Crash Course In Capital
Things I wished I knew before I raised my first round
Preface: This guide is written without guarantees, and with VERY little experience. This is my first time raising money, and it could have all been luck. That said, I learned a lot during this and I want to make sure people avoid some of the mistakes I made.
Note: This guide covers SAFE rounds only, because that’s all I’ve done.
So recently we raised a bit of money from some angels to build out a new devtools company. I’m ecstatic, and especially excited to be able to return to work with the team into growing out the product after pitching for the last 2-3 weeks. I told a fellow founder about our experience and he asked if I could talk to one of their friends who was raising currently. 30 minutes later I got this email.
Haha, no. I’d struggle to call myself a super expert in anything. In fact, in many of these fields I haven’t spent time in, I’m flat out dumb. I spent a couple hours during this fundraising session on the phone with Poison Control because I thought I had given myself botulism from self-canned mushrooms.
But when we sat down, I found myself actually having a lot of thoughts on how to run a process, so when we got off the phone, I resolved to write them down while they were fresh in my head. This serves more as a log for when I do this next time, but I’m experimenting with giving away the vast majority of my thoughts and notes so here they are. I want people to have access to all the knowledge they can possibly get their hands on, and I really believe in the “Good information floats to the surface” philosophy. If you’re a founder, a VC, etc and you disagree with anything in the article PLEASE let me know. I will insert your warnings, corrections, etc and together we can build a guide that helps founders navigate this process.
With that out of the way, here’s how I’d run the process again
Guide
Pre-Raise: Build Your Network
Not in like a knobby “So where do you work Google Haha wow that’s awesome I work at Facebook” way. Just, meet great people in your space. Stuff that worked really well for me was:
My participation in Pioneer.app (10/10 recommend this or another program like OnDeck, YCombinator, or another accelerator)
Launching products on Products on Hacker News/Product Hunt
Tech Twitter
In my experience, people will naturally be interested in what you’re building if you let them in. Let me paint you a picture:
Back in January of 2019 I moved to San Francisco. After a couple months, I started working on a project called Darklaunch. I entered into Pioneer, put in tons of updates, worked hard to build it out, and ended up winning. Pioneer let me meet tons of awesome people like Dylan Field (Figma), Patrick Collison (Stripe) and a couple others. It’s truly awesome and there’s a great community of people working to build out new and exciting tech. As a result of these interactions, I met 2 people who are currently on our cap table.
In November of 2019, I created EasyDB. I put this on my Twitter, on Hacker News, and on Product Hunt. People ended up loving it, and I amassed some additional Twitter followers, but also had a couple VCs/angels reach out to me. Believe it or not, lots of them keep track of Twitter/Product Hunt/Hacker News. One of these investors introduced me to a couple people who are currently on our cap table.
Over this past year, I’ve kept a rolodex of people, mainly through Twitter. When I was ready to raise our round, I sent out this tweet
Now, anybody who was keeping up with me knew I was potentially in the market for raising funds. In the end, a couple more people linked to this tweet ended up on the cap table.
Note: I am NOT saying go out and build a brand on Twitter so you can launch a company. Jesus christ we already have so many Thinkboi Product People on there. What I AM saying is, just make shit worth consuming. Whether that’s a product, a blog, a series of insightful tweets, whatever. It might take a while, and you might have to flounder around in the space before you find your niche/calling, but eventually people will pickup what you’re putting down.
Now, you don’t HAVE to do this, but I think working in public, meeting awesome people, and being transparent are all things that will set you up for success. But let’s get onto the actual mechanics of the round.
Running the Process
There are really three things you should know before jumping into this process:
Round Dynamics
Who you want to raise from
How much you want to raise
Round Dynamics
You should really plan out what your ideal composition for the round is. Ideally you should know what you need next. Is it a go to market strategy, is it connections, is it technical resources, a venture partner to work deeply with, something else? All of these thoughts will influence what your round looks like, and who is in it. In general, there are two options:
Lead Round: One person puts in 50% or more of the round. This person is the lead, and has a heavy investment in your success. They are your defacto venture partner and you should be able to count on them to answer your midnight texts and unjam critical problems. Expect your lead to jump into a burning building to save you and your company, one under each arm. If you can’t see them doing that, don’t let them be your lead.
