Hult Founders Lab Week 2: 360-Pitch

360-pitch

This week was our 360-pitch event; this means that all founders needed to pitch their business idea or existing start-ups to the other program member. Hosted at the Hult campus.

The audience, therefore, roasted and gave clear & transparent feedback and critics back to the pitching founders. Thankfully all founders are still motivated, and the whole atmosphere in the room was great. The ideas and businesses already developed quite well since the first pitches during our Bootcamp 2 weeks ago, and the board was very proud of seeing the founders doing such a fantastic job! A very successful 360-pitch event.

Furthermore, the founders learn from each other, and can through the feedback, develop their idea even more. Some founders went down. Completely different paths, whereas some others decided to have a new customer group, a new USP, a new idea for a CSR, and much more. This helps the founders getting on the right path with their concept and their future business. All in all, the process the founders went through is incredible, considering the early time of the program. 

The board is looking very much forward to the future! Well done!

Check out our other events here.

Hult Founders Lab Week 1: It Starts With You

harvest london founder and hult alumni

Hult’s Founder’s Lab is back this term with exciting programs, guest speakers, as well as eye-opening activities. We are very proud of all the startups that have joined us! For those of you who have not yet heard about what we’ve been doing lately, then reading this blog post out would be a very good idea! It starts with you!

One of our main purpose at HFL is to create and support an innovative space for all our founders. We are grateful to say that it has been truly inspiring this couple of weeks learning together and also hosting a couple of events with guest speakers. Yesterday, on the 23rd of October, we were able to get the opportunity to listen to Alexandra Cruz Welch, our fellow Hult Alumni and founder of Harvest London, also the ambassador of Thought For food (World’s next-generation innovation engine for food and agriculture). Alexandra started by defining what value is. As may you might know, the value proposition is key in startups. Finding out what “value” means, might not be that simple. It is no doubt that putting a value on our future goods and services is a complex process. One that needs time, effort, and of course a lot of thoughts. How do we create value? Alexandra made a point that the most important value in a business is our founders itself.

“Your value proposition starts with you”.

Question of the day:

How can we bring value to our community, friends, and family around us?

Under the loop: GREM App

Zan Alexander Bozic, co-founder of the GREM App

In this interview, Lars talks to Zan Alexander, a Hult Founders Lab program Alumni and the co-founder of the GREM App, currently live in Ljubljana (Slovenia). Alex and his team have built their MVP, raised money and are currently in process of applying to and joining YC in the San Francisco bay area. All of us at the Hult Founders Lab wish you the best of luck!

Interview

LARS: What is the GREM App?

ALEX: The GREM App is a platform that provides people looking for events/fun space where they can identify this. In addition, it provides the auxiliary services you need for these events, such as transport, meals, and all other things you would want for having a great experience. It’s all about the overall package, what happens before and also what happens after. This also gives brands and sponsors a much broader and explicit impact on each attendee.

LARS: Where did it come from?

ALEX: The idea of the GREM App came from myself organising events when I was 15… I was organising these events for people that were underage, effectively what I was doing was moving from them the streets into an organised environment, increasing safety and oversight. With Grem we’re tried to replicate the success I had alone there with people in different age-segments. We’re also looking at having sponsors do events and increasing the broader impact for the event-goers and the event-organisers as well as the brands

LARS: How was the Hult Founders Lab program helpful for you?

ALEX: The Hult Founders Lab was helpful in many ways but especially with one of the external speakers that hosted a workshop during the program, speaking about the fundamentals of projects, about the details, filling holes that who had overlooked and so on. It really made me review the entire concept with a fine-tooth comb and we came out much stronger on the other side of that.

LARS: What has been your biggest challenge?

ALEX: The biggest problem for us has been the fact that we are all full-time students and we all study in different schools – in different timezones! Communications and coordination become so much more laborious but because we have done it like this since we began it has really hardened us in a way where we manage to work effectively like this. Additionally, when we actually get to be in the same room for four months over summer it makes us work so well, we are able to shoot through all our to-do’s and problems we’re faced with because we have these barriers on a day-to-day basis, that we eliminate when we are together.

LARS: What is the best thing you learned from this experience?

