What Companies Should Know Before Allowing Secondary Sales? Companies who want to give their employees the opportunity to sell their shares should consider the following: Set specific timeframes to allow for stock sales by the employees. This limits the distraction of employees and reduces the amount of disclosure the company…

Valuation Method for a Secondary Sale In pricing a secondary sale here are some valuation techniques: Estimate the value of the equity by multiplying the revenue by the multiple for similar companies. For example, SaaS companies are sold for a multiple of 10X revenues. Reduce the value of any debt…

Types of Buyers of Secondary Shares There are several types of buyers for secondary shares. Each has its own motivation for doing so. Here’s a list to consider: Employees often want more shares of a startup that is doing well. They may also want to sell their shares to pay…

Tax Issues With Secondaries There are tax issues associated with a secondary sale. Here’s a list of issues to consider: Gains on secondary sales are taxed based on the holding time of the shares. If less than one year, then ordinary income tax rates apply.  If longer than one year…

Pricing Secondary Shares In selling secondary shares a price must be set. Since the shares are in a private firm there’s no market to review for a list price. Here are some factors to consider in pricing a secondary sale: Are the shares preferred stock or common stock? Preferred stock…

Type of Secondary Transactions There are several types of secondary transactions as follows: Confidentially marketed public offerings — these offerings go to institutional investors. These transactions use an S3 form to provide shares to known buyers. Bought deal — these shares are bought by an underwriter who takes the risk…

How Do Secondary Sales Work? Secondary sales typically occur with later-stage startups. Investors who want shares in a company will buy the shares from founders, employees, or other investors. The price is typically at a discount to the last priced round such as 15 to 30%. The seller must find…

Customize the Pitch for the Investor Customize the pitch for each investor.  Research the investor before the pitch to learn more about their investment thesis. Review their portfolio of startups to see what is common about them and how your deal fits. For each investor choose three points to highlight…

Challenges in Secondary Sales There are several obstacles to overcome in completing a secondary sale. Here are some challenges to consider: Board approval — In many cases, the company must approve any founder shares being sold.  Right of First Refusal — companies that have raised funding have Rights of First…

Benefits of a Secondary Sale A secondary sale brings several benefits to the stakeholders in a startup. Companies stay private much longer than before.   Those in the company need access to capital.  For founders, a secondary sale provides some liquidity in the near term giving them the opportunity to continue…

Why Do Investors Want Secondaries Secondaries stands for secondary sales which refers to selling privately held stock in startups to other buyers. Investors buy secondaries instead of waiting for the next fundraise round. By buying now rather than later the investor can lock in a lower valuation. Investors in secondaries…

Why Companies Delay IPOs Companies stay private much longer than they used to. Previously companies ran an Initial Public Offering to gain access to the public markets for financing. Companies delay their IPOs for any of the following reasons: Avoid the cost of going public which is fairly high given…

What Are Secondaries Secondaries stands for secondary sales which refers to selling privately held stock in startups to other buyers. This arises from several sources such as investors who want to get into the deal after the fundraise is complete or employees who want to sell some of their shares….

Preparing the Diligence Documents Investors interested in your startup will want to perform due diligence on the deal. Diligence is a standard process investors go through to review all the relevant documents and checkmark all the boxes before investing. In preparing your diligence documents consider the following: Start with a…

Customize the Pitch for Your Investor Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. In pitching investors, you’ll find that each investor is unique. Customize the pitch for the investor by emphasizing the elements of your deal that…

Preparing the Pitchdeck In preparing your pitchdeck consider the following: Start with a template slide deck.  This ensures you cover all the key points. Each slide is one section of the executive summary.  Problem/Opportunity, Solution, Product, Team, etc. Write out on each slide what you want to say about that…

Identify the Target Investors Once you’ve identified the ideal investor type for your business you’ll need to build a target list of investors to pursue. Research potential investors for their criteria and how it matches your deal. Key areas to look for are industry sector, stage of investment, and geographic…

Profiling the Ideal Investor There are several types of accredited investors in the startup world.  These include angels, venture capitalists, and family offices. Angels write smaller checks compared to the other two but can provide support for your business as advisors and networkers to raise more capital. Venture capitalists write…

Valuation Methods To Consider In preparing your fundraise you need to consider your current valuation even if you’re using a SAFE or Convertible Note. There are several methods to use to estimate your valuation. The most often used method is comparables. This method looks at similar companies that recently raised…

Preparing the Business Metrics Investors are looking for a high-growth company with good unit economics. In preparing for your fundraise you need to identify a handful of key metrics that show your growth story. For the seed stage, you must have a run rate that is above 10K revenue per…

