Cosi102

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<h2 id="startup-funding">Startup Funding</h2>

<p>(Alternate version <a href="/content/topics/entrep/startup_funding_good/">Startup Funding</a>)</p>

<ul>
  <li>You need money. You don’t have enough revenue.</li>
  <li>Before you raise: <strong>do you actually need outside money?</strong></li>
</ul>

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<h3 id="the-road-map-today">The Road Map Today</h3>

<ul>
  <li>Should you raise at all?</li>
  <li>Where does the money come from — and what does it cost you?</li>
  <li>Who are investors and what do they want?</li>
  <li>How do you actually raise?</li>
  <li>What are you signing?</li>
</ul>

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<h3 id="should-you-raise-at-all">Should You Raise At All?</h3>

<ul>
  <li>Raising money is not an achievement — it’s a trade</li>
  <li>You are selling a piece of your company, permanently</li>
  <li>VC money = <strong>growth-or-bust trajectory</strong></li>
  <li>Many great companies are bootstrapped</li>
  <li>Can you reach profitability without outside capital?</li>
</ul>

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<h3 id="where-might-money-come-from">Where Might Money Come From?</h3>

<ul>
  <li><strong>Keep all your equity:</strong>
    <ul>
      <li>Consulting / Side Work</li>
      <li>Grants (NSF SBIR, NIH)</li>
    </ul>
  </li>
  <li><strong>Give up some equity, stay in control:</strong>
    <ul>
      <li>Friends and Family</li>
      <li>Crowdfunding</li>
      <li>Angels</li>
    </ul>
  </li>
  <li><strong>Give up equity and a seat at the table:</strong>
    <ul>
      <li>Incubators / Accelerators (Y-Combinator, TechStars)</li>
      <li>Micro VCs (Precursor, Hustle Fund)</li>
      <li>Venture Capital (North Bridge, NEA)</li>
    </ul>
  </li>
</ul>

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<h3 id="what-stage-is-your-business">What Stage Is Your Business?</h3>

<ul>
  <li><strong>Pre-seed</strong>: idea/prototype, no revenue — $50K–$500K</li>
  <li><strong>Seed</strong>: early users, maybe revenue — $500K–$3M</li>
  <li><strong>A-Round</strong>: real traction, growing fast — $8M–$25M</li>
  <li>Note: stage names have inflated</li>
</ul>

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<h3 id="what-do-investors-want-to-see">What Do Investors Want to See?</h3>

<ul>
  <li><strong>Team</strong> — expertise and resilience</li>
  <li><strong>Market</strong> — is the TAM big enough?</li>
  <li><strong>Traction</strong> — show don’t tell</li>
  <li><strong>Insight</strong> — do you see something others don’t?</li>
  <li><strong>Timing</strong> — why now?</li>
</ul>

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<h3 id="understanding-your-investors-vcs">Understanding Your Investors: VCs</h3>

<ul>
  <li>Fund structure: Limited Partners → GPs → Startups</li>
  <li>GPs get paid: <strong>2% management fee + 20% carry</strong></li>
  <li>10-year fund life: 5 years investing, 5 years returning</li>
  <li>Returns follow a <strong>power law</strong> — one deal returns the whole fund</li>
  <li>This is why VCs need hypergrowth</li>
  <li><strong>Wrong tool for a lifestyle business</strong></li>
</ul>

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<h3 id="the-fundraising-process">The Fundraising Process</h3>

<ul>
  <li>It’s a <strong>sales process</strong> — treat it like one</li>
  <li>Warm introductions only — cold emails don’t work</li>
  <li>Run a <strong>parallel process</strong> — many investors at once</li>
  <li>Timeline: 3–6 months</li>
  <li>Create urgency</li>
  <li>Get a lawyer before you sign anything</li>
</ul>

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<h3 id="how-money-is-structured-equity-vs-debt">How Money Is Structured: Equity vs. Debt</h3>