ALEX: The team, for sure. With all the challenges and hurdles we’ve had, the realisation of how important it’s been that the core team must be right. In the beginning, we started out not really knowing each other that well, merely being acquaintances but throughout this, we’ve made friends. However, that’s not really important, the number one factor is that we are able to separate business and friendship and have each and every one of us focus on what’s the priority for the project. That’s what matters.

LARS: What does the future hold for you and the team?

ALEX: The optimistic version of the story is that we will disrupt and pivot the market for how sponsored events work, where we sit on data that allow us to position sponsors in a way not seen before. Realistically, our MVP will prove the concept in Slovenia, then we’ll aim for the US straight away and replicate the model and success in that market. There is some fundraising on the horizon as well but we’ll get to that by the end of the year, early next year.

LARS: Any tips for the Hult Founders Lab community?

ALEX: Definitely. My two tips are: Don’t be afraid to change. You’ll never have it right in the beginning, you need to adapt! And number two… When you’re in the deepest hole, mentally, or otherwise… There is always light on the other side, you just have to stay true to what you believe and keep iterating until you get it right, even if that means pivoting completely, the right iteration may be the next one.

Are you interested in joining the Hult Founders Lab? Get in touch via Hult or directly with the Hult Founders Lab, here.

A Guide to Seed Fundraising

fundraising: a guide
This article was taken from blog.ycombinator.com… All credit to the original author, Geoff Ralston.

Introduction

Startup companies need to purchase equipment, rent offices, and hire staff. More importantly, they need to grow. In almost every case they will require outside capital to do these things. From this need we get to fundraising.

The initial capital raised by a company is typically called “seed” capital. This brief guide is a summary of what startup founders need to know about raising the seed funds critical to getting their company off the ground. Seed fundraising is the first plant to make the founding teams vision into reality.

This is not intended to be a complete guide to fundraising. It includes only the basic knowledge most founders will need. The information comes from my experiences working at startups, investing in startups, and advising startups at Y Combinator and Imagine K12. YC partners naturally gain a lot of fundraising experience and YC founder Paul Graham (PG) has written extensively on the topic 1234. His essays cover in more detail much of what is contained in this guide and are highly recommended reading.

Why Raise Money?

Without startup funding, the vast majority of startups will die. The amount of money needed to take a startup to profitability is usually well beyond the ability of founders and their friends and family to finance. A startup here means a company that is built to grow fast 12. High growth companies almost always need to burn capital to sustain their growth prior to achieving profitability. A few startup companies do successfully bootstrap (self-fund) themselves, but they are the exception. Of course, there are lots of great companies that aren’t startups. Managing capital needs for such companies is not covered herein.

Cash not only allows startups to live and grow, but a war chest is also almost always a competitive advantage in all ways that matter: hiring key staff, public relations, marketing, and sales. Thus, most startups will almost certainly want to raise money. The good news is that there are lots of investors hoping to give the right startup money. The bad news is, “Fundraising is brutal” 1. The process of raising that money is often long, arduous, complex, and ego-deflating. Nevertheless, it is a path almost all companies and founders must walk, but when is the time right to raise?

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. When founders are ready to tell this story, they can raise money. And usually, when you can raise money, you should.

For some founders, it is enough to have a story and a reputation. However, for most, it will require an idea, a product, and some amount of customer adoption, a.k.a. traction. Luckily, the software development ecosystem today is such that a sophisticated web or mobile product can be built and delivered in a remarkably short period of time at very low cost. Even hardware can be rapidly prototyped and tested.

But investors also need persuading. Usually, a product they can see, use, or touch will not be enough. They will want to know that there is a product-market fit and that the product is experiencing actual growth.

Therefore, founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate. How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. And to raise money founders need to impress. For founders who can convince investors without these things, congratulations. For everyone else, work on your product and talk to your users.

How Much to Raise?

Ideally, you should raise as much money as you need to reach profitability, so that you’ll never have to raise money again. If you succeed in this, not only will you find it easier to raise money in the future, you’ll be able to survive without new funding if the funding environment gets tight. That said, certain kinds of startups will need a follow-on round, such as those startups building hardware. Their goal should be to raise as much money as needed to get to their next “fundable” milestone, which will usually be 12 to 18 months later.

