Tag Archives: raising capital

Keeping a Seed Financing Round Open

Startups don’t want to wait until every investor is ready before closing on a seed financing round. First, the roster of investors will not be identified and/or cutting checks on the same day. Second, what startup wants to wait on cash?

Therefore, most seed financings allow for an initial close (i.e., that first investor check) with an extension period for future investors. But in order to properly accomplish this, your startup will have to keep the round “open” via the deal documents.

Here’s what an open round mechanism might look like in a convertible note financing document:

The initial closing of the sale and purchase of the Notes (the “Initial Closing”) shall occur on [DATE], or such other date as is agreed upon by the Company and the Purchasers (the “Closing Date”). The Company may sell all or part of the remaining Notes in one or more subsequent Closings to be held on or before [X] days after the Initial Closing (each a “Subsequent Closing Date”). Each Purchaser at such Subsequent Closing Date shall become a party to this Agreement and shall have the rights of, and be subject to limitations applicable to “Purchasers” hereunder.

From the investor’s perspective, they don’t want the round to extend forever and let subsequent investors get in on the same terms several years from now. Thus, 60-90 days is a fairly common “final close date” and anything beyond that you probably need strong justification. But remember that while a lot of these deal structures are standard — each individual deal is unique. Additionally, there is a push to keep seed financing rounds open for longer than the “normal” open period.

If I Launched a Startup

Here’s what I’d do in the beginning:

Incorporation

(1) Entity Choice: Corporation or Corporation
(2) State of Incorporation: Delaware
(3) Authorized Shares in Charter: 10,000,000 Shares
(4) Type of Shares: Common Stock
(5) Par Value of Common: $0.0001
(6) Initial Founders Issuance: 8,000,000 Shares
(7) Founders Equity Split: Depends on the Team, But Quickly and After the Awkward & Difficult Conversations
(8) Vest Founders Shares?: Hell Yes
(9) Vesting Schedule for Founders Shares: 4 years with a One Year Cliff
(10) Consideration for Founders Shares: Cash & IP
(11) Handling of “Lost Founders”: Lock Down the IP (then Wish Them Well)

Raising Capital

(1) Length of NDA: 0 pages
(2) Fees Paid to Pitch my Startup: $0
(3) Investors: Accredited Investors
(4) Structure of First Capital Raise up to $1MM: Convertible Notes

Never Ever Ever Ever Pay to Pitch

Your startup should never have to pay $$$ to pitch to potential investors. Period.

Today, Alex Muse posted on his Texas Startup Blog about a recent encounter with an investor group asking $4,500 to pitch from ShopSavvy, one of my clients.

Alex has written about why a startup should never have to pay to pitch time and time again. Thus, the investor group would have been wise to check out his blog before asking for the cash.

Jason Calacanis authored an epic post on the topic of paying to pitch as well. It’s a great read.

Just remember that no matter how hard it is to source funds, your startup should never have to cough up its own funds.

Should Your Startup Hire a Finder?

Raising capital is not easy. While startup entrepreneurs usually have a strong network of people within their own industry, many entrepreneurs lack contacts at venture capital firms and other angel groups. And even if the entrepreneur knows about such funding sources, it’s difficult to get solid intros to such people.

Sometimes startups will run into a person who offers them assistance raising capital. This person is called a “finder.” The finder offers to help the startup find investors in exchange for a cash commission (usually in the 5-7% range) based on the amount raised through the finder. However, I’ve seen some pretty appalling finder commission structures, such as a 10% cash commission plus 10% warrant coverage.

My advice to your startup: Don’t hire a finder or broker for your startup, unless you have a compelling reason to do so. And “We can’t find investors on our own” is not a compelling reason.

But if your startup is still considering using a finder to help raise capital, I strongly advise you to vet this person or group:

(1) How successful has the finder been raising capital for emerging companies like yours?

A lot of finders may have experience raising capital for companies with a much longer track record and developed balance sheet (and of course, revenue & profit). These types of capital raises usually involve different investment structures and investors with different risk-tolerances when compared to your startup’s capital raise. For example, your finder’s network of investors may prefer investing in secured-debt deals rather than in unsecured securities of a startup. Thus, make sure the finder — and the finder’s investor syndicate — are both a match to your startup.

(2) Is the finder registered with FINRA and your state’s securities board?

Most likely, the finder offering to raise capital for your startup SHOULD be registered with FINRA (Financial Industry Regulatory Authority) and your state’s securities board. But the reality is, a tremendous amount of unregistered “brokers” (as defined by the SEC) are out there offering to raise capital for companies. FINRA offers an online broker check and so do most states.

Capital raising is hard, but finders are usually not life-savers for startups.

Soliciting Investors: One Thing Twitter Should Never Be Used For

I saw this TechCrunch article in my RSS reader and thought I would pass it on to you:

Social Median Disregards 60 Years of Securities Regulations With Sale of Stock on Twitter

I’m a new user of Twitter and I believe it can be used for a lot of things. Soliciting Investors? Not one of them.

When it comes to raising capital and soliciting investors, I think the best approach you can take is that you should assume you can’t do what you want to do.

Still a Glitch with the Y Combinator Angel Funding Legal Documents

I mentioned last week that Y Combinator was open sourcing their angel funding legal documents. I also noted that soon after the documents were made public, people (myself included) received this error message visiting the documents’ URL:

Sorry, there’s a glitch with the documents and we had to take them down. We hope to have something back soon.

Well 6 days later the same error message appears if you visit the link. This leads me to believe that WSGR really did have an issue with the release of the documents. I do understand why WSGR would have an issue with the release, but I hope WSGR and Y Combinator can work it out.

Y Combinator Open Sources Funding Documents…Venture Lawyers Leave Office Early

Well I guess that’s it folks. I had a fun ride. Y Combinator has “open sourced” legal documents they provide to their startups seeking funding. The documents were created by Wilson Sonsini Goodrich & Rosati, Y Combinator’s law firm.

But as of 7:39PST on August 13, there is a “glitch” with the link to the open source documents. Here is the current message you get if you click the link to the documents:

Sorry, there’s a glitch with the documents and we had to take them down. We hope to have something back soon.

I’m wonder if by “glitch with the documents” they really mean that Wilson Sonsini Goodrich & Rosati is not exactly happy with this particular open source movement.