The terms sheet sets out the Information Rights for the investors. The Information Rights section defines what information and reports are required and the reporting schedule, and sometimes which investors are entitled to receive the information. The standard set of financial reports that investors require include profit and loss (P& L) statements, balance sheets, and […]

The terms sheet contains several investor rights relating to Governance and Control.  Here are three of them:  Right of First Refusal   The Right of First Refusal clause says that if a founder sells his or her shares, then the preferred share investor gets the right to buy those founder shares first. Doing so results in […]

You may come across the term warrants in a terms sheet. Warrants are a type of security that gives investors the option to buy more stock over a designated time frame, at a specific price. Three parameters define the details of a typical warrant clause: the term, the coverage, and the price. The term sets […]

Pay to play is often used in terms sheets. A pay to play clause is intended to create an incentive for existing preferred share investors to invest on a pro rata basis in future financing rounds. The clause spells out that, if the existing investors choose not to participate in future rounds, they will lose […]

Terms sheets use anti-dilution clauses to protect the investors. Anti-dilution comes into play during down rounds in which the founders raise funding at a lower valuation than a previous round. There are three scenarios: No Anti-Dilution Protection – Investors and founders share in dilution from any follow on rounds funding. Full Ratchet Anti-Dilution – With […]

Liquidation preference is a right commonly found in terms sheet. It provides the investor the right to receive their investment back and then the remaining profits are distributed pro rata to other stakeholders. It’s often expressed in multiples such as 1X, 2X, or 3X. This means the investors with those rights will receive 1X their […]

Here are some Financial Parameters to look for in a terms sheet: Type of Security: Convertible Preferred Stock, Series A Convertible Preferred Stock, or Series Seed Preferred Stock. Investment Amount: How much is being raised. Pre-Money Valuation: What the business is worth before the investment. The pre-money valuation can also appear in the “Price Per […]

Term sheets lean to the founder or to the investor. One that leans to the founder is called a founder friendly term sheet. It has some of the following characteristics: The term sheet provides that the Preferred Shares will receive the same number of votes as the number of Common Shares it could be converted […]

In raising funding, valuation is a key number the CEO and investor must come to agree with. As a startup you must determine your target valuation. There are several methods. One method is the VC Quick Valuation Method This method starts with the exit of the startup. You assume the exit value your startup is […]

In raising funding, valuation is a key number the CEO and investor must come to agree with. As a startup you must determine your target valuation. There are several methods. One method is the Risk Mitigation Valuation Method. The Risk Mitigation method assigns dollar values to the startup’s accomplishments in each of four categories: Technology, […]

In raising funding, valuation is a key number the CEO and investor must come to agree with.  As a startup you must determine your target valuation.  There are several methods. One method is called Step up Valuation It uses ten factors. Each factor adds $250K to the valuation To calculate your total pre-money valuation add […]

In raising funding, valuation is a key number the CEO and investor must come to agree on. As a startup you must determine your target valuation. There are several methods. The first method is called Market Comp. In short, you look at other companies of a similar sector, stage and revenue and determine how you compare. […]

The startup pitch is a key step in raising funding. You must be able to talk about your company in a compelling, coherent, and comprehensive manner in a short amount of time. Your pitch should contain the following: The Attention Getter: Lead with the most compelling reason why you have a great business. State the […]

Some wonder what causes the failure rate for startups to be so high. Is it because they are doing new, unproven things? Was it because the market changed or the customer preferences shift? Or was it because they didn’t have funding or access to key accounts. The cause of startup failure comes back to one […]

I had a startup the other day approach me about investing. In the discussion it came up that one of the founders recently left and took half the equity with him. It appears there was no vesting on the founders equity. Vesting means one has to earn the equity by continuing to work in the […]

Who should have access to the cap table in a startup? The Cap Table which shows the ownership of each investor and those from the company is reserved for investors, board members, the CFO, and the corporate attorneys. For employees, you want to create a culture of openness. Employees and other shareholders get visibility into […]

One common misconception about fundraising is that you must know an investor before you can approach for funding. It’s best to have some validation from your own group before approaching those outside of your core. Start with your current network and work out from there. Identify the right type of investor for your deal based […]

