Getting your company funded in silicon valley by VCs or angel investors

Photo credit: Mark Coggins

These are my notes from a panel discussion, “Getting your company funded” by Justin Fishner-Wolfson at SXSWi 2010. Justin is principal of The Founders Fund, an early stage venture capital firm which is managed by past founders of tech start-ups.  There were also occasional video contributions by Reid Hoffman, founder of LinkedIn.

The basics: what is the different between Angels and VCs? The most obvious one is the amount of money invested, although there is no firm guidelines, Angels will invest smaller amounts, sometimes up to $1m, (typically a lot less than that). Early stage VCs will invest up to a few million dollars, and in later rounds VCs may invest hundreds of millions of dollars.  As investors will generally only invest in C corps it is therefore easier to incorporate as a C corp at the outset. An important point: angels should be accredited investors.

Questions that investors ask themselves:

  • Is the idea big enough?
  • Are these the right people?
  • Is the idea possible?

Having a big vision with big ideas and clear milestones is essential, but remember that early on people are mainly investing in you. The people aspect is also something the entrepreneur must consider, and it’s important to build relationships and trust before you need funding. Look for investors who you can get along with and you consider will add value to your business, and not just their money.

Reid Hoffman: “Taking investment is like marriage but after two powerpoints and a dinner”.

To build relationships before funding find people with a common interest and get them on board as an advisor. When the time comes ask if they are interested in investing. Look at their past investments and experience to ensure you are approaching those with relevant interests. Create an advisory board, and offer your advisors a fixed number of shares at the outset. [They will be diluted in the future, but this is acceptable as during the course of building your business your advisors will change over time as your needs change].

Does the VC’s “brand” matter? Mainly, it’s the PEOPLE who count, but the top firms have the best networks and the strongest track record.

Understand the terminology, and ensure you have an experienced lawyer that someone has recommend to you.

  • Common stock (for founders)
  • Fully diluted ownership (FDO) – after all options have been doled out FDO is the equity position of each investor.
  • Liquidation preference – a premium that the investor may receive when the company is sold. e.g. 2x LP means if they put in £50M and company sells for £100M then the investor takes it all.
  • Options (for employees – right to buy stock at a fixed price at a later date)
  • Option Pool – an amount of stock you agree to reserve for future employees. (You may not end up allocating all of this).
  • Placement agents – intermediaries who find and negotiate investment between start-up and investor. These are used more for larger rounds of funding and not for angel or early stage funding.
  • Prefered Stock (for investors – with more rights)
  • Warrants (similar to an option)

Share options for employees:

Generally the more money that you pay staff the less share options you give. Give people enough options that they feel motivated and be generous. Typically more equity will be offered if the company is riskier. Early employees may receive share options of anything from 0.5% to 15%.

Term-sheets:

Be careful to read and understand all the terms. Don’t just rely on your lawyer, read it all yourself and understand what you are agreeing to. Also pay attention to the issue of control, how the board is composed, voting rights/thresholds, who can sack the CEO and the voting mechanism for an acquisition. It’s important to set up the best possible terms at the beginning, as terms get worse over time and the last money in is the first money out. The key advice when dealing with the finer point is, get a good lawyer. One with a good network. The benefits of a good lawyer are they can provide great insights and advice. Remember to get recommendations and references on your lawyer.

Tactics:

Assuming you have been wooing investors for months, the best way to get commitment is to create a deadline. If you receive one term-sheet it is absolutely right that you let everyone else know you have a deadline looming and if they want a chance they need to put their term-sheet in too.

Additional resources:

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