So you had a startup idea and (hopefully) at least one other person agreed it was a good idea. Now comes the scary part: fundraising.
Preparing to raise funds can be a daunting task – talking to investors, finding valuable connections and continuing to grow your business at the same time is a lot to juggle.
If you’re not sure where to start – or just want to make sure you’ve covered all the bases before you start trying to convince investors to part with their money – here’s a roundup of everything. a first-time founder getting into fundraising needs to know. This advice first appeared in Sifted’s Startup Life newsletter – sign up here to receive weekly wisdom from European founders and operators.
Finding the perfect angel investor
Angel investors can feel like they’ve been sent from above – if you find the right one for your business needs, that is. Many angels — the people who typically write the first checks for startups — were often founders or worked at startups themselves, and their guidance can be an invaluable resource.
The first step for find the right angel is to determine what your needs are: are you looking for someone who has already created a startup? Or are you looking for someone with experience and expertise in a particular industry? No matter what’s on your shopping list, finding someone who believes in the business, introduces you to crucial connections, and gets the word out is key.
Founders are often hesitant to send a “cold” message to would-be angels – but Karoli Hindriks, co-founder and CEO of the immigration startup Jobbatique, says there’s nothing wrong with sending a hopeful message on LinkedIn. Having someone in your network do a “warm” introduction is ideal, but that’s not always possible, so don’t be afraid to reach out. Avoid sending your complete pitch deck right away: introduce yourself and your company, explain why you chose to contact them and invite them to meet you in person first.
Not only does a coffee chat give investors a chance to hear about the company in person, it’s also a great way to find out who you’re contacting. Hindriks believes that one of the biggest red flags is when an angel investor doesn’t understand equity or asks for an exorbitant share, which may indicate a lack of experience (or an abundance of greed…). Anyone who looks like they want to take over running the show should also sound the alarm. “If an angel tries to make requests regarding management, company decisions, or use of funds in early discussions, that’s also a red flag,” Hindriks says.
If all goes well, be sure to consult a lawyer before signing an agreement to ensure that everything is in order and that your business will be protected.
Structure your table of ceilings
Once the stockholders in your company have expanded beyond the founding team, it’s time to have a look at the table of ceilings — the document that describes who owns what share of a company.
The team at 10×10 Capital, a firm for black founders, suggests you keep it simple. Investors will only be interested in who has money at stake, how much they have invested, and the type and amount of shares each person or fund owns.
Don’t worry about the number of names on the list – “rounds” with lots of investors don’t have the negative reputation they once had, and it’s good to have multiple angels on board.
But you need to keep a close eye on how much equity you’re giving — to your co-founders, employees, advisors, and investors — to make sure there’s enough VC cake left over when you go to fundraise further. line.
keep your option pool under control — this is the part of the company’s shares reserved to be offered to your team. Allocating around 10% of company stock to employees is a good way to start. Make sure your advisors don’t get more than 5% collectively. Decide on the length of the vesting period – how long people have to work for the company to own the full amount of their stock – from the start (four years is the norm).
Investors who have invested more capital might be annoyed if they see smaller investors with a better stock option
Remember to reserve the majority of the equity for the founding team – in Series A, there should still be 60-65% to split between the founders. But don’t set those actions in stone; if the roles change and one founder ends up contributing more to the business than another, equity should be adjusted accordingly.
Deciding what type of stocks each investor owns is also important. Stocks come in several varieties: ordinary, common and preferred. Preferred stock holders are promised a return on investment before others. Investors who have invested more capital might be annoyed if they see smaller investors with a better stock option.
How to set a budget to raise a round
Fundraising is unfortunately not free either. Startups need to cover their legal fees — and potentially those of your new investors. In the UK it can cost between £10,000 and £100,000. Check again who is supposed to bear these costs; some VCs with deep pockets might foot the bill.
Once investors start sending you money, June Angelides, investor at Samos Investments, recommends using a fundraising platform like Odin or Vauban to consolidate your incoming money in one place. These platforms aren’t free, but they can also help you keep your cap table clean, so they’re often worth paying for.
Be selective with where you spend your money, however. Angelides suggests using a CMS to track the conversations you have with investors and DocSend to securely share your pitch deck and other confidential documents. She recommends first-time founders never pay for pitch training, someone to introduce you (if you can’t tell your story yourself, there’s no hope!) or services that introduce you to people. investors.
What’s worth spending money on is your pitch deck – it’s the first time your potential investors are learning about your business – and you want to make an impression. If no one on the team is particularly design-minded, be prepared to pay around £200 to have a professional fix it for you.
Finally, that your time is money – think about who will be watching the fort as you connect with investors and check with the senior team to make sure they are coping with the added load.
Sadia Nowshin is an editorial assistant at Sifted. She tweets from @sadianowshin_
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