ALL PODCASTS
EPISODE
2

How to raise your first rounds with Scott Fox

Hosted by Jason Atkins
President & Co-founder, Cake Equity

Episode notes

In this podcast episode, our guest Scott Fox, an expert in the field of raising capital, shares valuable insights on reducing the time to raise funds and increasing the chances of success.

Here are the key talking points covered in the podcast:

  • The significance of raising capital for founders and the challenges associated with it.
  • Proven methods and strategies to streamline the fundraising process.
  • Practical tips from Scott Fox, a respected figure in the Orange County innovation ecosystem.
  • Insights on various topics related to raising capital.
  • Actionable advice to enhance fundraising efforts.
  • Scott Fox's wealth of knowledge and expertise in this space.

Join us for an informative and insightful conversation with Scott Fox as we explore strategies to make the fundraising more efficient and successful.

Experts

Subscribe to —
Startup Equity Matters

Transcription

Transcription to follow!

Jason Hello and welcome to today's episode of Startup Equity Matters, Interview with Scott Fox. These interviews and the podcast are for early stage founders, their teams and investors. It's all about helping create value from your startups equity. Capital raising and building teams are two of the top issues for startups. And how better can they learn that than from experts and founders that have done it before? So we need founders to be able to hack through this complexity and handle their equity like pros. So they've got plenty of time to spend with their customers, finding product market fit. There will be potentially some financial and legal matters discussed today, but these are not deemed to be advice. This is all general in nature. We're going to give you our best opinion, but no advice today. So happy to have you here, Scott. Good friend of mine now. Our topic today will be how to fund your early stage startup. We've been working together for how long now? Maybe six, nine months. Yeah, something like that. Mainly around the Orange County startup ecosystem. That's right. Yeah, about six months, I'd say. You're a legend down there. I think every time I go, I realize the amount of love in the ecosystem for you. It's awesome to see. And I guess that comes a lot from your passion and for innovation

Scott and your commitment to that ecosystem. Yeah, I'm a big fan of entrepreneurs at all stages and have been doing a lot here locally in Orange County and worldwide on Zoom. The one good thing to come out of the pandemic was relationships like this and broadcasts like this, right? We can reach entrepreneurs everywhere and try to help accelerate them.

Jason So thanks for having me today. It's great to have you here. I know you, but looking at your LinkedIn as well, you've done a lot of things in innovation. You're an angel investor and advisor. You're a chairman of the Orange County Startup Council. You also had a very successful year, career, sorry, starting out at Stanford Law. It'd be great for everyone to hear a bit about your journey. Maybe tell us a little bit about starting out at Stanford. It's an incredible institution and still holds a tremendously prestigious position in the innovation space in the US.

Scott Sure. Well, that's a long and tortured story. But I guess Stanford is actually my second career. My first career, I was an investment banker in New York. I went to Wall Street out of college and did pretty well there. And then decided I wanted to move to the West Coast because as exciting as New York is the West Coast of California, a lot more like where you live, Queensland. So I came out here and went to graduate school at Stanford. That's right. Law school, business school. And that's what got me into the Internet, which is really what led me to be here today. So I started my first Internet company back during Web 1.0. Thanks to all the education early. Being there early helps a lot. Right. So being at Stanford in the 90s, Yahoo was still on the campus servers, for example. And before Google started, before Mozilla released the first browser. So I was there in the middle of all of that.

Jason It's like being there with the guy who made the wheel. It's like, wheel.

Scott Yeah. Yeah. Those of us, we were really excited about it. Most people thought we were crazy, but we still may be crazy. But it did take over the world. And these days, a lot of us, obviously, we're still involved with digital media and e-commerce and software of all descriptions. So anyway, these days, I'm mostly an angel investor. I invest in a lot of different companies and funds, including you guys. Good cake. A big fan of cake. And I've read these books, actually. These are the three in the middle are in English. Those are all designed to help entrepreneurs like hopefully your viewers here to go farther, faster with their dreams and help make a difference and make some money, too. So the other ones are foreign translations are in many languages around the world. But I spend most of my time doing stuff like this and helping early stage found. I just got off another I do monthly office hours on YouTube. I have a YouTube channel just trying to. I really want to share the expertise that comes from Silicon Valley. It's become a very clubby environment. And I think that there's a lot more opportunities that I know we're mission aligned on this, that everybody deserves a chance to play. And it doesn't matter where you're from or what you look like. But if you've got good ideas and you're willing to work hard, I think the Internet and it's one of the few meritocracies left. Right. It's got to be us. I'm sure you know, us entrepreneurs are going to make a difference. If it's not us, who's going to do it? Right.

