Startup funding F.A.Q.
1 like466 views
The document provides a comprehensive FAQ on startup funding, detailing when to raise money, the amount needed, expected valuations, and which investors to approach. It emphasizes the importance of understanding runway, cash burn, and preferred investment structures like convertibles and SAFEs. Additionally, it discusses the necessity of a legal entity and using a term sheet to streamline funding agreements.
Startup funding F.A.Q.
- 1. Startup funding F.A.Q. Image source Volodymyr Nesterenko, Digital Future
- 2. Whatever I do, I end up in Investments Managing Partner @ Digital Future Digital Future is the most active Ukrainian VC firm Closed 11 deals in 2016, $4M+ invested About me
- 3. When to raise money How much to raise What valuation to expect Which investors to approach Debt or Equity Can I get paid my past cost Do I need a legal entity What is Term Sheet and do I need it Questions
- 4. When to raise money? Image source
- 5. When to raise money? When there is no other choice Image source
- 6. When to raise money? When there is no other choice You know how to use it and prove you can do it Image source
- 7. When to raise money? When there is no other choice You know how to use it and prove you can do it You have at least 6 months of runway Image source
- 9. Runway: how many months a company can operate without new financing at the current level of cash burn Cash burn: monthly net cash outflow
- 10. Mailchimp: The most known bootstrapped company Founded in 2007, never raised venture capital $300M+ annual revenue, 550+ employees
- 12. How much to raise? Image source
- 13. How much to raise? The round should cover 12-18m runway Image source
- 14. How much to raise? The round should cover 12-18m runway If less: out of cash => depressed valuation (at best) Image source
- 15. How much to raise? The round should cover 12-18m runway If less: out of cash => depressed valuation (at best) If more: selling your stake too cheap Image source
- 16. How much to raise? The round should cover 12-18m runway If less: out of cash => depressed valuation (at best) If more: selling your stake too cheap Mind investors’ ticket Image source
- 18. What valuation to expect? Image source
- 19. The one promising an investor min 10x return over 5-7y What valuation to expect? Image source
- 20. The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method What valuation to expect? Image source
- 21. The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method Investors also check valuations vs potential exit value What valuation to expect? Image source
- 22. The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method Investors also check valuations vs potential exit value If it’s $50M, they’re unlikely to accept valuation >$5M What valuation to expect? Image source
- 23. Revenue multiple: a benchmark ratio that is used to measure a company's value based on its annual sales; expressed in ‘times revenue’: 3x, 5x, 10x ... Multiples depend on industry averages, growth and margins
- 25. Which investors to approach? Image source
- 26. Which investors to approach? Most appropriate for your stage Image source
- 27. Which investors to approach? Most appropriate for your stage Seed and earlier stages: raise where the money is Image source
- 28. Which investors to approach? Most appropriate for your stage Seed and earlier stages: raise where the money is Late seed, venture stages: raise where the revenue is Image source
- 29. Which investors to approach? Most appropriate for your stage Seed and earlier stages: raise where the money is Late seed, venture stages: raise where the revenue is Seek VCs which can bring clients and other investors Image source
- 31. Debt or Equity? Image source
- 32. Debt or Equity? They both suck Image source
- 33. Debt or Equity? They both suck Selling equity is better for a founder Image source
- 34. Debt or Equity? They both suck Selling equity is better for a founder But it steals much time and costs money Image source
- 35. Debt or Equity? They both suck Selling equity is better for a founder But it steals much time and costs money That’s why we use convertibles and SAFEs at early stages Image source
- 36. Convertible note SAFE* Preferred stock Common stock Class debt derivative equity equity Ownership no no yes yes Voting rights no no no yes Asset claim priority 1 1 2 3 Maturity yes no no no Interest yes/no no no no Valuation yes** yes**/no yes yes * Simple Agreement for Future Equity; it is neither equity, nor debt, as it doesn’t have any maturity or interest; ** So-called ‘valuation cap’ -- maximum valuation, at which the underlying amount will be converted into equity; actual equity round valuation can be lower (or higher)
- 37. Can I get paid my past cost? Image source
- 38. Can I get paid my past cost? Never ask this ^^^ question Image source
- 39. Can I get paid my past cost? Never ask this ^^^ question Yes, you can. If it’s not your personal debt Image source
- 40. Can I get paid my past cost? Never ask this ^^^ question Yes, you can. If it’s not your personal debt To repay personal debt, sell your own shares (be prepared for low valuation) Image source
- 41. Do I need a legal entity? Image source
- 42. Do I need a legal entity? YES - at any stage later than Friends & Family Image source
- 43. Do I need a legal entity? YES - at any stage later than Friends & Family Register where your clients are Image source
- 44. Do I need a legal entity? YES - at any stage later than Friends & Family Register where your clients are LLC is just fine until you need to issue shares Image source
- 45. Do I need a legal entity? YES - at any stage later than Friends & Family Register where your clients are LLC is just fine until you need to issue shares Corp - for raising equity and for SAFEs Image source
- 46. What is Term Sheet and do I need it? Image source
- 47. What is Term Sheet and do I need it? The summary of key terms of a future binding agreement Image source
- 48. What is Term Sheet and do I need it? The summary of key terms of a future binding agreement Needed to save time & money for everybody Image source
- 49. What is Term Sheet and do I need it? The summary of key terms of a future binding agreement Needed to save time & money for everybody Normally used by professional VCs Image source
- 50. What is Term Sheet and do I need it? The summary of key terms of a future binding agreement Needed to save time & money for everybody Normally used by professional VCs This is an investor’s document Image source