You're seeking funding from venture capitalists. How can you explain specific terms to founders effectively?

The Holy Grail of ownership! Explain to founders the "before" and "after" of a funding round, so they understand the impact of dilution. If it is a SAFE note, it gets a bit more complicated, but walk founders through multiple scenarios (especially edge scenarios like valuation caps being achieved). One can go above and beyond your call of duty by guesstimating the cap table after the next 2-3 rounds of funding (at which point the company will presumably be exit bound). Reinforce to founders that they need to individually own (at least) a single digit percent of the company individually , each, on exit for the journey to be financially rewarding.

Savvy investors often request startup founders to share their data room, which includes essential documents like the cap table, bylaws, company registration, and other legal papers during due diligence. It's crucial for founders to understand these terms & integrate such practices. The cap table is key, detailing ownership distribution among shareholders, including founders, employees, advisors & investors. It should also explains vesting schedules, option pools, active & inactive members, company valuation, and the total amount raised. While many VC-backed startups use solutions like Carta for cap tables, others still rely on Excel templates. Implementing a robust data room aids in securing investment & ensures the company is transparent.

This is where ownership of the company lives. It is the document that is used between multiple parties, service providers and sides of the table (many times with a power imbalance of experience and knowledge) that includes lawyers, accountants, VC partners, and founders. It will be the place that existing and future equity ownership is articulated and brainstormed. It is the model in which future employee equity is expressed. It will be the "pro-forma" for modeling scenarios that will impact the business. One of the best questions coming out of any capitalization conversation or legal conversation is "how will this impact the cap table?" and its important to understand that at each and every step of the way.

Valuation is one area which has been describe at length: in summary it is a triangulation between DCF, Comparables and one other valuation metric of choice. And, its largely an art over a science - one an investor decides to invest they bucketize startups based on Team, Traction and Technology moats. Best you can do is get competition for the deal to increase valuation and reduce dilution. I counsel startups at the Seed and Pre-A stage to choose SAFE (with reasonable floors and caps) over a priced round to help avoid the valuation discussion altogether when there are countless variables in daily operations and beachheads are getting established. A priced round at a later stage is plausible and defensible.

In VC Speak, deciphered for founders, the valuation is the total fair market value of your company. If someone wants to own 10% of your company for an investment of $1 million dollars, then your company would be worth $9 million dollars and when they invest $1m it is now $9m + $1m = $10m of value. You (Company) own 90% and they (VC) owns 10%. Now imagine splitting that 90% with a co-founder. Reserving 10-15% for future employees in an option pool, and recognizing that most investors want to own 10-20% of a business you quickly see that the 90% becomes much less. This balance is where the valuation definition and understanding really matter.

Key factors influencing valuation include: Market size and potential: The overall market opportunity for the product or service. Revenue and growth: Current and projected revenue, along with growth rate. Profitability: The company's ability to generate profit. Competition: The competitive landscape and the company's unique selling proposition. Technology and intellectual property: The strength of the company's technology and patents. Common valuation methods: Comparable company analysis: Comparing the startup to similar publicly traded companies. Discounted cash flow (DCF) analysis: Projecting future cash flows and discounting them to present value. Venture capital method: Using a multiplier based on revenue or other metrics.

Typically, when a VC wants to invest in your company, they provide a term sheet outlining the investment terms, valuation, amount, rights, board seats, and expected closing date. Once your lead investor signs this non-binding term sheet, it presents an opportunity to attract other investors. However, lead investors often include a "no-shop" clause to prevent competition. Before sending the term sheet, VCs usually discuss & negotiate terms with founders to ensure mutual agreement. Receiving a term sheet indicates a high chance of investment, but the VC may retract it if issues arise during due diligence or if the required investment amount isn't met.

A term sheet is essentially a non-binding agreement outlining the key terms and conditions of a potential investment deal between a startup and an investor. It serves as a roadmap for the subsequent, more formal legal documentation. Key elements typically included in a term sheet: Valuation: The agreed-upon value of the company. Investment amount: The amount of money the investor will provide. Ownership stake: The percentage of the company the investor will receive.

The burn rate is the speed at which a company that is unprofitable consumes its cash reserves. Your cash reserves divided by your burn rate is your runway.

What are you spending monthly? How much money do you have in the bank minus what you are spending monthly is your runway in months. Biggest mistake I see is founders putting in "cash out date" as runway when there are two numbers that matter - cash out and LAST PAYROLL date. Otherwise you are deluding yourselves.