THE DREAM IN ACTION

[This is the second portion of a series on raising seed funding for a web startup. You can find the first post here, where we discussed referrals, short pitches, accountability, and tracking opportunities. Note: I’ve never raised any seed money for a startup. I write these observations to share what I’ve been learning and to motivate myself and the other entrepreneurs in my shoes to get out there and get’r done.]

I won’t take those terms. You know your situation better than I do so any decision about funding must be very specific to the conditions of that startup. Always keep that in mind. However, it’s my opinion that if your a new entrepreneur, you take what you can get. Don’t push for one form vs. another, or hold out for a great named investor. Take something to get you going and/or keep you alive. If you’re important to the business as the entrepreneur (which I assume you are) then you get equity in later rounds, they’ll have too to keep you. People who are good get compensated, end of story. On your second startup you can become particular, negotiate harder, and work with the big name investors.

Giving away shares for cash. A lot of founders and early-stage investor are focused on percentage. This may help in initial deal terms, but this is a short term number. It’s healthy and common for companies to take 2nd, 3rd, and more rounds of funding so percentage won’t ultimately matter. What you need to focus on is price. Investors want to avoid dilution but often mix up percentage dilution with economic dilution. Their percentage might decrease but the value may increase.

Percentage dilution in most contexts is actually rather meaningless, but economic dilution is crucial.  The reason is simple.  An emerging business which is growing and creating value for itself is able to sell its shares at a higher common share equivalent price than in previous financing rounds.  Under this scenario, new investors buy shares at a higher price than existing investors.  Existing investors surely suffer percentage dilution, but they also enjoy economic accretion.  This is a good thing for existing investors, because although their percentage interest in the emerging business goes down, the value of their economic interest in the company goes up.

Once you throw blood in the water the sharks come. Ok I’m not sure if the analogy is that good but deals will get competitiveve once you have a single term sheet. Momentum becomes critical to prove to your first investor that you’re legit and to show that the deal terms were favorable. Each consecutive term sheet you get makes the next one easier. Remember that pipeline we talked about? Now is the time to hit that hard.

Here’s a voicemail Travis Kalanick left on a 2nd termsheet prospect on a recent *competitive* deal. The recipient of this voicemail called back in 5 minutes, AND ended up being the lead on the deal (notice the urgency while staying true and credible):

Hey , wanted to check in with you regarding . . .things are heating up with a couple other parties and it looks like things could get done pretty quickly from here… wanted to check in with you, see where you’re head’s at on the deal, and see if we there’s a shot we can work together on this one… give me a call back as soon as you can… talk to you soon

Piggy backing is piggy banking. You’ve likely talked to many “small time” investors leading up to this point. They weren’t ready to make the investment at first but now that you’ve landed a term sheet from a likely larger investor there is nothing wrong with letting the small players piggy back the deal. They now have confidence that it’s a legit investment and can just use the same terms as the existing term sheet. $200k can double or triple relatively quickly this way so don’t slow down after 1 or 2 investors agree. The clock is ticking.

Don’t be this guy, what an idiot.

The best entrepreneurs are never finished. Keep selling your idea, keep piling on investors at the original terms, and don’t let the first big guy change his terms just because you’ve added others, fight collusion. A very smart entrepreneur, Travis Kalanick, says that “until the deal is closed, you have at best a 50/50 shot of it happening.” The moment you think you’re done with a deal, watch this video again and save yourself the embarrassment.

image via BenGoode

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• Term sheets that you don’t want (startupcfo.ca)
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