In looking at cap tables, there are several red flags to watch out for. Look for shares that are actually issued and not just verbally promised. Is the cap table up to date with cancellations and repurchases? Many startups consider their cap table to be a work in progress so don’t be surprised if it […]

I was approached by a listener the other day who was contemplating investing in a friend’s business. He was the first money in and was trying to figure out how much equity his investment bought. There’s an equation for determining equity ownership. There are three terms in the equation. Pre-money valuation –  how much the […]

Many investors look for traction in a startup to gauge their progress. Traction stated as a single number on a pitch deck can be hard to judge as sufficient for an investment. Many investors tell the startup “nice traction, but we’d like to see more.” Instead of traction look for momentum. Momentum demonstrates things are […]

Many enterprise software programs come from service businesses solving a problem for their clients. In searching for a solution on the market, they find none, so they build their own. Later, other clients come ready to buy it. I call this contractor funding, and it’s one of the most overlooked forms of funding in the […]

It’s best to play nice with others in the startup community. While it may seem diverse and diffused, I’ve found word travels fast. The startup world is transparent and highly viral. So much of what happens regarding deal-flow and investing  is based on reputation and trust.  It takes a long time to build but can be […]

Before the fundraise, startups should spend time with the investor first. It’s less about the amount of face time and more about the number of interactions over the phone, via email, in person, and otherwise. It’s best to connect with investors before you start your fundraise so you have a basic relationship established. You can […]

Some startups think their business will succeed based on the idea, the technology, the market or something else. They think their technology will win the day, or that their idea is so great, or the market is growing so fast that they will succeed based on that alone. For the investor, all of these are […]

Most startup pitches focus on their future. It’s bright. The numbers are growing fast and will be big. The sky’s the limit. Just how much do investors put behind those startup forecasts? The answer: It depends on the historical numbers the forecast is based on. If there’s a consistent track record of historical growth, then […]

I’m often asked when you should raise funding. There are funding requirements to consider. Calculate your cash burn and estimate the need for new cash. There are also preparation and timing issues. Start your preparation six months in front of the launch Launch your fundraise six months before you need the funding. Use the six […]

There are truisms in the startup world you can always count on. A few that come to mind are: – All software has bugs. – All startups take longer than expected (to generate revenue, finish the product, fill in your favorite one here). And my newest one is: The only startup without glitches is the […]

While unforeseen events can overtake a startup, many CEOs simply don’t plan ahead when it comes to fundraising. For every $1M you want to raise, it will take you one calendar year to raise it. Most of the time, an entrepreneur who approaches me is raising funding today and is looking for a check now. […]

I recently saw a pitch deck from a seed stage startup which had a small amount of revenue. The deck claimed a valuation of $50M because a similar company exited at that valuation. I asked about his valuation, and he said he claimed $50M because “that’s what my company will be worth.” I reminded him […]

Many entrepreneurs approach me for funding. I find the biggest misconception is that you must first raise funding before you can launch and grow your business. In reality, the ones who raise funding have a growth story and can communicate it effectively to investors. Investors funding startups look for market validation and product validation – […]

Today, we’ll talk about Impact Investing. There’s an old saying about angel investors: “They want to make a little money, have a little fun, and do a little good.” The ‘do a little good’ talks about how investors want to make a contribution to the community with their investment. Some do it through Impact Investing, […]

Today, we’ll talk about whether you should be raising a Seed+ round. In startup funding, you raise funding in stages. There’s the seed stage, when you have developed the product to some level and potentially have some users. Startups typically raise $500K to $750K for this round. You don’t want to raise more at this […]

To launch your startup, identify a large market then target a small segment of that market to attack first. Choose your first segment based on ease of access and a close fit to your initial product. In other words, focus on your most ideal customer, and then grow your business from there. Most startups want […]

As soon as your startup establishes a stock incentive plan and issues stock options to employees or other stakeholders, it’s time to work on a 409A valuation. This is a valuation of your startup for assigning a cost basis to the stock options. The U.S. tax code in section 409A requires private companies to show […]

Changing the product, the price or the promotion? Today, we’ll talk about What to do when the investor says no. In raising funding you’ll hear “no” quite often. There are many reasons why investors do not invest. Sometimes, they are busy with other deals. Other times, they are looking for a deal in another sector […]

