Category Archives: fundraising

May 01

Stumped on Stocks & Options?!

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Regularly I am asked about stocks & options.  Entrepreneurs have sent me their equity packages to look over for a “sniff test” & first time entrepreneurs ask for general information about stocks & options.  Depending on the specific situation I usually point them in the direction of David Weekly’s “An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee”.  This overview does a great job of simplifying & clarifying what stocks & options mean.  If you haven’t read it & are at all questioning stocks & options, I recommend checking it out.  In the meantime, here are some things from the intro that I’d like to point out & elaborate on:

The Board.  ”Most people don’t realize this but shareholders are, legally, at the top of the totem pole.”  The Board is appointed to serve the Shareholders, but the Shareholders have a right to change the Board at anytime.

In other words, the CEO is not the boss.  If you own a share in a business you are the CEO’s boss’s boss.

The Board must receive notice of a board meeting at least 48 hours in advance.  Remember, a majority of Board members (aka quorum) must be in attendance (either in person or via phone/Skype/etc).

Equity.  “ownership in a company”

A cap table is used to organize & track who owns what.  Advice to entrepreneurs:  KEEP THIS CLEAN.  Update it whenever there is a change, make it legible, & keep in mind when raising money that all investing parties will need to be accounted for in the cap table.  You’ll thank yourself for keeping this updated regularly, as opposed to waiting until the day before your company is acquired to go back in time & get the cap table up to speed.

Dilution.  ”reduction in ownership”.  A touchy subject for many entrepreneurs.  No one wants to own less of her/his baby.  Keep in mind CEOs…no investor wants you to own so little of the company that you are not motivated to make the company a huge success.  The investors’ interests (should be) aligned with yours.  They want a return on their investment too!

Common vs. Preferred Stock.  Preferred Stock are “shares that grant special rights”.  Those rights vary depending on the investor, investment round, & other factors.  Examples of Preferred Stock are Series A, Series B, Series B-2.  Series Seed shares are also considered Preferred Stock.  We are seeing more & more Series Seed shares issued.

Weekly also discusses types of investors – angels, VCs, & a bit about how venture firms work.  One thing he mentions that I want to point out & comment on is that Associates/Analysts/JuniorVCs will call you sounding really excited about your company, but if no partner is involved in the discussions it is not worth your time.  That’s only half true.  True – all deals need to eventually get to the partners’ desks.  However, a way to get there is through the Associate/Analyst/JuniorVC.  You’ll have better luck getting a phone call with a Junior VC than a partner her or himself,

Oh & on that note…Junior VCs aren’t stupid.  Don’t try to be their friend & then only call them when you want a meeting with a  partner.  That fakeness shines right through & reflects on you as an entrepreneur & a person.

On that subject, Weekly also brings up the typical “weekly Partner Meeting” that most VC firms have.  True story.  If a VC brings you to pitch to partners at a Partner Meeting that’s great.  For smaller VC firms, not all pitches in front of the partners are made at the Partner Meeting.  In fact, rarely do we have entrepreneurs actually come pitch during our Partner Meeting.  We schedule other times during the week instead.  I imagine that may not be the case for larger VC firms with many partners who are all on different travel schedules.

Raising money?  Have a term sheet?  That’s not the end.  Once you sign a term sheet there is a “closing process” & the VC will continue to do some “due diligence” while things are getting legalized.  Once “closing documents” are prepared & signatures in place, then the money is wired (by 1 pm Pacific Time ideally).  So no, a signed term sheet does not mean you have cash in your bank account the next day.  It’s only the beginning of another process.

Going to work for a startup?  Here’s what to expect…

A vesting schedule with cliff.  No that does not mean that you are put on the edge of the cliff with a life or death scenario.  Vesting is done so the employee earns stock purchase rights over time (typically a 4 year period).  That vesting doesn’t start until a “cliff” is reached (generally 1 year), which means the employee won’t start to vest any purchase rights until she/he has been employed for one year.  Vesting gets you the right to purchase stock…you still have to exercise options to purchase though!

Read Weekly’s “STRATEGIES & PITFALLS” section.  It covers Alternative Minimum Tax, filing an 83(b)…must knows if you have stock purchase rights!

