Strategy Roundtable For Entrepreneurs: Non-dilutive Financing Through Revenue Sharing

ReadWriteStart

For a more elaborate explanation of the deal, please read my blog post 1M/1M: Alternative Financing For Startups Using A Sales Channel Partner. Clearly, it can go much further, and Hicham is trying to decide whether he grows organically, or raises outside financing.

Early Employee Dilution

ithacaVC

But here is one that I want to focus on in this post: “Can I ask for undiluted stock (non dilution clause)?” I am not even sure what “undiluted stock” is, but safe to say the person (I will call him Exec X) meant stock that his equity would not be dilutable in terms of ownership. It is legally possible to grant non-dilution via a contractual right. Those additional grants would prevent Exec X from being diluted.

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Should I give my seed investors anti-dilution protection?

Gust

What this investor is seeking is called “permanent, full-ratchet, anti-dilution protection”, and that is neither (a) in line with the market, nor (b) practical. Even if you were willing to give it to him, it is highly, highly unlikely to stand up beyond the next financing round, because there’s no way your next investor is going to take a dilution hit for this first one.

Revisiting Paul Graham’s “High Resolution” Financing

Both Sides of the Table

When I first read Paul Graham’s blog post on “High Resolution&# Financing I read it as a treatise arguing that convertible notes are better than equity.

Finance Fridays: Getting Started – Allocating Equity and Founder’s Investment

Feld Thoughts

Finance Friday’s gets off the ground with today’s post by introducing you to an imaginary startup, the entrepreneurs that we’ll being following throughout the series, and their first challenges: splitting up the founders’ equity and addressing the case where one of the founders provides the initial seed capital for the business. Jane and Dick briefly considered a valuation based on the next external financing round, perhaps applying a discount.

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Can you finance your company with grants?

Berkonomics

The company has been funded entirely by grants from the National Institute of Health, amounting to millions of non-dilutive dollars in all. The company grows in value to its customers and to prospective buyers of the business, but without any dilution of control or ownership for the founders.

The fine line between dilution and delusion

BeyondVC

I can also say that there is a similarly fine line between dilution and delusion but this one is easier to draw. As we walked through the process for the current round of financing, my partners and I clearly understood that while we can guide the market with our pricing expectations, that ultimately the market decides. So if faced with this situation, my only word of advice for entrepreneurs is that it is important to know that there is a fine line between dilution and delusion.

The Glorious Post Seed Startup Financing Chaos

Fred Destin

Startups Uncategorized Venture Capital angellist chaos financing seed startup The other day I got a call from Scott Kirstner at the Boston Globe answering: “what happens to all these incubators entrepreneurs after Demo Day”. The short answer: chaos. Full of opportunity, but chaos nonetheless.

Series Seed Financing Documents

www.seriesseed.com

SeriesSeed.com Series Seed Financing Documents Blog Home Documents Blog Archives Subscribe 09/02/2010 Version 2.0   That’s because there are not that many issues to negotiate in a simple equity financing.   Of course, one could argue, that I’m just not taking comments I disagree with (or that nobody cares enough to comment), but I am of the opinion that these documents represent the 95% consensus of what should be in a very basic set of equity financing documents. 

Everything You Ever Wanted to Know About Convertible Note Seed Financings (But Were Afraid To Ask) – Part 1

Scott Edward Walker

Introduction We are in the golden age of seed financing. Venture capital funds, seed funds, super angels, angel groups, incubators, and “friends and family” are all playing the seed financing game and investing early in startups in an attempt to land the next Facebook.

Building a financing plan around value creation milestones

The Equity Kicker

Twice in the last week I found myself coaching founders on how to build a financing plan around value creation milestones so I thought I would share what I said here. Given that the valuation of a startup increases when milestones like these are hit it makes sense to build a financing plan based on when they are likely to come in.

Walker Twitter Highlights: March 25th – April 7th

Scott Edward Walker

“Be careful not to have too many co-founders; it’s the most expensive dilution you’ll ever face.” Seed Finance Survey 2012 (via Fenwick) [link]. Twitter Highlights co-founders dilution quora seed seed finance startup startup ideas startups I’m using Twitter as a form of micro-blogging to share interesting blog posts, articles and podcasts relating to entrepreneurship and startups, M&A and legal issues.

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Knowledge Is Power: Convertible Note Financing Terms, Part IV

Gust

To account for scenarios in which the startup is acquired before it has a chance to complete a priced equity financing round, most term sheets and deal documents contain a “ change in control ” provision. Suppose the notes converted as if the acquisition were an eligible financing round. This week we move on to something near and dear to the hearts of entrepreneurs and investors alike: The exit, more formally known as a “ liquidity event.”

Debt Or Equity To Fund Your Start-up: Which Is Better?