It’s important for a startup to have regular communication with investors during the fundraise. It keeps the investor up to date on your progress and helps build the relationship. For updates, find  a cadence that fits your business. For fundraising, every two weeks is a good pace. After funding move to monthly or quarterly updates. […]

I receive requests for introductions from many sources. Startups want to meet investors. Advisors want to meet growth companies. The list goes on. Over the years, I’ve learned to raise the bar. I could take whatever attachment they have and make the introduction. Instead, I raise the bar by requiring the requestor to make it […]

I was recently talking with a startup who had a photo service. He spent $3K to test out his business model. He found he could sign up one photographer for every dollar spent and how much revenue he could generate with each one. As he spoke, I found myself engaging with his pitch when he […]

Every startup has one key metric to grow their business to the next level. The one key metric for mobile app businesses is user engagement with the app. This measures how much time or how often the user engages with the app. The user needs to engage on a regular basis and over time increase […]

Every startup has one key metric to grow their business to the next level. For a software as a service business it is the CAC: LTV ratio CAC standards for Cost of Customer Acquisition and represents the cost of signing up the customer including marketing, sales, and any other related expenses. Lifetime value and stands […]

Every startup has one key metric to grow their business to the next level. The one key metric for network effect businesses is organic vs. paid users. The share of organic users relative to paid users should increase over time because as the network expands, more users want to join. Users can come from those who […]

Every startup has one key metric to grow their business to the next level.  In applications requiring FDA certification, revenue is not the key metric, but rather FDA approval is. For medical device companies the key metric is cycle time through the 510K application and approval process.  The purpose of a 510k submission is to […]

Every startup has one key metric to grow their business to the next level. For consumer product companies selling through retail, the key metric is same-store sales. You track ongoing sales by units per store each week or month. This metric tracks your organic growth rate of the product and can range anywhere from 1 […]

Every startup has one key metric to grow their business to the next level. For eCommerce, the key metric is sales conversion rate. Your conversion rate is the percentage of visitors who make a purchase. For most sites, the conversion rate is 1 to 5 percent. You can find it manually by dividing the number […]

The first vision of a business may seem grand and clear.  Upon launching the business you’ll find it doesn’t exactly fit with the market so you pivot. It takes 3 pivots to get to the growth phase of your startup. The first is the Target Market pivot– you take this when you find the right […]

Before you launch your fundraise, you’ll need to build some basic documents for pitching the investor and following up their due diligence. Start with a basic pitch deck, ten to 12 slides, that includes a non-confidential introductory version of your deal. For first presentations to an investor, keep it simple and focused on the core. […]

I’m often asked where startups should look for funding. There are many sources. First, start with your family and friends, as they already know you and believe in you. Second, expand the circle to include current and previous coworkers. If accelerators are appropriate for your deal, then consider those not only in your geographical area […]

For early stage funding there are several types of investors. Angel, VC, Family office, or customer funding. So which type is right for your deal? This depends on your type of business, the return and timeframe for that return. VCs want standard business models in high growth sectors with a 10X return in seven years. […]

There are two primary deal structures for your startup fundraise. There’s the convertible note which is a debt instrument that converts to equity later. However, if you want to use a straight debt instrument you should use a promissory note. Then there’s equity. It gives ownership rights in the company. The ownership is set by […]

Every day I ask entrepreneurs how much they are raising. Most begin with the big number–the full and complete raise they anticipate to run. This ranges usually between $1m and $10M. It’s good to have the big picture in mind. Some actually consider raising it all at once because “they want to get the fundraising […]

Competitive advantages increase revenue by 30% over the competition or decrease cost by 30%. Virality is a key competitive advantage in which users invite other users to join your platform. Virality reduces your cost of customer acquisition. It’s is different from Network Effects. Network Effects shows the platform increasing in value based on more users […]

A competitive advantage increases revenue by 30% over the competition or decreases cost by 30%. Most businesses increase in value as the customer base grows and validates the product/service. Users encourage others to join the platform. This is called Network Effects. As the number of users grow, so the value of the platform grows as […]