Jason It's not the politicians. No, absolutely. There's so much energy out there and access to the best insights and advice, experience and capital has been incredibly exclusive over, you know, over long periods. And there's never been a better time. You know, information is everywhere. Startup like accelerators are now virtual. People like yourself and your platform, software like Cake. Everyone has the same cap table advantage. It's just getting better and better and more and more access everywhere all over the world. So it's something we're very excited about. Speaking about locations, though, spend a bit of time in Orange County with you. And I must just have to point out what an amazing place this is. For those of you that haven't been there, it's it's it really is a wonderfully well-kept gem of a place. You must be really happy to be, you know, working in and around there every day.

Scott Oh, sure. Well, for those who don't know, Orange County is in Southern California. We're midway between San Diego and Los Angeles. So it's a county of about four million people. And yeah, it's a lovely place. It gets overshadowed by our neighbors north and south. But there's a lot going on here. So it's been great to have you here and and introduce you to the ecosystem. And anybody that wants to move to Orange County, let us know. I run the Startup Council here in Orange County, an organization I founded specifically to spin things up. Right. I was in Palo Alto before it all exploded. And then I was in New York and in L.A. and London. And, you know, I've seen this movie before and I like the ending. So we're trying to trying to accelerate everybody. It's a win win situation if we all work together.

Jason If you can't move to Orange County, I recommend it. It's an absolutely wonderful place. All right. Cool. So let's get into this topic. So capital raising is an ultra hard thing for founders. You know, it takes months. There's a lot to learn. There's a lot of no's. It changes every time, you know, your pre-seed to your seed to series A, you know. So you never really feel safe because every time you raise the next round, it's more difficult. Myself personally, as a founder, I've raised five rounds now per cake. I've raised and did a pivot. I've done precedes in regional cities. I've got now great VCs and even Jason Calacanis, you know, on my cap table. So I've kind of done it all. And and me, my me, of course, joined in. And I'm very, very lucky. This is an awesome thing about capital raising. If you do get great investors that support you, they can come on and really help you build your company. So it is a wonderful journey, but it is it is a difficult journey. So let's really try and help founders to, you know, what we want to do on this part is give people the answers, you know, when I want to give people all the complexity and the jargon and just explain everything to you. This is all about like, how can I raise in half the time? How can I raise in a third of the time? How can I minimize major errors from my capital raise so I can not wreck my cap table or or get kicked out of my own company or really that really sort of hectic stuff that can happen? So for me, there's three phases to a capital raise is the preparation phase. There's the marketing phase, as I call it, which is when you're pitching and you're doing the meetings. And then there's the closing phase, which is all about documentation and banking and that. So let's talk about the preparation phase first. It's the most important phase, in my opinion, is the longest phase. If you do it right, let's just say let's start with like how to start up. No, they're ready to go into that marketing phase so that you've done all the prep. What would you say are the big indicators that I'm ready now

Scott to go out and ask investors for money? Yeah. Well, I like the way you think and you divided that because preparation is those were three equal parts nominally, right? But the preparation is the game, honestly, especially these days. There are so many investors and so many startups. And the communication speed is so fast that preparation can cut the down. If you want a trick, that's the hack, right? Is measure twice, cut once, cut once. Totally. I love that. Yeah. I mean, this is like measure four times, right? I mean, because all of us who are on the investing side, all we get is pitches. And most of them are just spam, basically, right? With no appreciation of who we are or what we're interested in or what we're not interested in. And frankly, there's a lot of information about anybody that's investing out there, at least in the earlier stages. We need the deal flow and we're all interested. And if you don't do the research, why are we going to read your email? Right. Why? So anyway, I just want to highlight that.

Jason I love that. I love that. You've touched on what I think is one of the most important elements of being ready to raise, and that is having a warm investor network. Right. Right. And I don't know if you would agree with this. I presume you will. But if you get all your documents ready and then you start raising. So do the marketing phase, actually asking for money. But you don't have a big enough warm investor list. Your raise is going to take a really long time, is my understanding. And you're going to be learning in front of the investors, which is not what you want to be doing.

Scott That's right. Right. Right. Right.

Jason You're bolting the wings on after you've already left the ground. You want to learn in front of investors, but you want to do it while you're not raising. You're asking for advice. You're asking for help. You're saying I'm raising in the future. It's my opinion. And I get to know you first. How do you see that phase of getting to know investors before you ask for money?

Scott That's the piece that most people miss. A lot of founders understandably come from a technical background, may not have any sales training or may just be introverts. Right. And then that's fine. But you've got to realize, like I said earlier, we're people, too. This isn't like getting a car loan where you just walk in, you say, I have my credit score is this and I have a job like this. So I make this much money. Therefore, I want a loan of whatever it is. You know, forty thousand dollars to buy this car. This is relationship driven business, especially at the early stages, because angel investors like me, we're writing personal checks. Right. Like it's do I invest in ultra high risk as well? Ultra high.