In choosing how much to raise you are trading off several variables, including how much progress that amount of money will purchase, credibility with investors, and dilution. If you can manage to give up as little as 10% of your company in your seed round, that is wonderful, but most rounds will require up to 20% dilution and you should try to avoid more than 25%. In any event, the amount you are asking for must be tied to a believable plan. That plan will buy you the credibility necessary to persuade investors that their money will have a chance to grow. It is usually a good idea to create multiple plans assuming different amounts raised and to carefully articulate your belief that the company will be successful whether you raise the full or some lesser amount. The difference will be how fast you can grow.

One way to look at the optimal amount to raise in your first round is to decide how many months of operation you want to fund. A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k x 5 x 18 = $1.35mm. What if you are planning to hire for other positions as well? Don’t worry about it! This is just an estimate and will be accurate enough for whatever mix you hire. And here you have a great answer to the question: “How much are you raising?” Simply answer that you are raising for N months (usually 12-18) and will thus need $X, where X will usually be between $500k and $1.5 million. As noted above, you should give multiple versions of N and a range for X, giving different possible growth scenarios based on how much you successfully raise.

There is enormous variation in the amount of money raised by companies. Here we are concerned with early raises, which usually range from a few hundreds of thousands of dollars up to two million dollars. Most first rounds seem to cluster around six hundred thousand dollars, but largely thanks to increased interest from investors in seed, these rounds have been increasing in size over the last several years.

Financing Options

Startup founders must understand the basic concepts behind venture financing. It would be nice if this was all very simple and could be explained in a single paragraph. Unfortunately, as with most legal matters, that’s not possible. Here is a very high-level summary, but it is worth your time to read more about the details and pros and cons of various types of financing and, importantly, the key terms of such deals that you need to be aware of, from preferences to option pools. The articles below are a decent start.

Venture financing usually takes place in “rounds,” which have traditionally had names and a specific order. First comes a seed round, then a Series A, then a Series B, then a Series C, and so on to acquisition or IPO. None of these rounds are required and, for example, sometimes companies will start with a Series A financing (almost always an “equity round” as defined below). Recall that we are focusing here exclusively on seed, that very first venture round.Most seed rounds, at least in Silicon Valley, are now structured as either convertible debt or simple agreements for future equity (safes) 17. Some early rounds are still done with equity, but in Silicon Valley, they are now the exception.

Convertible Debt

Convertible debt is a loan an investor makes to a company using an instrument called a convertible note. That loan will have a principal amount (the amount of the investment), an interest rate (usually a minimum rate of 2% or so), and a maturity date (when the principal and interest must be repaid). The intention of this note is that it converts to equity (thus, “convertible”) when the company does an equity financing. These notes will also usually have a “Cap” or “Target Valuation” and / or a discount. A ‘Cap’ is the maximum effective valuation that the owner of the note will pay, regardless of the valuation of the round in which the note converts. The effect of the cap is that convertible note investors usually pay a lower price per share compared to other investors in the equity round. Similarly, a discount defines a lower effective valuation via a percentage off the round valuation. Investors see these as their seed “premium” and both of these terms are negotiable. Convertible debt may be called at maturity, at which time it must be repaid with earned interest, although investors are often willing to extend the maturity dates on notes.

Safe

Convertible debt has been almost completely replaced by the safe at YC and Imagine K12. A safe acts like convertible debt without the interest rate, maturity, and repayment requirement. The negotiable terms of a safe will almost always be simply the amount, the cap, and the discount if any. There is a bit more complexity to any convertible security, and much of that is driven by what happens when a conversion occurs. I strongly encourage you to read the safe primer 18, which is available on YC’s site. The primer has several examples of what happens when a safe converts, which go a long way toward explaining how both convertible debt and safes work in practice.

Equity

An equity round means setting a valuation for your company (generally, the cap on the safes or notes is considered as a company’s notional valuation, although notes and safes can also be uncapped) and thus a per-share price, and then issuing and selling new shares of the company to investors. This is always more complicated, expensive, and time-consuming than a safe or convertible note and explains their popularity for early rounds. It is also why you will always want to hire a lawyer when planning to issue equity. To understand what happens when new equity is issued, a simple example helps. Say you raise $1,000,000 on a $5,000,000 pre-money valuation. If you also have 10,000,000 shares outstanding then you are selling the shares at:

  1. $5,000,000 / 10,000,000 = 50 cents per share
    and you will thus sell…
  2. 2,000,000 shares
    resulting in a new share total of…
  3. 10,000,000 + 2,000,000 = 12,000,000 shares
    and a post-money valuation of…
  4. $0.50 * 12,000,000 = $6,000,000
    and dilution of…
  5. 2,000,000 / 12,000,000 = 16.7%
    Not 20%!