Any specific questions?  Ask in the comments or send me an email.

Venture on,

MEL aka Venture Gal

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Mar 28

ES569: Jan Garfinkle, Arboretum Ventures Founder & Managing Director

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Healthcare investing is great because beyond the possibility of generating significant returns, the companies invested in save lives & really impact people.  Yes, there are huge risks.  Huge risk, huge reward.  At this week’s class, Jan Garfinkle, Founder & Managing Director of Arboretum Ventures spoke to the class.  Jan started her career as an engineer & in 2002 founded Arboretum Ventures.  The firm celebrates its 10th birthday this year & has successfully raised 3 funds.

Jan focused her discussion on financing companies, answering common questions that entrepreneurs ask:

How does an entrepreneur figure out how much money the company needs?

  • Start with a budget.  VCs want to know what is the most important thing the company must do to increase its value (aka a milestone) & how much money will it take to reach that milestone.

How to decide which source of funds to pursue?

Consider

  • Cost. What are the cost of the funds you raise (i.e. cost in terms of ownership)?
  • Flexibility. What level of decision making responsibility do you want?
  • Supply. Where is capital available?
  • Entrepreneur’s goals long term. Do you want to build a lifestyle business that you can work at for the rest of your life?
  • Type of business.  Not all businesses are venture hackable.

What are sources of capital?

  • Yourself
  • Grants (government, foundations, universities)
  • Debt (customers, bank, venture debt)
  • Equity (friends & families & fools, angels, VC, IPO)

What do VCs look for?

A great jockey, riding a great horse, in a huge race.  In other words, a great entrepreneur, commercializing a great product, in a huge market.  Jan, like many VCs I know, prefers an A team & B product, over a B team & A product.

What do VCs do when they due diligence?

Try to learn as much as possible about tit!

  • Management
    • Track record
    • Relevant experience
    • Highly motivated
    • Honest & ethical (how are decisions made? how does the team communicate?)
    • Make sure you can recruit the right people
  • Financials & exit potential
    • capital requirements
    • exit price & timing
    • talk to strategic corporations to understand what they need to see in order to be interested in buying the company (*we at RPM don’t do this well)
  • Product need
  • Market size
  • Time to market
  • Competitive positioning
    • existing technologies
    • emerging technologies
    • IP

Material company provides & how long it takes to get the materials to the VC are indicators of how the entrepreneur will be like to work with.

What is the best way to get VCs’ attention?

Get a warm introduction/referral!

In addition to the insights Jan shared in response to those particular questions, she also shared a few notable quotables:

  • “Your career will not be a straight line. Be flexible”
  • “If it’s a great exit, every body wins. Even the janitor if he got shares”
  • “The more touch points you’ve had as problems the more successful you’re be as a CEO”
Selecting investment opportunities & selecting funders involves building relationships.  Getting to know each other.  Building trust.  Even if you are a great jockey, with a fast horse, in a huge race, if the investor doesn’t trust you, or you don’t trust the investor – that’s not a good way to start an investor/entrepreneur relationship.

Way to go Jan!  Keep up the great work & Venture On,

MEL aka Venture Gal

May 16

Investors like Proven Jockeys & Top-Notch Thoroughbreds

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In spirit of my adventure to the Kentucky Derby last weekend, I’m going to write about what investors look for using an analogy I commonly bring up when an entrepreneur asks me what venture capitalists look for when making investment decisions – the horse racing analogy.

There are three key things investors look at – the product, the team, and the market.  In other words – the horse, the jockey, and the race.