Jason Ultra high risk. Right. And it's like, well, with the car loan, you got the car as collateral. So worst case, you know, the bank gets the car. You know, they've got some recourse. There's like no recourse here except for the trust that you have with the founder

Scott and the relationship with the founder. That's the word. That's the key word, the trust. Right. So that's exactly where I was going, Jase, is that you have to spend the time to build the relationship because a lot of founders, they walk into this and they've been so focused and understand I'm a serial founder myself. I mean, I sympathize. This is why I like working with people like and why I started the startup council, because the founder perspective is often lacking from. I think I even have on. Yeah, I have on the T-shirt. Look. Nice. I need one of those. That's a good one. But you have to allow time to build a relationship before you get to the asking for money. Right. And people ask me all the time, how do I meet investors? How do I raise money? It's like, well, start in advance and then preparation three months, six months. I mean, yours is even better, right? Because the easiest investors. Yeah. The easiest investors are those that know, like and trust you already. And usually at the early stages, you know, that's like your family, right? Like your mom is going to trust you, even though she doesn't understand what you're doing, she'll trust you. You have to do the opposite with investors. They have to understand what you're doing because they have domain expertise. And then you need to build a relationship so they trust you. And that takes time. That's not an overnight sort of thing. So that preparation is key.

Jason There's also a mathematical way you can sort of look at it as well. Just say you want 500K. Your average check size might be 25K or just say 50K for simplicity. So you need 10 investors to say yes. But many are going to say no. What's the conversion rate going to be? So you need 10 investors. Maybe one in five will eventually say yes. So you need 50 investors. But that's 50 warm investors. That's not 50 cold investors, because if you're just talking about cold investors, you're going to have a one in 100. Yes, ratio. So you've got to start with all the investors in the world and then slowly warm them up. Then you do have invested groups. So like you've got angel groups. You get a lead in an angel group. They might once you get a lead, they might be able to do a couple of hundred for you. And you can put a few groups together. But so you want to work backwards. What's my average check size or what's my average sort of like angel group size that I need? And then, you know, you work backwards from that. And then you can sort of work on how many investors you need at the top of your your funnel, whether it's 50 or so. And then and then you work your way through. So we've talked about warming up your investor list. Let's talk about some of that other preparation that needs to be done.

Scott Can I say one more thing about the warming up? There's a great hack for warming up. The ideal, of course, is what we're talking about. You go and you meet people repeatedly at events or meetups or whatever. Right. And you build actual relationships. The in-between is especially if you live somewhere remote, like you're not in the Bay Area, right, as most of us aren't. Right. And that's research. The preparation and research can really help you skip a level. It can help you level up. So if you outreach to an investor and you can say, I know you've invested in these three other companies that are like mine, you've had success. I see that you went to the same school that I went to or whatever. Or, you know, I saw your speech when you spoke at that conference and it looks personal, that's going to get a better response. And that's kind of a hack. It's not like warm, but it's at least lukewarm, because then you're not just some random stranger who wants money. You're someone who's demonstrated some forethought and some preparation and some care. And that's really what this is about. A relationship you care enough to say, hey, Jason, I know something about you. And I think this really might fit for you. And honestly, that means if I get one of those, hopefully it means that you research nine, if not 90 other guys, and it didn't fit. Right. So I really feel like, OK, this is this person is paying attention. And that's what we're really after is finding people are paying attention. We're going to build a successful business.

Jason I absolutely couldn't agree more. I think pitching in the right room is probably the number one thing. Get in front of the right people that care about your stage. They care about your niche. They have a track record. And that stuff's all going to be publicly available, whether it be through the panels that they're on or their LinkedIn or their portfolio. That stuff is available and that's going to drastically shorten the time from, hey, I need to raise to, hey, I've got money in the bank. So incredible insights got there. Thank you for that. And then there's all the nuts and bolts preparation you need to do. I sort of see this is in two parts. There's the pitch. So the powerful pitch pitch deck, all that content in the pitch deck needs to be tight. And then there's kind of the data roomy bit. I sort of see that. Would you agree that we could maybe bucket them in two ways? So there's getting your pitch really strong, but then having all that that information available for people to dig into to check that you've got you are who you say you are kind of. Yeah, yeah, yeah. Changes from round to round. Let's talk about, say, the first round preparing to pitch. What are the top three, top five elements of that pitch that you need to have strong in your actual pitch

Scott when you're having coffee and in your pitch deck? Well, I like the coffee reference there, because, again, a lot of first time founders think that this is like getting a car loan or a home mortgage where you don't have to have a relationship, but you probably do. So you need to have your pitch kind of outlined in your head for the small, medium, large and extra large version, by which I mean the elevator pitch, the three minute pitch, the eight minute pitch, the 12 minute pitch, because every encounter you have with an investor is really like dating. You're not going to get funded on the first date. You're going to you got to build a relationship over time. So and over time, you're going to get them interested enough to ask you for another date.