Competitive advantages increase revenue by 30% over the competition or decrease cost by 30%. A platform-based solution is a competitive advantage over a single-product company, as a platform brings an inherent cost advantage. Platforms reuse the research, design, architecture, and product packaging. Customer support is also reused. Consider adopting a platform-based approach to your business. […]

Competitive advantages increase revenue by 30% over the competition or decrease cost by 30%. Recurring revenue is a key competitive advantage. In today’s world you would think every business has recurring revenue. Yet, I find most businesses who are raising funding did not structure their business for recurring revenue. Recurring revenue helps your business in […]

A competitive advantage increases revenue by 30% over the competition or decreases cost by 30%. Channel access is a key competitive advantage. Channel access lets you connect to a set of customers that others cannot. Perhaps your previous job gave you contacts throughout the industry that you can now leverage for your startup. Perhaps you […]

In raising funding you need to find investors. So how do you get in front of them? First, identify the right type of investor and build up your network in that area.  Know your sector, stage, and revenue category and look for those who invest in it. If your target investor funds  biotech then you […]

Entrepreneurs are often enchanted with the idea behind their business that they think investors will write them a check based on the idea alone. Many have great ideas but I always say no matter how great your idea is standard startup metrics apply. New technologies can capture the imagination such as blockchain in 2017 that […]

When I ask an entrepreneur what their competitive advantage is, most point to their product and say it’s better. Of course, they spend ten minutes citing anecdotal stories to “prove” it. My definition of a competitive advantage is that it increases revenue by 30% over the competition or is a decrease in cost by 30%. […]

When I started angel investing over twenty years ago, there were angels, venture capital funds, and accelerators. That was about it. Today there are many more investor types in the early stage funding arena. Here’s my experience with the investor types including how much they invest and what they expect as a return in general: Crowdfunders […]

How Investors can find an exit in a Startup Investment. One of the challenges for investors funding startups is finding the exit.   Startups typically exit through an IPO or an acquisition by a larger company. As a startup  investor you have little to no control over the exit and can end up in a deal […]

I meet a great number of entrepreneurs and have seen numerous approaches to raising funding. Some approach it as an opportunity to meet new people and explore another part of the entrepreneur ecosystem. Others see it as a chore that distracts from the real business such as product development, closing sales, creating the next unicorn (take your […]

There are some statements I’ve never heard a startup Investor ever say. Here are some of them: No startup investor ever said: -I hear way too often from that startup that I invested in. -There are so many good deals to invest in- where do I start? -The payback on that startup investment came fast. […]

There are some statements I’ve never heard a startup CEO say. Here are some of them: -Fundraising just flew by. I didn’t have a chance to really enjoy it. -Sales is the easiest part of the business. -All my customers are happy and no one is complaining. -There are so many good people to choose […]

The startup world is open to anybody and it seems like everybody comes through it at some time or another. I receive calls daily from entrepreneurs who are seeking to start a business, raise funding, or hire a team member. I can always tell who is the serious entrepreneur and who is the pretend-preneur- someone […]

In the past venture capitalists stood in the shadows of their successful portfolio companies hinting about their contribution using veiled wording in Twitter posts. Today we see VCs stepping up to take more credit for their contribution. There are numerous examples of VCs using successful exits as validation for their investment thesis. With the explosion […]

I love startup stories. In the startup world everyone has a grand idea and big plans to make it happen.  It’s the venture world so you better have an idea that can be big. The talk around the idea is large and full of hyperbole. The future is going to be so bright that you […]

When I look through my LinkedIn network these days it appears every fifth contact is a venture capitalist of one kind or another. When I started in the early stage funding world 20 years ago, the VC was a rare breed who had access to venture funding. Most of them were in a handful of tech […]

Here are some pointers for startups raising funding Launching a startup and growing a business is hard.  It’s supposed to be hard.  You need a complete team to start a business – someone building it and someone selling it.  No fair, everyone on the team is building it and no one is selling it. Being […]

Here are three key pointers for investors who are funding startups. The team is the most important part of a startup. Diligence should focus first on the team, not the product, space, or anything else. Monitor the startup for three months before investing to gauge momentum and traction.  You need to peel back enough layers […]