Party Round: You could probably tell from the name, but it’s an absolute party. Your cap table looks like a Facebook Invite List, and EVERYBODYs invited. In these rounds, people usually sit anywhere from 1-10% of the round. They won’t be as involved as if you had a lead, but you’ll still be able to count on them to make intros, give product feedback, guidance, and unjam the occasional thing.
There are benefits and drawbacks to each of these. From what I’ve seen, as you move through Seed, Series A, Series B, etc, rounds tend to become mostly lead. Party rounds skewing more towards earlier rounds, where investors mainly consist of:
Angels who just want your product to exist
Scouts/VCs trying to get a foothold
Your overzealous Aunt.
It’s also a spectrum: you could have a “colead round” with 4 people putting in 25% each. The world is your oyster.
Decide what your team needs and go from there. If you need that dependable Superman VC alongside you as you become the best you you can be, maybe a lead round is for you. If you want to iterate on product, have many people invested in your success, and source distribution/go to market, maybe you’re better off cracking open a few drinks and having a Party Round.
Who
Who you put on your cap table is REALLY important. If you get the wrong person, at best they’re dead weight, but at worst they’ll be vocally bad or sap your precious time. As an aside, please reference check your investors. Dear god it’s so easy and it’s mind blowing the number of people who don’t do this.
1) Go to Google
2) “<Investor Name> Crunchbase”
3) Find 3 companies they’ve invested in recently, and 3 from a while ago
4) Email the founders asking how those investors/angels are
This is easy because founder’s emails are 99% of the time <first>@company.com. 100% of these cold emails came back within 48h. See my job hunting guide for tips on sourcing emails, particularly Gmail’s autofill trick. And you want to check founders from a while ago so you don’t get an ADHD partner who dips when another shiny toy comes along.
Now that we’ve gone over referencing, let’s talk about how to decide who you want on your table. The answer is: You probably already have some idea.
Open a Google Sheet and think about every person, VC, entity you have access to, through yourself or an intro. Take that knowledge graph, and compress it into a stacked rank list of people you’d want to work with. Now, in a separate column, do the same thing, but this time with people who you don’t have access to. This is your “Want Intro” list.
Now, you might think it’s weird to just message them out of the blue. Aren’t these people busy af running these awesome companies? Don’t they get tons of emails from people? Well, yes to both, but they’re also HUGE dorks (and I mean this in the best way) about their area of expertise. If you have something cool to show them in their wheelhouse, it’s my experience that 80% of them will respond and the majority will want to see it in action.
Another thing you should consider doing at this step: Fantasy Cap Table. Figure out what your dream cap table would look like. Who you’d want involved, WHY you want them involved, at what check size, and then note this down. This is called “Default No”.
These are the ONLY people you should say yes to during your meetings. Everyone else should get a “Thanks I really appreciate you sitting down with us. I’ll send you an email concerning the details of the round and you can let us know what your appetite is for contribution”. An angel once told me “The best thing you can do to make someone want to give you money, is to not take their money”.
After the initial meeting, people will probably say they enjoyed meeting you and ask how they can be helpful. Take your “Want Intro” list and ask them for introductions to the people on the list, as well as other they think would be helpful. The valley is tiny; I’m always surprised by who happens to be really good friends/roommates with who else. They may intro you, even if only to provide their value and angle for a cap table position.
Above All: Your investors won’t build your company
You should definitely consider, especially under a party round, angels as a resource who have incentives aligned with your success, but not as part-time employees. On average, their chief contribution will likely be:
Capital
Experience
Branding
Networking
This isn’t a knock at anybody. Angels are busy running their own companies, doing cool shit, and also angel investing in startups.
Takeaways:
NEVER underestimate a cold email/DM/etc.
Do NOT get pressured by someone to take your money on the spot. Some of these people, especially those who do this professionally, are VERY good at this
The Valley is Tiny. Everyone knows everyone. Don’t burn bridges and don’t be afraid to ask for intros.
How Much
One of my angels gave me some very solid advice. I think it actually comes from YCombinator but here it is: Have 3 raise targets:
Your minimum (Everything went to shit)
Your ideal (Things went ok)
Your maximum (Things went REALLY good)
I think this is really good advice, especially paired with something a couple other founders have told me: You don’t have to raise it all in one go. Here’s an example:
Napkin math says it’ll cost 300k to get to your next milestone. You budget 600k to be safe. You don’t want to sell more than 10% of you company.