There are several important components of an equity round with which you must become familiar when your company does a priced round, including equity incentive plans (option pools), liquidation preferences, anti-dilution rights, protective provisions, and more. These components are all negotiable, but it is usually the case that if you have agreed upon a valuation with your investors (next section), then you are not too far apart, and there is a deal to be done. I won’t say more about equity rounds since they are so uncommon for seed rounds.

One final note: whatever form of financing you do, it is always best to use well-known financing documents like YC’s safe. These documents are well understood by the investor community and have been drafted to be fair, yet founder-friendly.

Valuation: What is my company worth?

You are two hackers with an idea, a few months of hacking’s worth of software, and several thousand users. What is your company worth? It should be obvious that no formula will give you an answer. There can only be the most notional sort of justification for any value at all. So, how do you set a value when talking to a potential investor? Why do some companies seem to be worth $20mm and some $4mm? Because investors were convinced that was what they were (or will be in the near future) worth. It is that simple. Therefore, it is best to let the market set your price and to find an investor to set the price or cap. The more investor interest your company generates, the higher your value will trend.

Still, it can be difficult in some circumstances to find an investor to tell you what you are worth. In this case, you can choose a valuation, usually by looking at comparable companies who have valuations. Please remember that the important thing in choosing your valuation is not to over-optimize. The objective is to find a valuation with which you are comfortable, that will allow you to raise the amount you need to achieve your goals with acceptable dilution, and that investors will find reasonable and attractive enough to write you a check. Seed valuations tend to range from $2mm-$10mm, but keep in mind that the goal is not to achieve the best valuation, nor does a high valuation increase your likelihood of success.

Investors: Angels & Venture Capitalists

The difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part, they are much more like hobbyists. Their decision-making process is usually much faster–they can make the call all on their own–and there is almost always a much larger component of emotion that goes into that decision.

VCs will usually require more time, more meetings, and will have multiple partners involved in the final decision. And remember, VCs see LOTS of deals and invest in very few, so you will have to stand out from a crowd. The ecosystem for seed (early) financing is far more complex now than it was even five years ago. There are many new VC firms, sometimes called “super-angels,” or “micro VC’s”, which explicitly target brand new, very early-stage companies.

There are also several traditional VCs that will invest in seed rounds. And there are a large number of independent angels who will invest anywhere from $25k to $100k or more in individual companies. New fundraising options have also arisen. For example, AngelList Syndicates lets angels pool their resources and follow a single lead angel. FundersClub invests selectively like a traditional VC, but lets angels become LPs in their VC funds to expand connections available to its founders. How does one meet and encourage the interest of investors?

If you are about to present at a demo day, you are going to meet lots of investors. There are few such opportunities to meet a concentrated and motivated group of seed investors. Besides a demo day, by far the best way to meet a venture capitalist or an angel is via a warm introduction. Angels will also often introduce interesting companies to their own networks. Otherwise, find someone in your network to make an introduction to an angel or VC. If you have no other options, do research on VCs and angels and send as many as you can a brief, but compelling summary of your business and opportunity (see Documents You Need below).

Crowdfunding

There are a growing number of new vehicles to raise money, such as AngelListKickstarter, and Wefunder. These crowdfunding sites can be used to launch a product, run a pre-sales campaign, or find venture funding. In exceptional cases, founders have used these sites as their dominant fundraising source, or as clear evidence of demand. They usually are used to fill in rounds that are largely complete or, at times, to reanimate a funding round that is having difficulty getting off the ground. The ecosystem around investing is changing rapidly, but when and how to use these new sources of funds will usually be determined by your success raising through more traditional means. You can also read our article on the basics of crowdfunding here.

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. Investors will seldom choose to commit the first day they hear your pitch, regardless of how brilliant it is. So book lots of meetings. Keep in mind that the hardest part is to get the first money in the company. In other words, meet as many investors as possible but focus on those most likely to close. Always optimize for getting money soonest (in other words, be greedy) 2.