YoungUpstarts

Loan financing and equity investment are two common methods of funding a new business start-up, assuming you do not have the capital on your own. With debt financing, you restrict future cash flow by tying a portion of ongoing profits to your monthly payments. By Jenny Q.

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Knowledge Is Power: Convertible Note Financing Terms, Part III

Gust

Last week , we took the plunge and began dissecting an example term sheet for a convertible debt financing round piece by piece. In Part II, we looked at the mandatory conversion language that is at the heart of any convertible debt financing. The company is unable to raise more financing and becomes insolvent (whether or not it formally files for bankruptcy).

Reblog – Finance Fridays (Introducing the Cap Table and CTO)

ithacaVC

Here is the latest edition of Finance Fridays from Brad Feld called “Introducing the Cap Table and CTO” Every startup needs someone to be in charge of the Cap Table. That person is typically the inside finance person, but it does not really matter who so long is it is always current. Cap Tables can be very complex depending on the company’s financing history. This is significant because Jane and Dick took all the dilution from the option pool creation.

How do the sample Series Seed financing documents differ from typical Series A financing documents?

Startup Company Lawyer

After the recent announcement of the Series Seed Financing documents by Marc Andreesen, Brad Feld points out that there are now four sets of “open source&# equity seed financing documents: TechStars Model Seed Funding Documents (by Cooley). Y Combinator Series AA Equity Financing Documents (by WSGR). Series Seed Financing Documents (by Fenwick & West). This post assumes that you have a basic understanding of Series A financing terms. Anti-dilution.

Venture Capital Is Just One Funding Option, Reminds OnPay’s Mark McKee

ReadWriteStart

Here’s his take: Brad Anderson : As someone who’s worked in investment banking and been an early employee at a startup, do you think most founders understand their financing options? How do you collectively plan to finance the business as it grows?

7 Best Strategies for Maintaining Equity

Early Growth Financial Services

Whether you’re funded, seeking funding, or still bootstrapping, here are some of the best strategies for avoiding dilution and maintaining maximum equity: 1. Doing so will prevent unnecessary dilution and it allows you to get the highest possible value for each round. Of utmost concern to many entrepreneurs is how to retain maximum equity in their startups. Rightly so. It’s a constant balancing act: growing your company without losing control of it.

Pascal Levensohn in New York November 8: Speech at Museum of American Finance on Risks to Angel Investors

Pascal's View

But I am coming to the Museum to talk about the leading of edge of startup financing in the digital age and about real time investment risk management in the new Wild West– crowd-funded Silicon Valley post the lifting of the ban on General Solicitation.

Which Fundraising Round Should You Skip?

View from Seed

The reality is that if a founder raised every one of these rounds, and lead investors always got their “target” ownership, the level of dilution would be ridiculous. No good investor would want the founder/CEO of a company to have insufficient ownership by the series A, and every founder I know is sensitive to taking too much dilution. So, if a founder is going to avoid this level of dilution, the question is “which round to skip?”.

Should I Use My Investor’s Lawyer?

Scott Edward Walker

Which financing sources should they consider? For example, he will explain to you how the liquidation preference works and run spreadsheets, if necessary, to show you how much money you will receive based on different sale scenarios; he will explain to you how the option pool works, including the founders’ significant dilution; and he will discuss what protective provisions are and other tricky legal terms, such as drag-along rights and anti-dilution provisions.

What Are the Rights of Minority Stockholders?

Scott Edward Walker

Startup Issues anti-dilution provisions controlling stockholders conversion rights derivative claim fiduciary duty inspection rights liquidation preferences minority stockholders oppression proper purpose redemption rights

Is convertible debt with a price cap really the best financing structure?

Startup Company Lawyer

Convertible debt with a price cap seems to be the preferred structure for early-stage financings. Over the last 12 months, I’ve noticed a trend where early-stage startup companies raise seed financings of between $250K and $1M using a convertible note with a price cap. This leads me to believe that there is a mini-bubble in the early stage financing universe. Is a priced Series A financing a valid alternative?

The Road Less Traveled: Non-Standard Early Stage Funding Paths

View from Seed

The challenge with pre-seed rounds is that pricing will sometimes be pretty dilutive. The downside is that YC is itself quite dilutive, the program itself may not be a great fit, and there are many many companies out of your batch that won’t be one of the anointed winners.

Alternative funding methods for your small business

Up and Running

Specialty finance structures have been around since the beginning of finance, but in the last several years, as bank lending remained frozen following the financial crisis, alternative financial product offerings have exploded. Equipment finance. Revenue-based finance.

Introducing the Cap Table and Hiring the CTO

Feld Thoughts

As Finance Fridays continues, we are introducing the concept of the Cap Table. If the full pool were to be given out, the dilution is fairly significant to the founders. They would own from 55% and 45% down to 36% and 29%, but until options are exercised they are not diluted. Finance Fridays 83(b) cap table cto finance fridays option pool

Pre-Seed Rounds Aren’t Going Away, But Pre-Seed Funds Are

View from Seed

But this financing contour description is just a proxy for underlying business metrics. In reality, a pre-seed is “an early round of financing that is designed to help a company achieve certain intermediate milestones PRIOR to the magic combination of strong PMF + meaningful traction.”. Of course, as a labeled category of financing arose, so did a number of dedicated pre-seed funds emerge to specialize in it.