Instead of trying to do this:
1M/10M (1 million dollars at a 10 million dollar post money SAFE**)
You can do this:
300k/8M Primary
400k/10M Secondary
300k/12M Overflow
**For definition on what post money is, what a SAFE is, etc see here
This does a couple things:
For the Primary, it means you get more control of who you want onboard since the valuation is lower than targeted (If you didn’t pull 10M post out of your ass).
For the Secondary, you can pull value add people in because you’ll have had the liberty of choosing the best people in the primary, given it’s 25% discount.
For the Overflow, you can decide how much you want to take from people, or if you even want to run this round
Staggered rounds give you more flexibility. That said, you may lose people who aren’t happy paying more for the same round. My rebuttal to this was “I want to reward those who have high convictions in their bets while also keeping equity on the table for future employees”. Worked maybe 70% of the time, but it is a double edged sword.
UPDATE: From my good friend Yoni (@yrechtman on Twitter) I should add the following (Backlink to our discussion thread).The advice of a staggered round is a VERY doubled edged sword. It can make your cap table look bad. When an analyst goes to look at your following rounds table, they may see 3 different raises (cap tables don’t have dates). It also has the added disadvantage of increased dilution (via compounding of SAFEs). While this might make your current round easier, you’ll have to be cognizant of this moving forward. I recommend, when raising your next round and a partner asks about your financing, be upfront that you raised a singular staggered round on N different notes within your fundraising period, just so the information is out there. He has a really great thread on how compound dilution works. I’ll say: “Please ask your venture capitalist if multi-note preseeds are right for you. Side effects may include dilution, minor investor annoyance, and others not specified. Proceed with caution”Another piece of advice that was given to me: Always keep a safe open. You don’t know who will wonder in late and you may very well want to get that person onboard. In 3 months, when your product problems change, you might REALLY need a growth partner that you didn’t need before. Having a safe open lets you pull people in without saying “Oh well I’ll circle back when we’re fundraising again”.
“But wait Jake, you didn’t tell us how much to raise!”
Here’s the tea: I’m not going to. This is going to vary heavily by founder, by economic situation, by industry, etc. This guide is intended as a macro view and it’s up to you to decide how much.
What I will say: It is a lot easier to go raise more money than unsell equity. What we did was raise a little more than we wanted, at check sizes that were smaller than people wanted, from angels who we’re 90% sure we’ll love. Since we can’t be 100% sure (Good people are busy people) our philosophy with this is to give people enough that they’re interested, with the optionality to give more allocation to those we love working with. It’s the same philosophy we’re using for employee equity allocations. Work === Reward (I write lots of JavaScript).
If, for whatever reason, we’ve drastically miscalculated our milestones we can do any of the following:
Turn to our angels and offer them more equity
Return to those we passed on initially
Re-kick a fundraising cycle
In summary: Equity is optionality, cash is fixed
Note: Be weary of putting your valuation too high. Not only is it unattractive to potential investors, it’ll make it harder to raise your next round if you can’t command an increased valuation.
Takeaways:
It doesn’t have to happen all at once, but that is a double edged sword
Know your numbers. Why they’re set and what they get you
Don’t raise too much, don’t give too much company away, don’t raise at a dumb valuation. This is a marathon.
Back To Back (To Back To Back To…)
So, I don’t like fundraising. It’s annoying having to regurgitate 90% of the same pitch and answer 90% of the same questions again. As an aside, I think we’ll look back on this process as archaic in 10 years. I don’t know what will replace it, probably a bunch of Looms to memoize questions, but who knows.
My point is, if you like fundraising, you’re probably a sociopath. Sorry, that’s just how I feel, and I think it’s important to lead with that for the people who find this intimidating. It IS intimidating! Talking to people you admire, VCs controlling billion dollar funds, millionaire/billionaire entrepreneurs, that shit is SCARY, in theory at least. However, you’ll come to realize that all these people are absolutely awesome, and, for the most part, there’s a reason they are where they are. The vast majority want you, a great upcoming founder, to go out and kick ass, to either return the fund and/or continue the cycle of facilitating people dreams. It’s part of the magic of the valley.
But, back to pitching, you gotta do it, and the only way to get better at it is to do it A LOT.
What worked really well for me was to put all of your fundraising in a time-boxed period. We weren’t raising much, so I capped it at 2 weeks (Which leaked over a bit to the 3rd week but closed by then). Fair warning: You will get very little product work done here. Lining up 8 pitches a day, five days a week, for n weeks means you’re doing 40 pitches per week. This is good for 3 reasons:
You will have no choice but to get good at your pitching. Obviously practice beforehand, but after you do it 10-12 times, it’ll feel extremely natural.