Jason You said funded, right? And on the first date, not far.

Scott So yes, fun funded. So you got to work up to that. And so you want to have ready. This is the hard part for a lot of founders is the media continues to portray funding for early stage startups as something that happens kind of magically and in quantity for people who just have an idea. And as you well know, that those that doesn't really happen. I'm not sure it ever did, but it certainly doesn't happen these days with the kind of weird things it's doing. You got to have some traction, some customer demonstration of interest. The fact that you're actually solving problems that people will pay for. And that's table stakes these days. And a lot of founders still think that they can, you know, I have this great idea and I have a team and I have a this and that, but they haven't actually talked to any customers or generated any revenue. And unfortunately, you kind of need to do that these days before investors are going to be real interested.

Jason Yeah, I think there's sort of two schools of thought there. There's the I've done a ton of research. And I'm I'm pretty, but my research has been incredible in that this discovery, there's I've sort of been talking to a mate recently who the customer discovery process and the validation process is so strong. And then you get the funding. But that's not the normal. Most founders aren't that good at that process. So you actually do that with the customers, with those early traction signals

Scott and then move through from there. Yeah, let me warn entrepreneurs, because I think your first case is way too common again, especially I'm not picking on engineers, but they tend to do this or people are really in the product. They work and work and work and they're so obsessed with the product that they don't talk to customers. And you may have the perfect product, the perfect in-depth research that validates the crap out of everything. But if you come to me or I'm part of Tech Coast Angels or Stanford Angels, one of our angel groups, we want to see that you can convince somebody other than yourself. So if you come by yourself or a small team and you don't have you got to show that you can convince people this ideas alone aren't going to pay the bills or return on our investments.

Jason So you got to get out there and actually engage. Absolutely. So, yeah, so I guess we talked a bit about traction. What about data room? How do you see the data room? Have you got any insights on resources people can utilize with regard to just getting that, you know, like you said, a really bad outcome for a founder is you have a great meeting and your pitch resonates and the angel invest is keen. And then they say, great, send me your deck. And your model and access to your data room. And then you and then you like shit. I've actually done this because like sometimes you're leading up to your round and you think you've got time and then you're busy. Yeah, something will happen. Like some investor will hit you up like and say, oh, I want to see it now. And then you're like, shit. And then you have to go to your other investors and say, oh, my rounds. All of a sudden got hot. And then you need your data room is like rubbish. And you have to scramble and put it all together. But it's a lot of work to get it is enough. Pre-seeds a little bit easier, but every round you go through requirements are harder for your data room. But it's pretty important, right, to be able to provide that information pretty rapidly and pretty high quality to get investors

Scott confident that you know what you're doing. Oh, great. The organization of your data room reflects on your organization as a company and as a leader, too. So we need to see that you've got your act together. And I think it's OK to say we're not quite ready and say, you know, can I get back to you in a week or even two? Not months, probably, but, you know, some reasonable amount of time, because we'd rather see that than a half-assed effort, because that will look badly on you as well. Two of the things that I was thinking about, I one is a really common mistake that might be helpful for people is that they haven't thought about the ownership of their work, especially if you're using a lot of contractors and stuff. You need signed intellectual property transfer agreements from everyone who's ever touched your product. I'm talking mostly about software here. But that kind of chain of custody, ownership of products is people kind of think, oh, if I pay you, then I own it. Not necessarily. So you have to nail that stuff down. And that's one of the first things that investors are going to ask about, because it may be brilliant. But if you don't own it, it could escape essentially. Right. And you can end up getting sued by people who barely touched the thing, but you didn't lock it down legally. So I'd be careful about that. The other thing is cap tables. And those can be a real mess. And that's why we're here together, because cake can help you manage your cap table and your options plans, right, to make sure that that's all clean. I mean, the trick with all this stuff, I think, is you have only so much time and attention from an investor. So you want to use that time and attention to build a relationship and get towards the conversation about their investment. You don't want to waste your airtime defending problems with your model or your intellectual property agreements or why your cap tables mess. Don't waste your time on that stuff. Get that stuff done so that you can focus on the good stuff. And that will keep just like dating. Right. You want to keep each other happy and get happier together. And then, you know, then the check clears.

Jason That's the idea, I think. Nice, nice. All right. Well, I could talk about this forever. I don't know you could as well, but let's go on to the marketing phase. So we're out there. We've got our pitch deck solid. Let's talk about when we're ready to pitch. So for me, I'll tell you what I would I say to people when you're ready to actually go marketing. So you need to have advisors or investors, and ideally they're both. And you go to them and you pitch them and you show them your deck and you show them your data room and they look at it for you and they say, I think you should have advisors that can tell you when you're ready. And what ideally you want someone to say is, I'll participate in the round. I can't be the lead or whatever, but I would invest in this deal. Or I'm happy to introduce you to my investor friends based on this deal. So that's what I like to say to investors. Have trusted people that can say to you, this looks investable.

