowdprocess.com/49 https://en.wikipedia.org/wiki/Corporate_governance

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straightforward and simple, and easy for potential acquirers to understand and do quickly. In othercountries, the process may be less well-known and thus maycausedelaysorcomplications.

8. Free information availability.Althoughyouwilllikelyhave a lawyer helping you through many of these topics, it’s always great when you can learn on your own from others’ experiences. Some jurisdictions have morefounders sharing on forums and the like, relaying how theyovercametheir specificproblems.This canbeavery valuable way of reducing your cost to learn and thus reducingyourlegalcosts.

Having reviewed all of these issues with your current and/or future shareholders, you should at least have a better startingpointtomakeawellthought-outdecision.

The Importance of Good Legal Counsel

Entering into any new legal agreement is scary, but legal documentsarepartofbusinesslife.Yourbusiness’s“brushwith the law” doesn’t have to cause paranoia though,particularlywhenyou’vebeenabletobringagoodlegalfirmonboard.Goodlegalcounselcanhelpyouunderstandallthe tools in the legal toolbox: what the tools are for, how they are used, when they are appropriate and what they are protectingagainst.

Now,when I say“good legal counsel”, I don’tmeanyour cousin’s best friend who is a lawyer and can do it on thecheap.Cuttingcornersonlegalcounselisprobablythesingleworstthingyoucandointermsofstartingoffonthe

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right foot with your investors, since you’ll end up wasting theirtimeandyours.Onesuresignofastartupecosystembeingmatureistheavailabilityoftop-tierlegalfirmsinthearea.Ifyouneedtomovethelegalstateofyourcompanytogetaccesstothese,doso;youwon’tregretit.Ifyoudon’tknow where to start, cold-call a startup you admire and ask around.

In summary, good legal counsel does the following:

• Validates your company.Thebestfirmsareselectiveabouttheirclientele.Theirtimeisvaluable,asistheirreputation.Workingwitha top-tierfirmdefinitivelysayssomethingaboutyourcompany.

• Saves money.Yes,itsoundscounter-intuitive,butwhileyou may pay more in terms of fees, you’ll spend less in the long run by reducing issues encountered during negotiation and avoiding problems that arise due to bad legaladvice.

• Saves time. As mentioned in #2 above, the time an experienced lawyer takes going through documents they’ve seen time and time again is a huge savings over a lawyer who is getting acquainted with the docs on your timeanddime.Additionally,thattimecouldbebetterspent helping you think of what realistic scenarios you are trying to protect yourself against rather than making mountainsoutofmolehillstandardterms.

• Helps you consider the future. Your company will go through many permutations throughout its life, and a good, experienced lawyer will not only be able to help you with your current situation, but also prepare you for

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situationstocome.

• Good counsel knows the industry players. By the very natureofbeingatop-tierlegalfirm,yourlawyer(s)willknowandhaveworkedwithtop-tierinvestorsfirsthand.Thefirmwillknowwhattheinvestorstendtoofferintheir deals, what to expect as standard in their terms, andwhatmightbeoutofthenorm.

After considering the above, however, you do have to manage yourcounsel.Intheend,youareresponsibleforeveryitemonyourdocuments.Soasmuchasgreatlegalcounselcanhelpyouavoidmakingmistakes,don’tslackoffduringtheprocess.Stayengaged;you’lllearnalot.

Managing the Flow of Documents

One of the most time-consuming things founders have to do other than raise money is deal with all the legal paperwork pre- and post-term sheet that fundraising typically generates. This phase can also be emotionally difficult,depending on how many items are being discussed before finalizing.

While there is no standard process (largely due to the variabilityindealtypesandjurisdictionalissues)thatcanbeoutlined for how to deal with your unique legal situation, I’ve proposedafewtipsthatwillhelpyounavigatethisprocess.

1. Always be mindful that the most important thing you haveatyourdisposalisyourword.Ifyoumakepromises,keepthem.Createtrustbetweenyourselfandeveryoneyoudealwith.Saywhatyoumeanandmeanwhatyou

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say,andaskquestionsifyou’renotsure.Thiswillhelpbuildyouagoodreputation.

2. Ifyouaren’tincorporatedyet,orifyou’vejuststartedworking on an idea with friends, have a pre-founder and advisor arrangements (relating to equity splits and vesting) agreed on before lawyers start drafting stufflater.Lawyersoftenneedtochangedocsseveraltimes to accommodate founders changing their minds ornegotiationstakingadifferent turn.We’ve put up a document on our Seedhack site called the Founder’s Collaboration Agreement50, which you can use if you don’thavesomethinglikethis.

3. Always check what your legal responsibilities with existing shareholders are before making any decisions with or without them. When you have existingshareholders, involve them (including the distribution of information about the new round) regarding whatever rights they may have as part of their investment documentation.Ifthismeansyouneedtoinformthem,then inform them; if this means you need to ask them something, ask them—but don’t leave it to the last minute.

4. Don’t be annoying:

a. Lawyerscostmoneyforbothsidesofthetable.Doas much research as possible on your own and try to aggregate your questions as much as possible so that retainedcounselforallpartiesisusedefficiently.