<ul>
  <li><strong>Equity</strong> — sell a percentage. Permanent. No repayment.</li>
  <li><strong>Debt</strong> — borrow and repay with interest. Keep ownership.</li>
  <li>Most startup funding is equity, or converts into equity</li>
  <li>Equity investors become part-owners — they have opinions</li>
</ul>

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<h3 id="safes-and-convertible-notes">SAFEs and Convertible Notes</h3>

<ul>
  <li>Early deals rarely use priced equity rounds</li>
  <li><strong>SAFE</strong>: no interest, no maturity date, converts at next round</li>
  <li><strong>Convertible Note</strong>: similar but carries interest and maturity date</li>
  <li>Both include a <strong>valuation cap</strong> and/or <strong>discount rate</strong></li>
  <li>SAFE is now the industry standard</li>
</ul>

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<h3 id="valuation-and-dilution">Valuation and Dilution</h3>

<ul>
  <li><strong>Pre-money</strong>: what your company is worth before the check</li>
  <li><strong>Post-money</strong>: pre-money + investment</li>
  <li>Example: raise $1M on $4M pre-money
    <ul>
      <li>Post-money = $5M. Investor owns <strong>20%</strong>. You own <strong>80%</strong>.</li>
    </ul>
  </li>
  <li>Every round you give up a slice — this is <strong>dilution</strong></li>
  <li>Small slice of something big beats all of something small</li>
</ul>

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<h3 id="how-dilution-compounds">How Dilution Compounds</h3>

<table class="table table-striped table-sm table-responsive table-hover"><thead><tr><th>Round</th><th>Raised</th><th>Pre-money</th><th>% Sold</th><th>Founder Owns</th></tr></thead><tr><td>Seed</td><td>$1M</td><td>$4M</td><td>20%</td><td>80%</td></tr><tr><td>A</td><td>$5M</td><td>$15M</td><td>25%</td><td>60%</td></tr><tr><td>B</td><td>$15M</td><td>$45M</td><td>25%</td><td>45%</td></tr></table>
<ul>
  <li>10–20% at IPO is normal — the company is worth far more</li>
  <li>Watch out for excessive early dilution and option pool requirements</li>
</ul>

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<h3 id="term-sheets--what-youre-negotiating">Term Sheets — What You’re Negotiating</h3>

<ul>
  <li>Non-binding summary of the deal</li>
  <li>Economic terms: <strong>valuation, option pool, liquidation preference</strong>
    <ul>
      <li>1x non-participating preference = founder-friendly</li>
      <li>Participating preferred (“double dip”) = not</li>
    </ul>
  </li>
  <li>Control terms: <strong>board seats, pro-rata rights</strong></li>
</ul>

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<h3 id="board-control-and-governance">Board, Control and Governance</h3>

<ul>
  <li>VC money usually means giving up a board seat</li>
  <li>Board controls: hiring/firing CEO, selling the company, future rounds</li>
  <li>Early: founders control. Later: balance shifts.</li>
  <li>Founders get fired by their own boards — this happens</li>
  <li>Understand what you’re signing before you sign it</li>
</ul>

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<h3 id="fund-raising-step-by-step">Fund Raising Step By Step</h3>

<ul>
  <li>Develop a plan that balances capital/time/milestones</li>
  <li>Decide what need to do now, and what can be deferred</li>
  <li>Define your financing milestones</li>
  <li>Determine how much capital to raise for your first milestone</li>
  <li>Ensure you position yourself for the next financing, ideally at a step-up</li>
</ul>

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<h3 id="key-takeaways">Key Takeaways</h3>

<ul>
  <li>Raising is a trade — only do it if you need to</li>
  <li>Know what each funding source actually costs you</li>
  <li>Investors are not your friends or your bosses — they are partners with their own agenda</li>
  <li>Dilution compounds — model it before you sign</li>
  <li>The term sheet is where you win or lose control of your company</li>
  <li>Get a lawyer. Read everything.</li>
</ul>

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<h2 class="shadow p-3 bg-white rounded">Thank you. Questions?<img class="img-fluid w-100" src="https://picsum.photos/800/100.jpg" /> <small> (random Image from picsum.photos)</small></h2>