Design for virality not revenue I heard a startup CEO once comment, ‘I wish I had designed for virality and not revenue.’ Virality is a key competitive advantage. The more your users share your information with others the more traffic and sales opportunities you will receive. Most companies set up their product and website for […]

10X rule your Startup Today, we’ll talk about the 10X rule for Startups. For startups to displace an incumbent, the offer needs to be 10X better than the current alternatives. So often, startups go to market promising their customer an ROI of 10, 20, or 30% better. Unfortunately, that’s not enough to win over customers […]

If they don’t define the exit, then you define the exit. Today, we’ll talk about how to achieve an exit in a startup investment. It’s easy to get into a startup investment, but difficult to get out- especially with a positive return. Most startup exits come when they sell the business to another company or […]

Should You Invest in a Startup Fund Choose broad or narrow investing to meet your goals Today, we’ll talk about investing in a fund and choosing between a narrow or broad investment thesis. When does a fund make more sense than direct investments? A fund works best when you are not familiar with a sector […]

Figure out what you want to invest in then look for resources to help Today, we’ll talk about investing in startups Should you invest in startups? Startups are very risky and it’s a lot harder than it looks.  If you have already invested in mutual funds, index funds, stocks, bonds, real estate etc. then you […]

Use Metrics to show your progress Today, we’ll talk about knowing your metrics Investors look for the metrics in your business so it’s important to know them. There are three levels of metrics you can use: Activity metrics show the basic activity of the business Unit economic metrics show the unit economic model including cost […]

Six months to build it and six months to sell it. Today, we’ll talk about what to build first in your startup. Some startups suffer from what I call the “Vision Problem”. They have a vision in their mind about what the product/service should look like AND they have to have it on the first […]

Show the system behind your goals Today, we’ll talk about establishing a growth story for your startup Investors fund deals based on the team, the market, or the technology.  While these are popular investment thesis, the investment decision often comes down to what I call “the Growth Story”.   This is your operational revenue model showing […]

Validation — the Product Works and People will Pay for It Today, we’ll talk about demonstrating product and market validation In talking with startup investors the first two questions that come up are Product validation and Market Validation. The product works and someone will buy it. Investors look for evidence of this before moving into […]

For family and friends funding — no one is getting paid back. Today, we’ll talk about raising funding from family and friends. Many startups launch their business with family and friends funding. Some entrepreneurs are often reluctant to take money from their family because — well Thanksgiving turkey tastes different if things don’t work out. […]

Find customers to pay for the product before you build it Today, we’ll talk about product development for startups. In growing your business you must prioritize what products you develop. In developing a new product it’s helpful to ask ‘who is going to pay for it’ before you spend money on it. The goal is […]

Look for the right investor to lead your deal, not just the first investor Today, we’ll talk about finding a lead investor for your deal. I’m often approached by a startup who has several investors interested in their deal but no one wants to lead it. This is not surprising given how much work goes […]

Today, we’ll talk about how to value your startup. Since startups don’t have significant revenue then how do you value your startup when fundraising? Traditional tools such as discounted cash flow, book value, and other standard accounting techniques don’t work for early stage companies. For startup valuations we use the rule of 4. For each […]

Today, we’ll talk about the documents you need for your fundraise. The pitch deck, the terms sheet, and the projections The first document is the pitch deck.This is usually ten to fifteen slides introducing your deal to the prospective investor. It should cover the basics of the business including the problem you are solving, the […]

Today, we’ll talk about the different type of investors you will find in the startup world. There are four type of investors for your startup — Venture Capital, Angel Investors, Family Offices and High Networth Individuals. There are lenders who provide debt financing but that’s a topic for another day. Venture Capitalists are professionals with […]

Today, we’ll talk about the deal structure you should use for your fundraise. There’s equity, and then there are convertible notes and SAFE notes. If you want a straight loan, then you should use a promissory note. Equity agreements set the valuation for the company and various terms of governance, preferences, voting rights and more. […]

Today, we’ll talk about should you raise funding and if so, how much should you seek. – Funding accelerates what you already have going in your business today. You should have a core process for acquiring customers and providing a service. If you don’t have it then funding at this stage will only hurt your […]