Pitch Deck Month: The “Ask” Slide

View from Seed

To provide relevant perspective, listing past convertible note(s) and/or equity financing(s) including total round size and valuation (caps) is helpful. Plus, any other non-standard items here should be called out, too, like non-dilutive grants, as applicable.

Why Rand should take some money off the table

A Smart Bear: Startups and Marketing for Geeks

He’s in the best possible position — the company is profitable and growing and doesn’t “need&# the money, so with little dilution he could take $10m for safety, comfort, and scale. Essays advice finance happiness investment lifestyle

Kryptonite Angel Round Terms

The Startup Lawyer

Here’s a list of the top 5 deal terms that cause harm to startups at the seed financing stage and therefore should be avoided: 5. This is something you might see in a late stage private equity financing with a company that has a history of generating revenue. Non-Dilution. The investor wants non-dilution rights because they are either really greedy or they don’t trust you to issue additional equity. Startup Issues angel investor seed financing Term Sheet

The Pre-Seed FAQ

K9 Ventures

This post is intended to be a dynamic document, and I will attempt to update it from time to time with new questions that may arise or as financing trends evolve. Q: What amount of financing is considered Pre-Seed? It’s a legitimate stage of financing in the venture eco-system as of this writing (October 2017). In that post I explained that: Seed is not the first round of financing any more. Q: What does Seed financing get used for?

Is Small-Business Credit Starting to Flow?

Up and Running

Tags: bootstrapping startup financing Denise O'Berry small business financing Small Business Trends

What is it Like to Negotiate a VC Round?

Both Sides of the Table

I am reminded of this problem every time my firm does a financing where a note went before us but more specifically I was reminded by this great post by Brad Feld to talk about the pre-money vs. post-money conversion issue. So how DOES a VC think about financings at early stages? When you do, my 20% becomes 15% and thus my true price for your round is actually higher than it appears when I invested because I already know I’m going to face more dilution for options.

Fear vs. Greed at Facebook

Altgate

On the other hand, they are also understandably greedy about maintaining a high equity stake, by minimizing their dilution. Dilution is the progressive shrinking of each executive’s equity percentage as the startup raises each round of financing.)

Founders Should Set Aside More Equity for Their Team & “Split the Pain” With Investors

Hunter Walker

Employee options pools, typically created at the point of financings, shouldn’t be treated as haggling over dilution, but rather a strategic resource that will help founders build the best team and, by extension, a more valuable company.

Startup Boards

Both Sides of the Table

This is often true when the action of the board could dramatically affect shareholders such as raising new capital, acquiring new businesses (that drain existing cash or dilute shareholders), selling the company or raising a lot of debt.

Some Thoughts on Ownership

View from Seed

That may not seem like a big deal in the moment, but at the next financing round, the pro rata rights of all the prior investors may add up to a pretty big number, creating a fistfight for allocation. Remember that the new investor will want to hit their ownership target as well, which may put the founder in an awkward place of having to either take much more dilution than they want or fully honor all the pro-rata rights of their early investors.

Cash Crunch? 5 Unconventional Ways To Fund Your Startup

YoungUpstarts

Most young founders lack at least a few of those C’s, making debt financing only feasible under limited conditions (and with plenty of upfront legwork and planning). It’s an attractive transactional relationship, though it can severely dilute ownership. Consider owner financing.

Oh, go ahead and ask for a five-million-dollar investment in your startup.

Berkonomics

Third (if you’re keeping score), it is not wise to dilute the founder’s ownership greatly in the first round of financing. Giving control over that vision to others early on often dilutes the vision and is a disincentive to the entrepreneur.

Does Elon Musk + Peter Thiel = 3 or 1.5

Professor VC

Not surprisingly, the merger was highly dilutive, particularly to Confinity/PayPal shareholders. I originally got to thinking about this when I received a 485 page information statement on a previously announced merger between Clean Power Finance and Kilowatt Financial.

The Resetting of the Startup Industry

Both Sides of the Table

Optimize for a W more than % dilution in these circumstances. Founders hate them because they’re dilutive. The terrible consequence is that some great companies struggle to get financed. The best deals will continue to get financed.

How Much Should You Raise in Your VC Round? And What is a VC Looking at in Your Model?

Both Sides of the Table

Of course there are times where 15% dilution is more appropriate and other times it can be 33% but in a first meeting we’re just trying to establish general ranges for reasonableness. Most VCs lead one round of financing in your company and are looking for other VCs to lead subsequent rounds.