Scott What would you say, Scott? How do you switch to? Yeah, no, that's exactly right. I mean, it's a little odd to have advisors who aren't investors, right? I mean, unless it's just like your friends or something who don't have any money. Right. But again, a lot of this is about building a team and you want to go into the investors with a team. It's not just you. You found some co-founders. You found employees. You found advisors. You found all these people and they are excited and customers. Right. All of these people. You're building like a parade, I guess, right? Like a whole bunch of people were all going that way. So if you can get advisors to participate as well, for sure. And that's easier to do than ever. There's agreements online like the fast template and stuff that you can Google. You guys actually love that. Cake have advisor agreements in your system, right?

Jason We love the fast agreement. That's what we recommend. But then you go into cake and then you grant the options. You've got a proper signed option grant in the cake system. So they work together really well.

Scott Nice. Yeah, that's important. All that stuff standardized. That's a great point, actually, because advisor stuff. I've been being advising companies on and off for 20 years. And it used to be very nonstandard. Everyone was set up right. But this stuff is standard. Like everything is getting more and more standardized. So don't let anybody hold you up for like 10 percent of your company because they're going to make it. Please know, right? That happened. That used to happen.

Jason So I've seen it. It's crazy. There's like someone's doing half a day a month and then they're getting 10 percent. And you're like, yeah, right. But that's you're never going to get around on if you've got something like that on your cap table. Totally. All right. So now we're ready. So the ideal situation is your advisor says they're ready and they're going to put 50K in and they're going to take you to their angel network. And you might get a couple of hundred K from that. Like, that's the unbelievable outcome. And that can happen. So you should be working towards something like that. But, you know, just say you're not in that situation. But someone says, look, I'll check 25K, but I can't leave and I don't really have a network. So we're out pitching. How can startups show they'll be efficient and effective with the funding they receive? Because I think this is really critical all the time, especially with angel investors. But particularly in 2023, efficiency is super important. How can founders tackle that?

Scott Yeah, I think it's a great point with the economy the way it is these days. I actually was on the phone this morning with some fellow angel investors, and we're talking about changing the requirements even for application to some of our pitch sessions, because we need a longer runway. We need some visibility that you're going to be able to raise a follow on round because angel investors are at the end of the road. Usually, usually we're just the beginning. Right. So we need to see some visibility or some idea, at least about your A, B and C rounds, if you're going to be a traditional software style growth company. So capital efficiency is hugely important. So this is really I think it gets a lot to unit economics, which is a phrase. I don't know who's listening to this, but you got to really look at your profit margins, your cost of acquisition for each customer, their lifetime value. You got to get into the math. Sorry, it's arithmetic. It's a, you know, spreadsheets of your friend here. The whole market is moving towards, frankly, just more numbers driven. So if you're not a numbers person, you got to get fluent with this stuff.

Jason Maybe a virtual CFO, like I don't know how expensive they are. But if you're not good at numbers and you need capital and you're going to pitch, perhaps that's enough to not even get your money in this climate. Like if you can pay like a small monthly retainer for someone to help you build a better model and and help you with the economics and just help you learn quickly every month, because the quicker you can learn, like, what did I spend this month? What worked? What didn't work? How do I build? Get better and better and better every month. Perhaps a virtual CFO is going to be a real asset for you

Scott if you don't have that skill set. That's right. And the other thing, and this is one of my big complaints, actually, so many decks that I see, they ask for money. But they put up a pie chart, right? This is a classic pie chart. Give us a million dollars. We're going to spend three hundred thousand dollars on engineering and six hundred thousand dollars on marketing. And the rest of it on general administrative expenses like no shit. Like, it doesn't tell me anything, right? You're going to spend the money. No kidding, right?

Jason That's also like the chart that goes like the hockey stick chart. What everybody just goes double, double, double, double. Like the other week and the lady was like, I really like seeing a model. And I would love to actually have a conversation with her about that, because like every founder goes, right, we're going to go double, double, double,

Scott double, double. And I'm like, hmm, really valuable. Or the classic our total, the total addressable market is a trillion dollars.

Jason And if we just get 2% of that, we just get exactly we're going to be rich. Please don't do those things like if you're going to have a model, have a bottom up, have it be based on the unit economic assumptions that you're making today and you're going to be testing those assumptions and learning as fast as you can. That's much more important.

Scott So and then my follow on that is milestone. So if you're going to instead of that pie chart and you're going to raise X dollars, tell me how you're going to spend it to create a result.

