There’s already lots of great content on the web about raising capital and understanding deal terms. But, I figured it wouldn’t hurt to share some of the “lessons learned” from my own experiences.
1. Get the first round right: The terms of your Series A deal are very important. Not just because of the impact on that first round, but because many of those same terms are likely to carry through to future rounds. It’s tempting to concede on some important terms but try to resist that temptation. When negotiating the term-sheet for your Series B or Series C round, the “base” terms (the starting point of negotiations) is whatever terms were in your Series A. So, if you agree to some non-favorable terms on the “A” round, you’re likely going to continue to pay the price for that in future rounds as well.
2. Avoid valuation infatuation: Entrepreneurs often become obsessed with the pre-money valuation on the deal. Though this is certainly an important element of the transaction, there are other factors at play that have significant impact on the raw direct economics of the transaction including the employee stock option pool (and who pays for it). If you get close to finalizing a deal, it is imperative that you have a spreadsheet that helps you understand the economics of the deal. (See Jeff Bussgang’s article on the topic.)
3. Raise more than you need: Regardless of how much capital you raise, you’re probably going to have wished you had raised more. Within reason, if you have access to capital and the terms are decent, raise more than you think you need.
To help overcome the fear of dilution, build a simple spreadsheet that models the actual financial impact to your personal bottom-line based on various outcome scenarios. What you will likely find is that if things go really well, the extra dilution is not going to change things all that much. And, if things go really poorly, it won’t matter either (because those extra common shares aren’t going to make you money).
While you might raise the additional capital in a future round at a much higher valuation, it’s easy to forget the transactional cost of the additional round. Raising a venture-round is a very time consuming process and when your bank balance is getting low, you’re going to really want to just keep working on the business instead of shifting focus back to the funding game
4. Know what “market” is:
