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How to get funded is one of the most asked topics. You can't talk about funding without addressing the whole topic of financing. This section gives advice on the broader topic. If there is a specific topic you'd like us to write about please let us know.
It Ain'T Over Til It's Over
Fundraising for a startup is a curious dynamic of psychology. There is the interplay of greed and fear that draws in and keeps out investors. When it comes down to negotiating a final investment there are two dynamic and polar opposite attitudes. Optimistic entrepreneurs and pessimistic financiers.
Investors may think what you're doing is great and work to make a deal BUT until the money is wired into an account, "it ain't over".
I've never met a pessimistic entrepreneur who is seriously trying to make a go at their business. You just can't withstand the pain unless you're passionate about the cause. It comes with the territory. But that pessimism is often blind to the myriad risks to starting something new. In a Silicon Valley mantra of fail fast and learn. Someone is funding the failure and the learning.
It's experienced money that knows the odds disfavor the startup. Oh, there are a few glad handing "unicorns" out there. In this case, everyone throws money in a pot at crazy valuations and everyone high fives around the meeting room. Those kinds of deals are rare. Most deals I've been involved with are intense, ongoing and involved four letter words being flown about.
Despite the pessimism over startup risk, people do invest. But how do you get optimism and pessimism to "kiss"? Here are a few bullets from my experience.
Entrepreneurs need to sell. Fundraising is selling. It's not presenting. It's not lunches. It's not logical arguments. It's not passionate hype. Selling is a process of building a pipeline of interest, qualifying interest, determining what they're trying to buy and CLOSING THE DEAL. I know entrepreneurs that can network like the dickens but they don't know how to ask for money. They get nervous about closing. Sign up for Salesforce.com. Treat your fundraising like a sales process and ask for the money in part or preferably in full.
If you don't know what to do or you lack the gumption to chase deals then bring in a minority founding partner to get it done.
You have to be positive throughout the process. It's so hard to be positive because entrepreneurs tend to take everything so personal and everything is stressful but you have to stay upbeat, positive and responsive all the time with investors. If an investor is hammering you don't back down BUT don't step up either. You need to reflect their concerns, address them and remind them that this company is going to make everyone a lot of money. Upbeat, positive, always.
Don't Nit Pick. I recommend in any negotiation to write down three categories for negotiating must have, nice to have and sacrificial lambs. The must haves make the deal worth doing. They should be no more than the top three things you need out of the deal. Usually a minimum amount of money is on the list. Other things can be maintain company control, get a particular valuation minimum, pay yourself some sort of salary, etc. IF YOU GET these top things (no more than three) then the deal should be negotiated in full. If not, pass and move on. It's a numbers game.
It's best to have some range or flexibility in the Must Have's. For example, you may say "we need a per share valuation of $4 to $7 per share". You have a range and it allows you flexibility as you negotiate. If you just say I need $7 per share then you may end up compromising big time on other items.
The nice to haves and sacrificial lambs are those things you ask for and great if you get them but you don't throw out the deal over them. Ask for them because the odds are you'll get some of them or you'll use them to get your must have items.
Don't nit pick the items. I've worked with entrepreneurs that get their valuations but Nit Pick and fight about anti-dilution or clawbacks if there is a down round. These things kill deals. Guess what? If you mess up with other people's money they usually expect you to get punished more than them. If you think about it you'd want the same thing.
On one hand you're telling them this business is so great you'd be crazy to pass on it. On the other hand you're saying well you know there is risk and if that happens we're all in this together. It just doesn't work.
If no clawbacks (a clawback is a revaluing a prior investment with more shares over failure of a company to achieve goals) is a must have then put it on the must have list BUT you only get three so think it over.
Agree on Terms and then Shut Up. There are two phases in getting the money. You have to agree to the high level terms of the agreement on how much money, how much equity, timing, board seats, what happens if the investment goes bad, etc. These things go in the term sheet. This is stage one. Your hard negotiating should happen here. This is usually before lawyers get involved so it's "free". It takes up time but little money.
The second phase is the lawyering, the write up of the actual investment contract. You can come to terms but that doesn't get you the money. The investment contract signed gets you the money. The contract phase is expensive because attorneys are involved. In this phase you should ask questions, get language modified and/or cleared up, address issues not listed in the contract, etc BUT YOU SHOULD NOT BE NEGOTIATING TERMS AGAIN.
Two potential outcomes result if you start renegotiating: 1) the investor walks, 2) the legal fees go through the roof. In most cases, the investor will insist you cover their legal fees if you do this.
If you realize you negotiated a bad deal then walk away from the deal. Don't swing back into changing the terms. You will almost never achieve a deal at that point. You'll save your mental health, legal costs and your reputation with investors.
Document Your Issues and Concerns Succinctly. When you negotiate terms the biggie items get out of the way quickly like investment amount and valuation but there will be many other items to consider. When you are getting to fine points of concern then I recommend you do a write up brief. Give the concern a title, i.e. Funding Timing. Paragraph one, title "Situation" and list one paragraph describing the situation (no more than five sentences on the situation). Paragraph two, title "Resolution" and list one paragraph describing what you think the best way to resolve the situation is (no more than five sentence on the resolution you propose). Paragraph three, title" Key Advantages" and list one paragraph on the benefits to both parties.
This method takes emotion out of the issue and gets a thought framework created that addresses both parties. At the very least it will create a constructive dialogue. It will also reduce the risk of long drawn out phone calls. Investors hate long, drawn out phone calls.
Don't Make Old Issues the New Money's Problem. Don't create headaches for new investors. The deal overall is stressful enough. There may be contract items with prior investments that cause the entrepreneur issues. There may be payment or conversion triggers on the deal. That is the entrepreneur's issue to deal with and resolve. DON'T make it an issue for the new money. They didn't cause the problem or issue so don't clog up time and energy for them in dealing with it. Go back to the old investors and get it all tied up for the new deal.
Always Be On Guard. After several conversations with potential investors I've seen many entrepreneurs start to get casual and even chummy with the investors. That's usually when they say too much or change the nature of the conversation. The new money is not your old college chum. Shut up and remember item number one. You're selling.
Don't talk about your personal financial stress or how your wife is threatening to divorce you if you don't raise the money. Don't talk about that outsource programmer that took $20,000 from you and gave you crap code. Don't tell them you have no clue how you'll recruit 100 new employees in three months. Don't say, "I think we're committed to doing this" [true story on this one]. Just don't start down those roads. You are selling. You are selling. You are selling.
Do you lie? No. Do you cover up? Of course not. Just don't treat the investors like your therapist. Stay on your game through getting the check. Your a real person so have real conversations but don't say too much or off the wall things.
Keep Success In Perspective. Often entrepreneurs go into agony over "how much they're giving up of their company". I like people to think of it this way. If your business is wildly successful it won't really matter how much you own at the end. You'll be fabulously wealthy.
If your business fails it won't really matter how much of the company you own when this happens. You won't make a dime.
Doesn't that really sum it all up? Why are you fighting so hard to keep that extra 1% to 5%? If the company is a middling drag along it won't matter much either. Stop being greedy and realize the risk for those putting in money.
Happy, helpful investors are better than getting no money or having irritated, pissed off investors, particularly if problems crop up for your company.
Eyes on the prize! Bring in that money.
LEARN and SHARE in EVERYTHING
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