Jason And why are you spending that money? Exactly. Why am I spending this on engineering?

Scott Not just that I'm going to hire an engineer or I'm going to hire a salesperson. But when I hire this person, they're going to close. I predict four and a half more deals per month, which will generate fifty thousand dollars in revenue per month, which leads to this kind of with this margin leads to this kind of money to the bottom line. And over time, it's a multiple that leads to this kind of exit.

Jason That's just picturing that that use of funds live. We had like the three buckets on the left with the dollar amount. And then you said why on the right? So sales and marketing money, we're going to try and hit this many customers. And then with this amount of money, we're going to achieve this. And then the why is that I can raise another round because that's what the angel investors thinking like, OK, you're going to spend the money.

Scott Are you going to be able to raise another round? That's a really good idea. Why don't we make that tool and with your team will co-brand it and give it to everybody, because that's what people are missing. That's what investors want to know. Is this not, oh, you're going to take my money and spend it. But what am I going to get for that? And that's what makes you more fundable, because they can see that you can think ahead and that you have some idea about where the A round and the B round are going to come. That's good stuff.

Jason You're the absolute best. Let's make that use of funds, slide template. That's that's gold. All right. Let's talk to term sheets quickly. We haven't got much more time. I would love to talk to you. I love this stuff. But let's talk about term sheets. Some people see their term sheet for the first time when they get it. And it is a scary beast of a document. I remember when I got my first term sheet, I had to sit my co-founders down and we had like multiple meetings about what is the liquidation preference? What is Vito rights? And like we can't even make decisions about our own company now without investors. And like what is the drag along and a tag along? Let's not go into all of them, but like maybe let's cover liquidation preference because it can be a scary, interesting one, especially in the current climate. We even got warrants and stuff now. Let's talk about that. What is liquidation preference? What should founders be wary of with regard to the god?

Scott Well, believe it or not, liquidation preference and you know this stuff, too. So please help me. But it's the idea that you investors get their money back first

Jason and they may get multiples of their money back first before you found or get anything. Please know, please say don't accept multiple liquidation

Scott preferences. But that's accurate, right? Is what I said accurate? That's the concept, right?

Jason Basically, what I understand is if you're getting a two or three or four X liquidation preference, it means your current valuation is way higher than the investors agree to. And the only way they can protect themselves is to have that liquidation preference. So I would rather have a fair valuation and a one times non-participating liquidation preference, because it means you're actually doing a fair deal in the market now in very bad climates, like this year, next year, the year after that, potentially, depending on how this unfolds. These things are going to happen. And if it's make or break for your company, just do the deal you've got to do. I must say, like if your employees are there and your investors are there and your angel investors are there and you've got to protect them, like just do

Scott the deal you got to do. But one times non-participating is really where you want to be. And that's plenty. Right. I mean, there's other ways to incentivize people, valuation adjustments, discounts and stuff, but liquidation preferences can really come back and hurt you. They erase your gains, essentially. The one that scares me that I think are most surprising to a lot of founders is that you might get a term sheet and that it asks you to give up all your stock and start vesting again. That really surprises a lot of founders. That scared me. When I first saw it, I was like, fuck it. Yeah. Yeah. You've been working for a couple of years and now you're starting over, essentially. Right.

Jason You got startups to be like a business owner and then it just gets like less and less and less the case over the years. And it is a really difficult journey to go on, but it's actually very important. And there's a reason for it. And I'm actually a big believer now in founder vesting.

Scott So let's talk about why. Yeah. Well, from the investors point of view, right, they want to see that you're still down for the program and that you're going to carry it through so they can get their money back plus ex-return. Right. So, yeah, they might take away all your stock. You might be able to negotiate some piece of it. So you're ahead of the game, at least. But yeah, it's a conservative protect its insurance for them, really. And it scares the hell out of a lot of entrepreneurs. I'm not a huge fan.

Jason You're more OK with that than I expected, actually. Well, we J.K.L. didn't give it to us, actually. We were really grateful. The round before that, I think we had it at Seed. So we've got this thing in Australia, which is the Airtree open source term sheet for seed rounds. It is a bit hectic and it's a bit investor friendly. J.K.L. was cooler. We didn't have founder vesting on that deal. So I was pretty stoked. But it does just align interests and make sure the founders have got skin in the game. But it is a little bit investor friendly. All right. Let's go on to the closing phase. From my understanding, what are we doing in closing, Scott? We're signing the safe or the note or the equity transaction. We're banking. We're issuing stock option certificates or stock certificates. What else could we be doing there? What about the difference between closing an equity round versus a safe round?