When To Raise Funding Most founders go out for a fundraise prematurely because they need money, not because they are ready for fundraising. Consider the following to understand when to raise funding. Have a compelling idea that you can clearly articulate. Have a validated customer, market, and product lineup. Have…

Milestone the Raise Founders often want to compress their fundraising into one round for the sake of efficiency. While this may sound like a good idea, it’s actually an expensive one for the founder. Raising too much money in the early stages will cost the founder equity dilution. The valuation…

How Much Funding To Raise When raising funding consider how much you should raise. Start with the overall amount of funding required to take the business to cash flow positive. This is often a fairly large number for platform-based businesses in a high-growth sector. Take the overall amount of funding…

Fundraising Timeline For every $1M of funding you want to raise, it will take one year to raise it for early-stage startups. This includes time to prepare the company, the investor documents, and the pitch as well as contacting, pitching, and following up with investors.  It’s best to have your…

Fundraise Differences by Stage In raising funding over the life of the startup you’ll find there are differences in the fundraise at each stage. The goal at the Seed stage is to show you can sell the product. At this stage, the investors will look primarily at the team since…

Von Restorff Effect The Von Restorff effect is defined by Wikipedia as an item that sticks out and is more likely to be remembered than other items. The startup pitch that provides something unique will be remembered more than the others. To use the Von Restorff effect in your pitch…

What Type of Funding Should You Seek When raising funding consider the type of funding you should pursue. There are many types of funding such as equity funding including angels and venture capitalists. There are debt funding tools including loans and revenue-based funding. There are crowdfunding portals including rewards, equity,…

Zeigarnik Effect The Zeigarnik effect is defined by Wikipedia as uncompleted or interrupted tasks that are remembered better than completed ones. Investors will remember the pitch that leaves them hanging more easily than those with closure. The cliffhanger in a serialized show is remembered because the action is left unfinished….

Verbatim Effect The Verbatim effect is defined by Wikipedia as the “gist” of what someone has said that is better remembered than the verbatim wording. Catchphrases and taglines will help investors remember your startup and what it does. Investors remember the essential meaning rather than the specific words you say…

Should You Raise Funding for Your Startup Before raising funding consider if you should raise funding for your startup. Ask why you need funding and see if you have a specific need for funding tied to growing the business.  If you have a business on a high growth trajectory, consider…

Testing Effect The testing effect is defined by Wikipedia as the fact that you more easily remember information you have read by rewriting it instead of rereading it. Investors remember what they recall from memory better than just hearing the pitch again. This comes from research showing that taking a…

Spacing Effect The spacing effect is defined by Wikipedia as information is better recalled if exposure to it is repeated over a long span of time rather than a short one. A series of updates is more effective in communicating your startup story as the investor will remember more than…

Humor Effect The humor effect is defined by Wikipedia as humorous items that are more easily remembered than non-humorous ones, which might be explained by the distinctiveness of humor, the increased cognitive processing time to understand the humor or the emotional arousal caused by the humor. Startup pitches with humor…

Context Effect Context effect is defined by Wikipedia as cognition and memory are dependent on context, such that out-of-context memories are more difficult to retrieve than in-context memories Investors need context in order to understand the startup offering such as the problem to be solved. In pitching founders include basic…

Bizarreness Effect The bizarreness effect is defined by Wikipedia as bizarre material that is better remembered than common material. Presentations that use bizarre information are more easily remembered than conventional ones. Founders can capture and maintain the interest of investors by using unusual wording or language. This works when the…

False Consensus Effect The false consensus effect is defined by Wikipedia as the tendency for people to overestimate the degree to which other people agree with them. Founders sometimes overestimate how others may share their beliefs. They often mistake silence for consent in talking with investors. Investors often nod in…

Naive Realism Naive realism is defined by Wikipedia as the belief that we see reality as it really is – objectively and without bias; that the facts are plain for all to see; that rational person will agree with us; and that those who don’t are either uninformed, lazy, irrational,…

Illusory Superiority Illusory superiority is defined by Wikipedia as overestimating one’s desirable qualities and underestimating undesirable qualities, relative to other people. Every founder considers themselves superior and should be funded accordingly. This is a flawed view of the startup world in which investors can see many startups while the founder…

Illusion of External Agency Illusion of external agency is defined by Wikipedia as when people view self-generated preferences as instead being caused by insightful, effective, and benevolent agents. Founders often believe someone else can make their fundraiser successful. The responsibility of fundraising for startups lies solely on the founder’s shoulders….

