Masterclass: Capital raising for startups
Building your own startup is not an easy task. You go through pitch after pitch, work out the documents, attend meetings and consultations–all before you get your feet off the ground! Thankfully, there are different (and easier!) ways to go about this. Our team of startup founders and consultants can help you navigate these rough waters.
About the Speakers
- Jason Atkins: Co-founder of Cake Equity, a company that helps businesses issue equity and manage capital tables, etc.
- Alex Solo: Co-founder of Sprintlaw, a law firm that’s designed to make legal services more affordable, convenient, and accessible to small businesses and startups
- Know what investors are looking for and forecast how much money you’ll need for the road ahead.
- Get a legal health check and understand the type of investment you want to offer potential investors: straight-up equity, convertible note, or safe note.
- Minimize cost! Talk to an advisor and find a lead.
Slice of Cake #1: Raising Your Capital
“The first thing I must stress here is that depending on how experienced you are, it can feel like there's no market for capital raising. But there is a market and the experienced investors know what the market is, but as a founder, you quite often don't,” starts Atkins. For him, it’s all about figuring out what bucket you fit in at the start–pre-seed, seed, or Series A. From here, it’s easy to figure out your valuations and how to compute for dilution in each round.
What are investors looking for? Atkins continues, “It's really important that you know that when they're looking at you…they're thinking, can this company double in value next? You want to be able to tell a really clear story about…how you're going to double the value of the company every year.” And lastly, it’s all about your superpower, “Every founder has a different superpower. Sometimes it's your vision, sometimes it's your IP, sometimes it's your energy. It's your life's work, like whatever it is.”
From the get-go, you need to be able to forecast how much money you’ll need in the next 12-80 months. Capital raising takes about six months altogether, and it helps to start raising six to nine months before you actually need the money. In Cake, there are three phases you want to go through:
- Readiness: Prepare your pitch deck, data room, evaluation, cap table, investor list, legal documents and advice, etc.
- Marketing: Book as many meetings as you can and follow up on them! Find a lead investor and get your term sheet signed.
- Closing: Finalize commitments and get legal DD done. Sign all important documents and update your cap table and balance sheet.
Slice of Cake #2: Gearing Up For Raising Investments
Give yourself a legal health check! Solo says, “You want to make sure you've got your company structure in a format that's ready to receive investment. You want to make sure that you've got key contracts with key customers or suppliers. If they ask the question, where does your revenue come from? You want to say, it comes from these people and I've got contracts with them. These things help add credibility to the business and will help you raise investment.” You also need to make sure that your intellectual properties are in order, may it be your brand name or software.
Solo mentions three ways to raise investments:
- Straight-up equity raise
- Convertible note
- Safe note
For him, convertible and safe notes are early bird tickets to the equity show, “What happens under a convertible or a safe note is we'll invest in a company and the company's not yet ready to give a percentage of itself to the investor… So what it does is, it says to the investors, we're going to give you a discount on the price per share that investors pay at our next equity round. We can't tell you right now exactly what percentage you're going to get from the company, but what we can tell you is you're going to get more value for each dollar than the people that come in at our next equity round because you're going to get a discounted price on what they pay… It's simple, it's easy to understand, but it's a good way to just circulate the terms of investment to everyone who may be investing in your organization.”
Once the term sheet is signed, there are a few legal documents that flow from it. The first is a shareholder’s agreement. Next is the company constitution and then finally the transaction document which says how much an investor is putting in and how much they’ll be receiving.
When companies raise investment, you have to provide a disclosure agreement to incoming shareholders explaining the risks of investment. Under the Corporation Act, however, there are exceptions, “So one is if you're raising investment you just want to make sure that your investors are what's called a sophisticated investor. The second rule which people rely on, and this is often used with friends and family who are not sophisticated investors, is the 20-12-2 rule, which means you're allowed to raise less than two million from 20 people in any 12-month period. If you do more than 20 people or more than two million, you can't rely on that. But a lot of early stage companies are able to fall into that bucket.”
Slice of Cake #3: DIY-ing Your Startup
Building your startup sometimes entails cashing out even before you’re able to raise money. Luckily, there are ways to minimize cost and not have to open your wallet. Pitch decks, evaluations, and a cap table can be done on your own, but it helps to get help from an experienced advisor. An advisor or someone that can help with legal and financial aspects can go as low as 3,000 dollars and up, depending on the type of CFO you’ll be working with. However, Atkins commented, “I would always highly advocate not spending that much money early on. Get someone that understands a startup vibe, understands how to hack these things together really quickly and get you good enough to get you going through those stages.”
Solo adds, “DIY as much as you can until you get the funds in and then you can tick off some of the other boxes and I think that can be a way to make the whole process pretty efficient.”
One of the most important and difficult things to do when you’re raising is finding a lead investor. You may need to talk to at least 50 to get 10 interested, but it helps to put yourself out there as best as you can. Ask potential investors as well what they’ve been doing and if they lead. If they do, take note of that person and put them at the top of your priority list. And depending on the amount you’re raising, you may need more than one lead.