Scott Because there's a bit of difference there. Well, there's more complexity with an equity round, really. The whole point of an equity round. Well, actually, you can see it physically. If you print an equity round, the paperwork could be like this thick. Safe round is like depends, but maybe less than 10 pages, hopefully. Ideally, less than three. So and all that translates into legal costs and time due diligence.

Jason Yeah, especially normally. Normally it all happens on the same day. Right. So you kind of got to line all the investors up because you need to normally sign adjustments to the stockholders agreement or the articles of the company. And then everybody signs. And then there's like an escrow conversion of the funding from the legal, from the lawyer to the company.

Scott So it's a much more hectic process. Right. Yes. And nerve wracking and waiting for the wires to come in and

Jason probably run out of money by that point.

Scott You're like, shit, getting a fresh role. Refresh, refresh your screen. That's no joke. I'll be.

Jason Yeah, that's a joke. But a safe round, you can bank one safe one week and another safe the next week. You can do another safe the next month. So it is much more chill. It's much more open, much more flexible. There's actually no stock certificate necessarily. The money can come straight into the company's account instead of going through escrow. So it is a lot, lot, lot, lot easier from a closing perspective.

Scott Yeah. And that's also where you need like, again, like cake, right? Something to help manage that stuff. The transaction processes can overwhelm a non-lawyer or they can overwhelm your bank account in paying the lawyers to do it. Because it's not rocket science, but it's detailed, I guess. Right. There's just so many details. And they all have to fall like dominoes in the right order within a very prescribed period of time or money gets lost.

Jason And it doesn't. People sign in the wrong place. They don't sign. They've gone to the Bahamas like this. Every weird thing that can go wrong will go wrong when you're closing. So having something like cake is a tremendous advantage because it's all online. It's all systemized. Everything's one click. The money is going to be in the bank much faster. Not to pump our ties up too much. This is more about education than cake. But yeah, I will take this opportunity because this is a unique situation where you're a cake investor. So we were very fortunate at cake to get Jason Calacanis, one of the, you know, the greatest angel investors ever and now one of the highest profile, you know, investors in the world with his podcast and the launch program. We're very, very fortunate to have him lead our USC round. And you participated in that through his syndicate.

Scott So would you mind sharing a little bit about that for the crew? Sure. Well, syndicates are a great way to invest if you don't have enough capital to staff your own effort. Right. I don't have my own due diligence team and that sort of thing. So angel groups often substitute that way. And a syndicate is kind of like an angel group, but it's more deal by deal. And so Jason's launch syndicate is something I've been involved in. I've done at least a dozen deals through that. And they serve up great deals, right, because they're doing a lot of due diligence. They've got the scale to find fast growing startups with a lot of potential. And they have context for valuations, which are hard to do as an individual investor. To understand where the current valuation markets are. Comps, they call it. Yeah, it's generally a good experience. And again, they also help with a lot of the paperwork, which is also nice. That's been great. And we're glad to have found you. And like I said, several other companies I'm involved with. Yeah.

Jason Yeah, I loved working with launch the syndicate. And I'm so grateful when you get a syndicate, you potentially get, you know, incredible angels like yourself coming through and being able to help the company. So it's an excellent experience from our perspective and great working with you. I'll have to share this segment with J. Cal as well as if they can use it for some of their marketing. But give them a give them a plug.

Scott Sure. A little plug. You got to support your friends. It's a great tip for those watching. Also, if you're talking to investors and things are going well to ask them what kind of syndicate relationships they may have. So they may be formal or informal. But that's another way of saying, who do you know that can also help us? And I'm part of Tech Coast Angels and Tech Coast Angels. We helped start the Angel Syndication Network, which is a national syndication network of other angel groups. Right. So if you can tap into one, you can maybe get into some others. If you're nice and you play well with others.

Jason That's very important. You got to one of the number one things investors are looking for from you as a founder is do you play well with others? That's right. That's right. Let's talk a little bit about why you like cake, why you participated. What is it about our mission and the problem we're solving that resonated with you?

Scott Sure. Well, I'm a big fan. Like I said, big fan entrepreneurs. There are many problems with Silicon Valley for all the wealth that's created and the expertise it's generated. I mean, amazing world changing, literally world changing stuff. Right. But one of the problems is that it hasn't been well shared and that it can be too complex for people who are non technical, non financial founders, especially if they don't have a network of preexisting financially wealthy friends and family. Right. So anyway, so that's what I spend my time on with these, my books and my podcast and stuff. So it spoke to me. Thanks. Cake spoke to me in a way because it's helping founders and it's also helping the employees. And that was one of the problems when I was a startup employee many times. You get granted a bunch of options and you don't really know what they're worth, especially if you're younger and not as you know, I've got a strong financial legal background now, so I have at least some idea of what I'm doing. But if you're 25 and you're maybe beginning, you know, a million options, like what the hell does that mean? Right. So I really like cake's mission in the sense of actually providing actionable service and intelligence to both the founders to make it easier to administrate the programs, but also for the employees to understand what it is that they're a part of and that they can have more transparency into what their options are worth. Right. And I think that's a really cool way to help incentivize the teams and help get more people into the startup way of working, which I think is the future, honestly. And then, of course, there's the piece that you guys are headquartered in Australia, which means you're global by nature. And we can all see that growth of companies is increasingly global. I have contractors in many countries that work for me, for example, and you're keeping track all that shit is a big job.