There are a few simple rules to follow when preparing to meet with investors. First, make sure you know your audience–do research on what they like to invest in and try to figure out why. Second, simplify your pitch to the essential–why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company.

Next, make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets. In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long term commitment and most investors see lots of deals. Unless they like you and feel connected to your outcome, they will most certainly not write a check. Who you are and how well you tell your story are most important when trying to convince investors to write that check. Investors are looking for compelling founders who have a believable dream and as much evidence as possible documenting the reality of that dream.

Find a style that works for you, and then work as hard as necessary to get the pitch-perfect. Pitching is difficult and often unnatural for founders, especially technical founders who are more comfortable in front of a screen than a crowd. But anyone will improve with practice, and there is no substitute for an extraordinary amount of practice. Incidentally, this is true whether you are preparing for a demo day or an investor meeting. During your meeting, try to strike a balance between confidence and humility.

Never cross over into arrogance, avoid defensiveness, but also don’t be a pushover. Be open to intelligent counterpoints, but stand up for what you believe and whether or not you persuade the investor just then, you’ll have made a good impression and will probably get another shot. Lastly, make sure you don’t leave an investor meeting without an attempted close or at very minimum absolute clarity on next steps. Do not just walk out leaving things ambiguous.

Negotiating and Closing the Deal

A seed investment can usually be closed rapidly. As noted above, it is an advantage to use standard documents with consistent terms, such as YC’s safe. Negotiation, and often there is none at all, can then proceed on one or two variables, such as the valuation/cap and possibly a discount.

Deals have momentum and there is no recipe towards building momentum behind your deal other than by telling a great story, persistence, and legwork. You may have to meet with dozens of investors before you get that close. But to get started you just need to convince 5 one of them. Once the first money is in, each subsequent close will get faster and easier 6.

Once an investor says that they are in, you are almost done. This is where you should rapidly close using a handshake protocol 19. If you fail at negotiating from this point on, it is probably your fault.

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. Take requests away with you, and get help from YC or Imagine K12 partners, advisors, or legal counsel. But also remember that although certain requested terms can be egregious, the majority of things credible VCs and angels will ask for tend to be reasonable.

Do not hesitate to ask them to explain precisely what they are asking for and why. If the negotiation is around valuation (or cap) there are, naturally, plenty of considerations, e.g. other deals you have already closed. However, it is important to remember that the valuation you choose at this early round will seldom matter to the success or failure of the company. Get the best deal you can get–but get the deal!

Finally, once you get to yes, don’t wait around. Get the investor’s signature and cash as soon as possible. One reason safes are popular is that the closing mechanics are as simple as signing a document and then transferring funds. Once an investor has decided to invest, it should take no longer than a few minutes to exchange signed documents online (for example via Clerky or Ironclad) and execute a wire or send a check.

Documents You Need

Do not spend too much time developing diligence documents for a seed round. If an investor is asking for too much due diligence or financials, they are almost certainly someone to avoid. You will probably want an executive summary and a slide deck you can walk investors through and, potentially, leave behind so VCs can show to other partners.

The executive summary should be one or two pages (one is better) and should include vision, product, the team (location, contact info), traction, market size, and minimum financials (revenue, if any, and fundraising prior and current). Generally, make sure the slide deck is a coherent leave-behind. Graphics, charts, screenshots are more powerful than lots of words. Consider it a framework around which you will hang a more detailed version of your story.

There is no fixed format or order, but the following parts are usually present. Create the pitch that matches you, how you present, and how you want to represent your company. Also note that as the executive summary, there are lots of similar templates online if you don’t like this one.

1. Your company / Logo / Tag Line

2. Your Vision – Your most expansive take on why your new company exists.

3. The Problem – What are you solving for the customer–where is their pain?

4. The Customer – Who are they and perhaps how will you reach them?

5. The Solution – What you have created and why now is the right time.

6. The (huge) Market you are addressing – Total Available Market (TAM) >$1B if possible. Include the most persuasive evidence you have that this is real.