Group Attribution Error Group attribution error is defined by Wikipedia as the biased belief that the characteristics of an individual group member are reflective of the group as a whole. Startups often project the characteristics of one investor on the entire group when the group is much more diverse. Angel…

Zero-Risk Bias Zero-risk bias is defined by Wikipedia as the preference for reducing a small risk to zero over a greater reduction in a larger risk. Customers will choose a product that eliminates risk over another product that has a greater price reduction. For example, you could offer two products…

Survivorship Bias Survivorship bias is defined by Wikipedia as concentrating on the people or things that “survived” some process and inadvertently overlooking those that didn’t because of their lack of visibility. Incubators often measure their results based on startups that get funded rather than all the ones who go through…

Subjective Validation Subjective validation is defined by Wikipedia as the perception that something is true if a subject’s belief demands it to be true.  In developing products founders look for information that matches their own view of the problem and solution. Founders build their products for a market based on…

Pseudo-certainty Effect The pseudocertainty effect is defined by Wikipedia as the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes. As the startup finds success, the founder becomes more risk-averse because something at stake can be lost. For startups that…

Authority Bias Authority bias is defined by Wikipedia as the tendency to attribute greater accuracy to the opinion of an authority figure and be more influenced by that opinion. Founders seek experts in various roles to help grow their startups. In particular, this occurs when the founder is working in…

Optimism Bias The optimism bias is defined by Wikipedia as the tendency to be over-optimistic, overestimating favorable and pleasing outcomes  Startup founders often focus solely on the opportunity while ignoring the risks. Skeptical investors do the opposite by focusing on the risks. Startups succumb to the optimism bias because they…

Ostrich Effect The ostrich effect is defined by Wikipedia as ignoring an obvious negative situation. It’s common among founders to ignore the challenging parts of the startup such as competitive position or weakness of the product, and more. Some founders handle it by not paying attention to it. Others misinterpret…

Planning Fallacy The planning fallacy is defined by Wikipedia as the tendency to underestimate task completion times. Projects take twice as much time and cost as planned. First-time founders don’t have previous experience and cannot rely upon past projects when making plans. Some founders recall selected cases in the past…

Pro-Innovation Bias The pro-innovation bias is defined by Wikipedia as the tendency to have an excessive optimism towards an invention or innovation’s usefulness throughout society, while often failing to identify its limitations and weaknesses. Startups overestimate the speed of adoption of new technology. Users are often slow to adopt new…

Projection Bias The projection bias is defined by Wikipedia as the tendency to overestimate how much our future selves share one’s current preferences, thoughts, and values, thus leading to suboptimal choices Founders who hire team members in the early stage come to realize that different skills will be required later…

Omission Bias The omission bias is defined by Wikipedia as the tendency to judge harmful actions (commissions) as worse, or less moral, than equally harmful inactions (omissions). Founders will often omit details rather than give outright lies when pitching their startup to an investor. Ultimately, in due diligence, all the…

Observer Expectancy Bias The observer expectancy bias is defined by Wikipedia as when a researcher expects a given result and therefore unconsciously manipulates an experiment or misinterprets data in order to find it. Startups will take customer feedback and ignore the elements that don’t match their expectations. This is a…

Normalcy Bias The normalcy bias is defined by Wikipedia as the refusal to plan for, or react to, a disaster that has never happened before. First-time startups suffer from the normalcy bias as they have limited experience with what can happen to startups over time. Founders with previous experience tend…

Money Illusion The money illusion effect is defined by Wikipedia as the tendency to concentrate on the face value of money rather than its value in terms of purchasing power. In pricing the product, a startup should list their product price in the smallest unit possible such as daily cost…

Illusory Truth Effect The illusory truth effect is defined by Wikipedia as the tendency to believe that a statement is true if it is easier to process, or if it has been stated multiple times, regardless of its actual veracity.  In a startup pitch, facts repeated several times can increase…

Singularity Effect The singularity effect is defined by Wikipedia as the tendency to behave more compassionately to a single identifiable individual than to any group of nameless ones. People in general feel compelled to help individuals.  In a disaster scenario such as an earthquake, donors will feel numb to the…

Reactive Devaluation   Reactive devaluation is defined by Wikipedia as devaluing proposals only because they purportedly originated with an adversary. Founders skip the lessons that can be learned from competitors because they view the competitor as wrong in their approach. This also applies to situations in which the founder discounts advice…

Product Segmentation Product segmentation creates different versions of the product for different users. Novice users may get a version that is simple to use while power users have access to tools that are more complex. One can achieve product segmentation by using a platform approach to the product. A platform…

Illusion of Control The illusion of control phenomenon is defined by Wikipedia as the tendency to overestimate one’s degree of influence over other external events. Startups often display an illusion of control about how their product and sales efforts will take over a market. Just as the gambler in the…

Hindsight Bias The hindsight bias is defined by Wikipedia as the tendency to see past events as being predictable at the time those events happened. When an investor sees a  startup fail or succeed, early indicators come back to the investor’s mind. In some cases, investors selectively remember certain events…

Benefits of a Platform-Based Approach A platform-based approach to your business brings many benefits  Platforms make it easier to use a recurring revenue model.  Investors appreciate the value of this revenue model. It brings predictability to the forecast and makes it somewhat easier to manage the business and raise funding….