Jason And you guys do it effectively and cheaply. Mate, you're you're an absolute gem. I couldn't ask for a better, you know, now teammate and supporter. So thank you so much. And we like to finish with, you know, a couple of punchy questions. I know you've put your hand up for a couple. So let's go. So what is the biggest fuck up that you can share around capital raising, either something that you've seen or something that you regularly see? Because there's a lot in capital, right? Where are you going to focus on?

Scott It's not just the podcast. That's a whole another series, right? No, but I did think of one, and this is the one I usually use because it was just stunning and it boils down to research your investors. There are a lot of people running around with business cards and websites that look like investors who are not. And I don't need to get into the details here, but one startup I was involved with turned out that money that had been invested in them, a significant sum, was fraudulently obtained. And it turned out that the guy would he didn't kept not wanting to sign the deal and finish the wire and all this. He sent them the money. He didn't want to actually sign anything. And long story short, turned out he was in prison for tax fraud. Oh, my goodness. Just the fact that, you know, half a million dollars shows up in your account doesn't necessarily mean that it's a good thing, believe it or not. So you didn't want to have a face to face coffee. Yeah, obviously, that company imploded. It was taken over by the IRS, actually. Oh, it was spectacular. But anyway, hopefully that will never happen to anybody. Right. But research your investors. And, you know, just because somebody has a nice suit or drives a nice car doesn't necessarily mean that they're legit. These are people you're going to be in business with for a long time. So get to know them.

Jason I'm very sad for that startup. And you've said you've been you've set a new benchmark for a fuck up list. So that's going to be on the top. No, it's great. And so on the flip side, then, what's the top tip that you can give to a founder in this capital raising? Yeah, you know, they're always raising, right? Always be raising, I think, is a true

Scott comes to startups. But what's your top tip? Well, that's a great one, because always be raising is something a lot of founders don't realize. Like you're in sales now, even if you have a PhD in, you know, astrophysics or something, you're a salesperson now, at least at some level. Investors don't like meeting with people other than the CEO or a very tight co-founder if you're raising money, right? So you either are a salesperson or you need a partner or real close partner who is other than that. I would go back to what you open the show with and which we just visited again, which is research in advance. I think that's become more important than ever, because, again, there are so many pseudo investors out there and, you know, even a legit investor, they depends on where they are in the lifecycle of their fund, they may be out of money. They may be distracted by raising new money. And that's even leaving out all the craziness that's going on in the economy right now, right? So really knowing who you're talking to and how big their check size is and what their preferences are can just accelerate you so much faster. Just looking at their portfolio, like they do stuff like this or they don't do stuff like this. And knowing that they don't do stuff like this is going to save you a ton of time. Right. And if they do do stuff like this, knowing why and how often and how large is your key to success, I think.

Jason Great way to finish, Scott. So grateful to have you on. Yeah, I'm pretty sure we've helped founders with a few things. It is hard if you need any more advice. Hit cake up. We've got tons of content. Hit Scott up. Hit me up. We're all over LinkedIn and we are here to help. We've got programs you can participate in. It's not a not meant to be a lonely journey. Get involved.

Scott That's another great tip, right? Is don't do it by yourself. You don't have to be alone. Even if you're alone in your company or at that stage, there are lots of other people doing this kind of thing now. Go find some.

Jason It can feel lonely, but there's lots of groups out there. So get out there. Join groups. Learn as fast as you can. I'm a huge fan of your Scott. You've had a massive impact. You're still having a massive impact. And I look forward to working with you over the long term. But thanks for joining us today. And everybody take care out there. All right. Thanks, everybody.

Latest episodes

PODCAST HUB
Handling Finances for Founders with Rhonda Pitman
EPISODE
21

Handling Finances for Founders with Rhonda Pitman

The 2024 State of Aussie Startup Employee Equity with Kim Hansen
EPISODE
20

The 2024 State of Aussie Startup Employee Equity with Kim Hansen

How To Create Real Value From Startup Equity with Leah Bowes
EPISODE
19

How To Create Real Value From Startup Equity with Leah Bowes

Equity doesn't have to be complicated. Join Cake today and see for yourself!

Get started free
5-star rating5-star rating5-star rating5-star rating5-star rating
5-star Rating