Proposed Structure for Raising Money
So i’ve had the luxury of getting to know most of the top serial entrepreneurs in NYC and have asked most of them how they are raising money for their last venture. Here’s what I’ve learned … this is in no particular order but its 13 things i’ve seen being used lately…
1) Never put your own money in past a prototype (and generally get the prototyped paid for by someone else)
2) Use convertible debt that converts at a discount to the Series A round (discount, between 5-30%, depending on how long between when that debt was issued to when Series A closes)
3) Sometimes allow for additional warrants or for the investor to double investment at original valuation at time of Series A
4) Never assign a valuation until a Series A (not worth the mess)
5) if you’re investing your own cash, have your wife or uncle do it through another entity in the form of debt (no reason to put your money in as common stock when you can get preferred)
6) When you raise a series A, say you are raising a $5MM Series A at a $15MM valuation and allow for any investors for under $1MM to come in as convertible debt (this avoids the issue of raising angel money at one valuation and trying to raise a Series A at another simultaneously) . likely this valuation is too high but give some room for investors to negotiate it down.
7) Never state your valuation in raising money in your presentations. First get interest from investors before talking valuation. Get the investor hooked on the company before any negotiations and you’ll have a much friendlier negotiation.
Incorporate as a Delaware C-Corp (unless you are an insurance company, then use Bermuda- otherwise no exceptions)
9) Create vesting in your initial shareholder agreement so your investor doesn’t try to change it later. However, give yourself a good vesting schedule based on a mixture of time and milestones and instead of 3-5 year vesting, use 18-24 months. It’s a lot easier to demand vesting when there is none then demand changing vesting terms.
10) Always have an option pool. Between 10-20% (size of option pool is open to debate)
11) Always create full business plans. It shows you can do it though no one will really read it and it’ll be good to have for yourself. Make sure includes: Exec Summary, Profile (elevator pitch + team), 1 pager, PPT Deck (5-20 slides), Milestones, Use of Funds. Preferably have: Full Bplan & Full marketing Plan & Product Rollout plan and financial model. Use this in stages. First send the profile then 1 pager, then use the Deck in person then the Exec Summary then Milestones & Use of Funds. Then send financial model and other plans at once if you get that far. Also, be practical on your projections, never use the word conservative and when you discuss your financials, state the risks and assumptions and potential issues, don’t let the investor do it, do their due diligence for them.
12) Have a meeting with a potential acquirer and get some level of interest, and if possible an offer to acquire you as is (even if its 50 cents a double cheese burger). This shows that there is serious interest and that you have thought towards the exit (the only thing your investor cares about). It gets people excited when they hear you already have an offer for the company (don’t reveal the offer or who it is from until much later).
13) More management team, less advisors. Too many advisors makes you look like you’re window dressing. Unless your advisors are investing cash (then list them as investors not advisers) then don’t list many. 1-2 Spot on advisers is perfect.
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