Startups are about execution, not about ideas. Dramatically unequal founder equity splits often give undue preference to the co-founder who initially came up with the idea for the startup, as opposed to the small group founders who got the product to market and generated the initial traction. My advice for splitting equity is probably controversial, but it's what we have done for all of my startups, and what we almost always recommend at YC: equal equity splits among co-founders.
You will spend more time with these people than you will with most family members. These are the people who will help you decide the most important questions in your company. Finally, these are the people you will celebrate with when you succeed. However, the new money investors and the option pool increase in steps 2 and 3 should dilute the YC Safe and all other converting safes, assuming those safes are standard post-money safes.
If we exercise our participation right, step 3 then includes our additional new money investment. You can optionally include a summary product roadmap 6 quarters max indicating what an investment buys. It is worth pointing out that startup investing is rapidly evolving and it is likely that certain elements of this guide will at some point become obsolete, so make sure to check for updates or future posts.
There is now an extraordinary amount of information available on raising venture money. Several sources are referenced and more are listed at the end of this document. Fundraising is a necessary, and sometimes painful task most startups must periodically endure. Often that will seem like a nearly impossible task and when it is complete, it will feel as though you have climbed a very steep mountain.
But you have been distracted by the brutality of fundraising and once you turn your attention back to the future you will realize it was only a small foothill on the real climb in front of you. It is time to get back to work building your company. Many thanks to those whose knowledge or work have contributed to this document.
Of course, any errors are all mine. Please send any comments or questions to geoff yahoo. The term you are looking for is not here? Disagree with the definition? Go to Investopedia for a more authoritative source. Fundraising Seed Round Investors. Why Raise Money? When to Raise Money Investors write checks when the idea they hear is compelling, when they are persuaded that the team of founders can realize its vision, and that the opportunity described is real and sufficiently large.
How Much to Raise? Financing Options Startup founders must understand the basic concepts behind venture financing. Convertible Debt Convertible debt is a loan an investor makes to a company using an instrument called a convertible note.
Valuation: What is my company worth? Crowdfunding There are a growing number of new vehicles to raise money, such as AngelList , Kickstarter , and Wefunder. Meeting Investors If you are meeting investors at an investor day, remember that your goal is not to close--it is to get the next meeting.
Negotiating and Closing the Deal A seed investment can usually be closed rapidly. Negotiations When you enter into a negotiation with a VC or an angel, remember that they are usually more experienced at it than you are, so it is almost always better not to try to negotiate in real-time. Documents You Need Do not spend too much time developing diligence documents for a seed round.
Your Vision - Your most expansive take on why your new company exists. The Problem - What are you solving for the customer--where is their pain? The Customer - Who are they and perhaps how will you reach them? The Solution - What you have created and why now is the right time. Business model - how users translate to revenue. Actuals, plans, hopes. Summary - key takeaways market size, key product insight, traction Next It is worth pointing out that startup investing is rapidly evolving and it is likely that certain elements of this guide will at some point become obsolete, so make sure to check for updates or future posts.
If fundraising is difficult, keep fighting and stay alive. This means talk to as many people as you can, prioritizing the ones that are likely to close.
Get docs signed and the money in the bank as soon as possible. Always hustle for leads. Never screw anyone over. Hold yourself and others on your team to the highest ethical standards. The Valley is a very small place, and a bad reputation is difficult to repair. Play it straight and you will never regret it. Investors have a lot of different ways to say no.
The hardest thing for an entrepreneur is understanding when they are being turned down and being okay with it. Develop a style that fits you and your company. Stay organized. Co-founders should split tasks where possible. If necessary, use software like Asana to keep track of deals. Have a thick skin but strike the right balance between confidence and humility. And never be arrogant. Angel Investor - A usually wealthy private investor in startup companies.
Convertible Note - This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock. Common Stock - Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges and preferences. Dilution - The percentage an ownership share is decreased via the issuance of new shares.
Discount - A percentage discount from the pre-money valuation to give safe or note holders an effectively lower price.
Equity Round - A financing round in which the investor purchases equity stock in the company. Fully Diluted Shares - The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants and other convertible securities. Lead Investor - Usually the first and largest investor in a round who brings others into the round.
Preferred Stock - Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock.
If you hope your company will one day be extremely successful, then treat your equity as such. I also suggest founders take the time to model this all out or use Angelcalc , built by my partner Geoff Ralston. Founders are often surprised about how choosing to raise less helps protect their ownership more than negotiating valuation does.
In all cases, they are having a tough time. At some point, it gets hard to make it all work.
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