You can minimize your time spent away from building product. Remember, angels/VCs/etc won’t build your product. Any time you spend not building product is time lost.
You can drum up hype. Lining up a ton of meetings all at once and being unavailable, is a good way to get people buzzing about your product, which will make more people interested. During week 2 I got this text from my VC friend.
During these meetings, know which angels/VCs you’d say yes to immediately (and for what amount) and stick to your guns. If you can get a lot of offers at the same time, that will always increase your leverage. This goes for almost all things in life.
If you’re interested in meta gaming the process even harder, and I suggest you do, use the stacked rankings to order your meetings. Warm up to people you’re mildly excited about having onboard. Weirdly enough, your pitch may actually adapt as you answer the same question over and over and over… Once your pitch is dialed, try to close those “Dream People” with a bulletproof pitch, then finally whoever you need to polish off your round. For more info on timing meetings, see my Hackers Guide To Job Hunting Post (Skip to Week 4-7, same vibe).
Aside: Check Compression
So, this one’s interesting and I ended up doing it by accident since we were raising so little. We had a couple people want to put in over 100k, which was 1/3rd of our initial raise. We asked them to half or quarter their check size. Apparently, it has this effect on people.
Now, I’m not sure if this works but I’m inclined to believe it after what we saw during our small raise. You can always expand their contribution later, but once you’ve made a commitment, it’s a dick move to back out of it. Again, the valley is small so be careful whose toes you step on. People will know if you’re rude, or ghost them, or etc. Comport yourself in a manner that you’d like to be known for, because you will be.
Setting Contribution Expectations
So now, you’ve got your dream roster filled. You’re ready to go take on the world. Send out the SAFEs and then get back to building product right?
You could, but I’d recommend a step in between: Set Expectations.
You should know the following for everyone on the cap table:
What their contributions are
What their response times should be
What their preferred method of communication is
How many meetings per year you should have (approx)
This was recommended by a highly technical founder friend and I think it’s really a great one. You’re essentially creating an directory for everything you need. This is also a chance to go over your cap table and see if there’s something you missed (e.g that growth person you might need).
This simple email should cover it
Hey <X>,
We're really excited to have you onboard! We're going to send the SAFE over in the next day or so, but I wanted to sit down and discuss expectations for contributions
Here's what I have you pegged for in terms of your value adds
- Go to market strategy
- Hiring pipeline for marketers
- Product design experience
- A designer on staff that we can use
Anything else you'd think is worth us noting? As for communication moving forward, here's largely what I'm thinking.
- 2 meetings a quarter we can schedule a week out
- Product feedback as we hit our milestones
For anything else, we can be in touch via your preferred method of communication. What might that be?
Once we've landed on this, I'll have someone send the SAFE over.
Looking forward to working with you,
<Name>This is an extremely powerful discourse since it lists everything you think they’re great at, gives them the opportunity to add, and provides you a directory to solve your problems as they come up. Growth problem? That’s Charlie, Tom, or Aaron. Product UX problem? That’s Jeremy. Plus, you might have missed someones hidden talent, or that someone has a designer on hand, or anything else.
I put these all into a Notion board. When I need a thing, or have a problem, etc I just look at the board and say “Okay, I need to talk to X”.
Again you can skip this step but I’d strongly urge you to do it
Closing
Once you’re ready, start sending out SAFEs. There are lots of tools for this. Carta, CapBase, Clerky does most stuff from start to finish, etc. Totally up to you what you’re choosing, but whatever you do: Don’t cheap out on legal. Legal paperwork is complex, and honestly you’ll probably have to get a lawyer pretty soon after you close your seed.
Once the SAFEs are signed, the wires are done, and the champagne is popped, you can get back to what you do best: Building a kickass product
Have fun, Good luck, and you can always reach out on Twitter if you’ve got questions. I’m a novice but happy to help :).
After The Raise
Asking For Help
If you need help, go to your directory of people and send that email/iMessage/etc. If you’re stuck/need something, don’t feel like you need to “save up” asking for help.
Special Thanks
Thank you to every person who has helped me along the way. This path has been filled with a smattering of people taking a chance on me, and I’ll be forever grateful to them.
And an apology to all the VCs whose deal flow this might affect. Please don’t cut my brake lines.
Great advice!