50 http://www.seedcamp.com/2011/09/seedhack-founders-collaboration-agreement.html

http://www.seedcamp.com/2011/09/seedhack-founders-collaboration-agreement.html





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b. Make sure you have a position on items that are being discussed so that you don’t go back and forth onstuffoverthephoneorafterdecisionshavebeenmade.Nothingismoreannoyingthanbacktrackinginlegalprocesses.

c. Don’t let your lawyer get annoying or overly aggressive with your investor. The investor canalways walk away if you and your lawyer come acrossasdifficultoraskforstuffthatmightactuallybe destructive for the company in their view.Beassertive for sure, but don’t be divisive. Seek tounderstand the issues and always think creatively about how to solve problems rather than letting the lawyers get into a stalemate or argument with your potentialinvestor.Alwaysfeelfreetosay“let’sparkthis point for now and return to it after we’ve had timetoconsiderit.”

d. Don’t let paranoia of what others could do to screw yougetthebetterofyou. It isokaytobeslightlyparanoid, but don’t let it be so bad that you make the legal process feel painful, as you come up with bogus reasons with which to reject perfectly commonclausesinaninvestor’sproposeddocumentation.

5. As we covered in the term sheet section, legal documents havevariousparts,bothcommercialstuff(valuations,percentages, etc.) and legal (jurisdiction, filing/reportingprocedures,etc.).Getallorasmuchof thecommercial points agreed between you and the investor beforeinvolvingthelawyers(thisiseffectivelywhatthetermsheetis,butsometimessomestuffslipsintothe

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subsequent docs to keep the term sheet “light”), sothatthe lawyersare just leftwithrepresentingtheseonyourdocuments.Ifyouneedtohaveadiscussionona commercial point, do it with the investor alone and offline(evenifyouhadtoaskyourlawyeroranothershareholder for advice); you shouldn’t spend time on thephonewithlawyersnegotiatingcommercialpoints.Lawyerswillhelpyouthroughthetechnicalpoints.

6. Always“redline”anychangesyoumaketodocuments.Keeptrackofallchanges.UsetrackchangesonWord.Rememberyoucanalwaysusethe“Compare”featureof Word to identify any changes from one document to thenextifithasnotbeenredlined.GoogleDocsmayhavethis,butlawyersgenerallydon’tuseGoogleDocs.

7. Generally speaking, conversations are founder-to-investor and lawyer-to-lawyer, meaning you rarely speaktotheinvestor’scounseldirectlyandviceversa.Youshouldbepresentinsomewaywhencounselmeets.

8. Keepcalmatalltimes.Ifyouloseit,yourisklosingtheinvestor.

9. Alwaysseeksolutions.Therearemultiplewaystoskinacat.Anyissuecanusuallybesolvedwithathoughtfulandcreativeapproach.Thelawyersaren’ttheretocomeupwithsolutionsforyou—they’rejusttheretoarticulateyourcreativesolutionsinlegalterms.

10. DO propose using standard documentation that other lawyers have frequently seen; in the US considerusing the Series Seed docs mentioned earlier51, or the

51 http://www.seriesseed.com/

http://www.seriesseed.com/


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Seedsummit docs52,etc.Familiarizeyourselfwithafewversions of standardized documents, and ask if the ones your lawyer is using are based on these standards—whichwillreduceeveryone’sworkload.

11. Manage the closing process. This is a difficult oneespeciallyintheUK,wheredeedexecutionrequirementscanbedifficult.Whentherearemultipleangelsinvolved,lawyers often spend a lot of time getting signatures anditincreasescoststhatfoundersdon’twanttopay.Sometimes, you as founder can handle this, but best case is if one of the leading angels takes charge of this process.Ifyoudon’thaveahighlyorganizedpersononboard,bepreparedtotakethelead.

12. Do your due diligence. Get your IP agreements,employment agreements, etc. organized to help theprocess go faster and smoother for your new investor, astheywilllikelyhavetoreviewthesedocuments.

The Closing & Funds Transfer

Once you have completed the key legal documents and any necessary due diligence the investor may require, the money comesinandthehardworkstarts.

Make sure you send investors the necessary international banking codes and also send them the zip/pdf version of all

signeddocuments.Don’tmakepeoplechaseyou!

52 http://seedsummit.org/

http://seedsummit.org/legal-docs/

http://seedsummit.org

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Conclusion

Hopefully you have found this book a good starting point to arm you with the right information to begin your fundraising journey.Theroadaheadwillbefilledwithtwistsandturns,ups and downs, and will most likely be scattered with many rejectionsbeforeyoufinallygettoayes,butdon’tlosefaithduringthisprocess.ThereisaJapaneseword,kaizen, that translatesas“seekingconstantimprovement”.Nofailureistrulyafailureunlessyoulearnnothingfromit.

Best wishes and thank you for reading!

Carlos

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Appendix: How This Book Was Made

In the Spring of 2014, I had the opportunity to meet Emmanuel Nataf, one of the founders of Reedsy.com, a marketplace for authors to meet publishing industry professionals.IwasimpressedbyEmmanuel’sambitiontodisrupt a huge industry with a new way of thinking about how, via a marketplace, all these parties could meet and work togetherandchangehowbooksarewritten.WeinvestedinEmmanuel and his partner Ricardo’s company a few months latertohelpthemachievetheirvision.