Applying AI to E-commerce AI brings new capabilities and benefits to e-commerce businesses. AI can enhance e-commerce companies in the following ways: Create better search tools for customers seeking products and services online. Retarget customers for related products. Provide better recommendations to customers for similar products. Enhance the customer shopping…

Applying AI to Current Product AI can be applied to your current products. Here are some benefits of integrating AI with your product line: Add new capabilities to the existing product. This could be a better analysis of the information coming out of the product. Reduce costs. AI capabilities could…

How To Use Data With AI Data is a key component of Artificial Intelligence systems. AI looks for patterns in the data and draws conclusions from it. The better the quality of the data, the better the output. AI requires a substantial amount of data with which to discover insights….

The Use of Data and Algorithms in AI Artificial intelligence utilizes data and algorithms to create technical solutions. Data and algorithms could be open or closed giving the business a competitive advantage. Here’s a list of the business models and how open and closed data and algorithms impact the business….

Why Add AI to Your Business AI brings many advantages to your business. Here’s a list of benefits to consider for your company: Automate repetitive tasks such as those found in sales, administration, and customer service. For support, AI can enhance help desk functions by searching the network for potential…

Types of AI Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. There are many types of Artificial Intelligence. Here’s a list of the types: Narrow AI — focuses on a single task or narrow range of functions. Applications…

Issues in adding AI In adding AI to your business consider these best practices: Create a list of potential applications and order them by the ease of use and value to the company. Identify a simple use case for the first effort. Check to see if you have the skills…

Business Benefits of AI AI brings many benefits to a business. Here’s a list of key benefits that can help your business. Improve existing products with new features. AI adds another layer of functionality to current products. Optimize the business. AI points out ways to improve business operations by reducing…

How AI Can Be Used in a Business AI can enhance the operations of a business. Here are some steps to implement AI in your startup: Identify an application where AI can enhance your operations. Define the outcome of the solution and what it should do. Choose an AI tool…

AI Art Generators AI brings new capabilities for generating art. There are many tools now available to create art of all styles, subject matter, and formats. One can even generate a new piece of artwork using the same style as an original work. By using machine language, algorithms, and data…

AI in Gaming AI brings many new capabilities and enhancements to gaming. Here’s a list of how AI improves gaming: Image improvement — AI can enhance the imagery in games by using neural networks to increase the number of pixels in the image. Level generation — AI can create new…

AI Applications in Business AI solves many business problems. Here’s a list of AI business applications: AI can create content for marketing campaigns building copy for social media, email, and website pages. It can assist sales in prospect management by searching all past correspondence with the lead. It can augment…

Generative AI Use Cases Generative AI even in its earliest stage provides meaningful use cases. Here’s a list of use cases it can handle: Creating marketing copy such as product descriptions and social media content. Assisting in sales work such as screening prospects and completing sales contracts. Code generation for…

Generative AI Artificial intelligence has been around for over fifty years. Through the use of large language models and machine learning tools, it is possible to mimic human output. Generative AI is artificial intelligence that uses algorithms to generate text, data, or images, that is new information. Generative AI models…

Curse of Knowledge The Curse of knowledge is defined by Wikipedia as when better-informed people find it extremely difficult to think about problems from the perspective of lesser-informed people. Startup founders are often experts in their field and find it difficult to discuss with investors who are not experts. They…

Default Effect The Default effect is defined by Wikipedia as when given a choice between several options, the tendency to favor the default one. It’s also called the Status Quo bias in which people choose the default option because it’s less risky. Startups should position their deal as the default…

Expectation Bias The expectation bias is defined by Wikipedia as the tendency for experimenters to believe, certify, and publish data that agree with their expectations for the outcome of an experiment, and to disbelieve, discard, or downgrade the corresponding weightings for data that appear to conflict with those expectations. Startups…

Fading Affect Bias The fading affect bias is defined by Wikipedia as a bias in which the emotion associated with unpleasant memories fades more quickly than the emotion associated with positive events. Startups encounter both hard times and good times.   People forget the hard times but remember the positive moments….

Framing Effect Bias Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. The framing effect bias is defined by Wikipedia as drawing different conclusions from the same information, depending on how that information is presented. How you frame the…

Ambiguity Effect The ambiguity effect is a bias defined by Wikipedia as the tendency to avoid options for which the probability of a favorable outcome is unknown. Startups are risky and make proposals about the outcome of their deal.  Investors avoid engaging with startups when they do not have confidence…