So you’ve had an idea for a startup, and (hopefully) at least one other person has agreed that it’s a good one. Now comes the scary part: raising money.
Preparing to fundraise can be a daunting task: talking to investors, finding valuable connections, and continuing to grow your business at the same time is a lot to juggle.
If you’re not sure where to start, or just want to make sure you’ve covered all the bases before you start trying to convince investors to part with their cash, here’s a rundown of everything a first-time founder needs to raise. money. to know.
Finding the perfect angel investor
Angel investors may feel like they were sent from above, if you find the right one for your company’s needs, that is. Many angels, the people who typically write the first checks for startups, were often founders or worked at startups, and their advice can be an invaluable resource.
The first step to find the right angel is to find out what your needs are: are you looking for someone who has created a startup before? Or are you looking for someone with experience and knowledge in a particular industry? No matter what’s on your shopping list, finding someone who believes in the company, introduces you to crucial connections, and gets the word out is key.
Founders are often wary of sending potential angels a “cold” message, but Karoli Hindriks, co-founder and CEO of immigration startup labor, says there’s nothing wrong with a hopeful message from LinkedIn. Having someone in your network make a “warm” introduction is ideal, but that’s not always possible, so don’t be afraid to reach out to yourself. Avoid sending all your Launch pad Immediately: Introduce yourself and your company, explain why you chose to contact them, and invite them to meet you in person first.
A coffee chat not only gives investors the opportunity to meet the company in person, but it is also a great way to get to know the people you are connecting with. Hindriks acknowledges that one of the biggest red flags is when an angel investor doesn’t understand equity or asks for an exorbitant stake, which can indicate a lack of experience (or a lot of greed…). Anyone who sounds like they want to take over running the program should also sound the alarm bells. “If an angel tries to make demands regarding management, company decisions, or use of funds in early discussions, this is also a red flag,” says Hindriks.
If all goes well, be sure to seek legal advice before signing any agreements to make sure everything is in order and your business is protected.
Structuring Your Limit Table
Once the people with shares in your company expand beyond the founding team, it’s time to have a look at the table of limits — the document that describes who owns what part of a company.
The team at 10×10 Capital, a firm for black founders, suggests you keep it simple. Investors will only be interested in who has money involved, how much they have put in, and the type and number of shares owned by each person or fund.
Don’t worry about the number of names on the list: “party rounds” with lots of investors don’t have the negative reputation they once did, and it’s okay to have multiple angels on board.
But you need to keep a close eye on how much capital you’re giving away (to your co-founders, employees, advisers, and investors) to make sure there’s enough pie left over for venture capitalists when you go to raise money later. line.
Keep your option group under control: that is the part of the shares of the company reserved to offer it to your team. Allocating about 10% of the company’s shares to employees is a good place to start. Make sure that the advisors you have do not get more than 5% in aggregate. Decide the length of the vesting period (how long people must work for the company to own the full amount of their stake) from the start (four years is standard).
Investors who have invested more capital might be upset if they see smaller investors with a better stock option.
Remember to reserve the majority of the capital for the founding team – for Series A, there should still be 60-65% to split among the founders. But don’t set these actions in stone; If the roles change and one founder ends up contributing more to the business than another, the capital should be adjusted accordingly.
Deciding what type of stock each investor holds also matters. Stocks come in several varieties: common, common, and preferred. People with preferred shares are promised a return on investment before everyone else. Investors who have put up more capital might be upset if they see smaller investors with a better stock option.
How to make a budget to raise a round
Unfortunately, fundraising is also not free. Startups must cover their legal fees, and potentially those of their incoming investors. In the UK, that can cost between £10,000 and £100,000. Double check who is expected to bear those costs; some deep-pocketed venture capitalists could shoulder the bill.
Once investors start transferring money to you, June Angelides, an investor at Samos Investments, recommends using a fundraising platform like Odin or Vauban to group your incoming cash in one place. These platforms are not free, but they can also help keep your cap table clean, so they are often worth paying for.
However, be selective about where you spend your money. Angelides suggests using a CMS to keep track of the conversations you have with investors and DocSend to securely share your presentation and other sensitive documents. She recommends that early-stage founders never pay for pitch training, someone to do it for you (if you can’t tell your story yourself, there’s no hope!), or services that introduce you to investors.
What’s worth throwing some money at is your pitch deck (it’s the first time your potential investors will learn about your company) and you want to make a good impression. If no one in the team is particularly design-inclined, be prepared to pay around £200 to have a professional fix it for you.
Ultimately, your time is money – think about who will be keeping an eye on the fort while you connect with investors and check in with the senior team to make sure they are coping with the added load.
Sadia Nowshin is an Editorial Assistant at Sifted. She tweets from @sadianowshin_