To elaborate:

  • If a horse is lame, obviously there isn’t a good chance of winning the race.  If a product is lame, no one will buy it.  It’s as simple as that.  A stellar horse/product is eye-catching.
  • A horse with great bloodlines is worth a lot more.  Would you like to race Secretariat’s offspring?  A product with strong IP compared to one without is a similar case.
  • With the right jockey, a less impressive horse can race really well.  The team is so important.  What it comes down to is that people really matter…a lot!  A great product and market are nice, but without a team executing toward a common vision, it’s just not as compelling.
  • A jockey with a proven record of success gets more bets than the new gal or guy.  A team with a track record of success starting and exiting companies is a sure way to get an investor closer to putting his/her money down.
  • A jockey and a horse need to be the right fit.  Both could be top athletes, but they may not work well together.  For anyone who has been on a horse, you know when it just isn’t right.  In a startup, a great team and a great product can work out really well.  But if you have a talented team in the software industry and stick them with an awesome solar technology, it may not be the best fit.
  • You want to be in a big race (market).  Racing in the Kentucky Derby is a lot more interesting than some small local race.  Sometimes you need to race in the small races to train for the Triple Crown, but if there’s no potential for the Triple Crown that’s not exciting.
  • All three – the product, the team, and the market – are very important considerations for VCs when evaluating investment opportunities.  Sometimes having 2 out of the 3 (e.g. a great product and great market) is not a deal breaker – a team can be built – especially when the company is early stage.  Of course, the more complete the package, the more likely a VC is going to be interested!

Think about it…how would you place bets on a horse/jockey in a race?  What do you look for?  Previous success, pretty horse, cool name…these can all be compared to what a VC looks for in an investment opportunity – previous success, good looking product, catchy name…

When you’re evaluating opportunities to invest, or building your company and fundraising, think about whether or not you would bet on your horse and jockey in the race you’re running.  If not, why not?  What are you missing?  If you can bet on yourself it’s a lot easier to convince a VC to bet on you.

MEL

Aka Venture Gal

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Apr 06

Raising Money for Your Startup is like Dating

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Fundraising is a lot like dating.  You can raise money from different sources, just like you can date different types of people.  And there are different levels of commitment when dating, similar to the varying degrees of expectations set when raising money from different sources.

There are several sources of capital when raising money for your venture: self-funded; friends, family, and fools (the 3 F’s); banks; customers; angel investors; venture capitalists; and more.  Fairly often I see a lot of companies that are seeking to raise venture capital when they don’t really need to.  Only a small percentage of companies raise venture capital and there’s a lot more involved than many realize.

Here’s how the analogy of common sources of capital and dating breaks down:

  • Bootstrapping. If you’re single, you’re essentially bootstrapping.  You are independent, report to yourself, own your schedule and own your company.  Sometimes the solo road can be tough, and you may experience the need to bring in more resources to grow your company or share your successes and challenges with.
  • The 3 F’s (Friends, Family, Fools). Kissing changes everything, and raising money from outside people changes everything.   It could be the death to a friendship, or the start to a deeper relationship.  The relationship may get better, or it may get worse.  Similarly, as soon as you take money, expectations change.  And taking money from friends or family can really change your relationships.  Instead of talking about work, current events, or food at the dinner table, you may be interrogated about the status of the company, and prodded about when the investment will be returned.  The 3 F’s may provide capital expecting a return or out of the goodness of their hearts because they believe in you.  That’s why it is important to communicate expectations, just as it is important to communicate expectations when dating.  Know what you are getting into before you take money from an F and before you go around kissing people.
  • Venture Capital. You’re in bed with a VC.  And you are living together.  The commitment is serious and you have high expectations to meet.  A good VC/Entrepreneur relationship will be a two way street – the entrepreneur will work his/her ass off to reach set milestones, and the VC will help out along the way (in the form of introductions or having their analyst work on projects for the company, for example).  Communication is key!  That means regular dialogue about what’s going on with the company.  There shouldn’t be big surprises at board meetings.  Similarly, communication is really important in building a successful relationship.  Lastly, the VC can fire the CEO and bring on a new CEO.  It may not be as simple of a “break up” as it would be in less committed relationships, but it sure is possible and it happens more than you may think.
  • Angels. The level is commitment is somewhere between the 3 F’s and VC.  I’ll let you use your imagination here…
  • Banks. You’re married to a bank.   If you get divorced, your spouse may take your house and/or your dog.  If you can’t pay back your debt, the bank takes your assets.  Simple as that.

There you have it.  You may not look at raising money or dating ever the same again.  I’ll take the blame for that.

What do you think?  Are there other similarities (or differences) that you notice?

Mary aka Venture Gal

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