7. Market Landscape – including competition, macro trends, etc. Is there any insight you have that others do not?

8. Current Traction – list key stats/plans for scaling and future customer acquisition.

9. Business model – how users translate to revenue. Actuals, plans, hopes.

10. Team – who you are, where you come from and why you have what it takes to succeed. Pics and bios are okay. Specify roles.

11. Summary – 3-5 key takeaways (market size, key product insight, traction)

12. Fundraising – Include what you have already raised and what you are planning to raise now. Any financial projections may go here as well. You can optionally include a summary product roadmap (6 quarters max) indicating what an investment buys.

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. 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 necessary, and a sometimes painful task most startups must periodically endure. A founder’s goal should always be to raise as quickly as possible and this guide will hopefully help founders successfully raise their first round of venture financing. 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.

Appendix

Fundraising Rules to Follow

  • Get fundraising over as soon as possible, and get back to building your product and company, but also…
  • Don’t stop raising money too soon. If fundraising is difficult, keep fighting and stay alive.
  • When raising, be “greedy”: breadth-first search weighted by expected value 2. This means, talk to as many people as you can, prioritizing the ones that are likely to close.
  • Once someone says yes, don’t delay. Get docs signed and the money in the bank as soon as possible.
  • Always hustle for leads. If you are the hottest deal of the hour, that’s great, but everyone else needs to work like crazy to get angels and other venture investors interested.
  • 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. You’ll feel better for it, too.
  • 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. PG likes to say, “If the soda is empty, stop making that awful sucking sound with the straw.” But remember that they might be a “yes” another time, so part on the best possible terms.
  • 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.

What Not to Do While Communicating with Investors

DON’T:

  • Be dishonest in any way
  • Be arrogant or unfriendly
  • Be overly aggressive
  • Seem indecisive – although it is okay to say you don’t know yet.
  • Talk so much they cannot get a word in edgewise
  • Be slow to follow-up or close a deal
  • Break an agreement, verbal or written
  • Create detailed financials
  • Use ridiculous/silly market size numbers without clear justification
  • Claim you know something that you don’t or be afraid to say you don’t know
  • Spend time on the obvious
  • Get caught up in unimportant minutiae – don’t let the meeting get away from you
  • Ask for an NDA
  • Try to play investors off each other when you are not a fundraising ninja
  • Try to negotiate in real-time
  • Over-optimize your valuation or worry too much about dilution
  • Take a “No” personally

A Brief Glossary of Key Terms

The term you are looking for is not here? Disagree with the definition? Go to Investopedia for a more authoritative source.

  • Angel Investor – A (usually) wealthy private investor in startup companies.
  • Cap / Target Valuation – The maximum effective valuation for an investor in a convertible note.
  • 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 noteholders 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.
  • IPO – Initial Public Offering – the first sale of stock by a private company to the public.
  • Lead Investor – Usually the first and largest investor in a round who brings others into the round.
  • Liquidation Preference – A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.
  • Maturity Date – The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)
  • Equity Incentive Plan / Option Pool – The shares allocated and set aside for grants to employees and consultants.
  • Preferred Stock – Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).
  • Pre-money Valuation – The value of a company prior to when investor money is added.
  • Pro-rata rights (aka pre-emptive rights) – Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.
  • Protective Provisions – Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.
  • Safe – Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.
  • TAM – Total Available Market. In pitches, this is the estimated total revenue available for the product(s) you are selling.
  • Venture Capitalist – A professional investor in companies, investing limited partners’ funds.