In terms of my personal journey writing this book,shortly after investing in Reedsy, the idea of aggregating all my blog posts from http://www.thedrawingboard.me andcreatingabookbecamemore“possible”as I furtherunderstood the world of self-publishing through my initial chatswiththefoundersofReedsy.Shortlyafterourfirstconversations, Emmanuel and Ricardo introduced me to Rebecca Faith Heyman, one of the early editors on the platform, and through chatting with her and her guidance ontheproject,Idecidedtotakealeapandwritethisbook.

Insofar as tools are concerned, I used Scrivener to help mewiththeoriginaldraftingandorganizationofthebook.After,tostartofftheeditorialprocess,ItransferredfromScrivenertoMicrosoftWord.ThismadeiteasierformyeditorandItotrackchangesandupdateversions.However,sincethen, Reedsy has created an online editor that will be useful forafutureseriesofdraftsandedits.Lastly,MattCobbfromthe Reedsy team was critical in designing the aesthetics of thebookitself,includingthecover.

https://reedsy.com/

http://www.thedrawingboard.me

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If any of you reading this are considering writing your owncontent,dogivetheReedsyplatformashot.Iambiased,butIknowIwouldn’thaveembarkedonthisproject if ithadn’tbeenfortheirplatform.

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Donation Causes

Thankyouforreadingthisbook.

Ifyouenjoyedit,pleaseconsidersharingitwithfriendsanddonatingthesuggesteddonationof$/£9.99tooneofthecharities listed on this book’s website:


Additionally, please consider leaving a review on Amazon or anyotherplatformyouusedtogetacopy.

http://fundraisingfieldguide.com


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Acknowledgements

Firstly, I’d like to thank all the founders I’ve had the chance toworkwithovertheyears.Theyhavetaughtmesomuchthroughtheircourageandperseverance.

I’d also like to thank my friends & work/industry colleagues whose support has been instrumental in helping me draft thisbookanditsmaterials,eitherviaablogpost,orjustasimpleideaoropinion.ThankyoutoTinaBaker,ReshmaSohoni, Philipp Moehring, Giles Hawkins, Dale Huxford, Sitar Teli, Ivan Farneti, Robin Klein, Alliott Cole, Ben Tompkins, Sean Seton-Rogers, Christoph Janz, Jason Ball, VincentJacobs,ChristianHernandez,NicBrisbourne,AndyChung,EzeVidra,SherryCoutu,JonBradford,JeffLynn,ScottSage,Nick Verkroost, Emmanuel Nataf, Ricardo Fayet, Matt Cobb, andMiguelPinho.

Lastly, but not ‘leastly’, I’d like to also thank the mentors whowere instrumental inmypersonal journey andwhohave helped in my understanding of much of the material contained herein. Thank you toWalter Urbaniak, AdamLipson,GeorgePowlick,NigelGrierson,Michael J. Skok,SorenHein,StefanTirtey, JerryEnnis,TuriMunthe,SaulKlein, Chris Grew, Gabbi Cahane, and many others who have givenmefeedbackandhelpovertheyears.

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About the Author

Carlos Eduardo Espinal is a Partner at Seedcamp, a London-Based Acceleration Fund with over 170 investments focusing on accelerating pre-seed and seed stage companies and helpingthemreachproduct-market-fit.

Prior to Seedcamp, Carlos was an Associate at Doughty Hanson Technology Ventures, an early stage investment firmbasedinLondon.Therehehonedhisunderstandingofwhatinvestorslookforwhenconsideringaninvestment.

Before his time as an investor, Carlos was an engineer for the Advanced Communications Technologies group of The New York Stock Exchange (SIAC) where he focused on the next generation of wireless and mobile trading platforms for the exchange and developed a strong love for cuttingedgetechnologies.PriortoSIAC,hewasanetworksecurity consultant for the professional services division of Cybertrust / Baltimore Technologies where he worked with global clients in the telecommunication and data services sectors.

CarlosholdsanMBAfromtheF.W.OlinGraduateSchoolof Business at Babson College and a B.S. fromCarnegieMellonUniversity.HewasawardedwithWiredEurope’s100MostInfluential,BritishInteractiveMediaAssociation’sHot100DigitalPeople,andTechCityInsider100List.

In his spare time, Carlos likes to travel, read, and photograph interesting places and experiences:

http://stories.iconografi.co

http://stories.iconografi.co

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You can find him on:

Twitter - @cee

Blog - http://www.carlosespinal.com

LinkedIn - http://uk.linkedin.com/in/carloseduardoespinal

AngelList - https://angel.co/cee

Podcast - https://soundcloud.com/carloseduardoespinal &

https://soundcloud.com/seedcamp

https://twitter.com/%40cee

http://www.carlosespinal.com

http://uk.linkedin.com/in/carloseduardoespinal

https://angel.co/cee

https://soundcloud.com/carloseduardoespinal

https://soundcloud.com/seedcamp

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