Sources

  1. A Fundraising Survival GuidePaul Graham 
    Techniques for surviving and succeeding at fundraising
  2. How To Raise MoneyPaul Graham 
    Detailed thoughts on fundraising. A must-read.
  3. The Equity EquationPaul Graham 
    How to decide if you should accept an offer from an investor
  4. The Future of Startup FundingPaul Graham 
    How startup funding is evolving
  5. How to Convince InvestorsPaul Graham 
    How to convince investors to invest in you
  6. Investor Herd DynamicsPaul Graham 
    How investors think about investing in early-stage companies
  7. “Venture Deals”Feld and Mendelson 
    Essential elements of a venture deal (book)
  8. Raising Money for a StartupSal Khan 
    Startup Fundraising from Sal Khan
  9. Venture Hacks: Debt or Equity, Babak Nivi 
    Discussion on debt vs. equity
  10. Venture Hacks: First TimeBabak Nivi 
    Advice for first-time fundraisers.
  11. How Much Money To RaiseFred Wilson 
    Advice on how much money to raise.
  12. “Startup = Growth”Paul Graham 
    Description of a startup.
  13. Venture Hacks / Babk Nivi: Should I Raise Debt or Equity 
    Discussion of whether raising debt or equity is the best answer.
  14. Fred Wilson: Financing Options 
    Another discussion of debt vs. equity
  15. Mark Suster on Convertible Debt 
    An analysis of problems with convertible debt
  16. Clerky Guide 
    Clerky docs and guides. A great place to start.
  17. Announcing the SafePaul Graham 
    The simple agreement for future equity. A replacement for convertible notes.
  18. The Safe PrimerCarolynn Levy 
    Lots of detailed information on the safe and examples as to how it works in various cases.
  19. The Handshake Deal ProtocolPaul Graham 
    A standard protocol to help ensure that verbal commitments turn into transactions.

The Basics of Crowdfunding

crowdfunding

REPOSTED FROM ENTREPRENEUR.COM … Credit to the original contributor. What it is: Crowdfunding is about persuading individuals to each give you a small donation — $10, $50, $100, maybe more. Once you get thousands of donors, you have some serious cash on hand.

Join the Hult Founders Lab today!

This has all become possible in recent years thanks to a proliferation of websites that allow nonprofits, artists, musicians — and yes, businesses — to raise money. This is the social media version of fundraising.

There are more than 600 crowdfunding platforms around the world, with fundraising reaching billions of dollars annually, according to the research firm Massolution.

Related: Crowdfunding’s Growth Spurt Going Strong

How it works: The most common type of crowdfunding fundraising is using sites like Kickstarter and Indiegogo variety, where donations are sought in return for special rewards. That could mean a free product or even a chance to be involved in designing the product or service.

It is also possible to use crowdfunding to assemble loans and royalty financing. The site LendingClub, for example, allows members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means “both sides can win” in the transactions. Royalty financing sites appear to be rarer, but the idea is to link business owners with investors who lend money for a guaranteed percentage of revenues for whatever the business is selling.

The holy grail is to sell company shares or ownership stakes in the company on crowdfunding sites because it could be like a mini-IPO without the traditional hurdles. In the past, this has only been legal with accredited investors, people who each have more than $1 million in net worth or more than $200,000 in annual income.

The good news is that the Jumpstart Our Business Startups Act of 2012 allows the stock to be sold to the general public over crowdfunding sites, but as of mid-2013, the SEC was still hammering out the rules.

Related: 3 Rules for Successful Crowdfunding

Upside: Crowdfunding provides another strategy for startups or early-stage companies ready to take it to the next level — such as rolling out a product or service. Before, a business owner was subject to the caprices of individual angel investors or bank loan officers. Now it is possible to pitch a business plan to the masses.

A successful crowdfunding round not only provides your business with needed cash but creates a base of customers who feel as though they have a stake in the business’ success.

Related: Raising Money Through Crowdfunding? Consider These Best Practices For Success

Downside: If you don’t have an engaging story to tell, then your crowdfunding bid could be a flop. Sites such as Kickstarter don’t collect money until a fundraising goal is reached, so that’s still a lot of wasted time that could have been spent doing other things to grow the business.

It could be even worse if you meet your goal but then realize you underestimated how much money you needed. A business can risk getting sued if it promises customers products or perks in return for donations, and then fails to deliver.

There is also an argument to be made that angel investors and even bank officers provide more than just money. They provide entrepreneurs with needed advice. Business owners miss out on such mentorship when they ignore traditional investors and turn to the crowd.

Here are more factors that can better ensure a successful crowdfunding campaign:

  • Have at least a small network of enthusiastic friends and family willing to help get the ball rolling by giving and urging others to give.
  • If you’re giving out perks in return for money, make sure the perks are cool.
  • Present a serious business plan and an explanation of why the money will take your enterprise to the next level.
  • Demonstrate that you have your own skin in the game because of the personal funds you have already poured into the business.
  • Include a video pitch and keep it short and concise, with a call to action.
  • PBS includes different rewards for different levels of giving; so should you.
  • Be prepared to essentially live online, staying active on social media sites, until the crowdfunding campaign is complete.