Founders – Use Your Down Round To Clean Up Your Cap Table

Feld Thoughts

I watched, participated, and suffered through every type of creative financing as companies were struggling to raise capital in this time frame. I suffered through the next financing after implementing a complex structure, or a sale of the company, or a liquidation. Until you are consistently generating positive cash flow, you depend on someone else for financing. Then, if you end up doing a down round, it suddenly matters a lot.

Three Startup Financing Myths You Should Avoid

YoungUpstarts

If you are building a startup, you’ll find no shortage of people who are willing to give you advice, particularly when it comes to raising financing. For some entrepreneurs, raising financing can seem like a full time job, particularly in these trying times.

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Cash is King: 8 tips for Optimizing your Startup Financing Strategy

For Entrepreneurs

Getting Funded avoid down round Startup fundraising startup valuationIntroduction This post aims to help startup CEOs optimize their funding strategy by examining how investors value startups, and explaining how to avoid the common cash management pitfalls. Note: The concepts in this post will likely be obvious to experienced CEOs and entrepreneurs. Despite that, our experience indicates that entrepreneurs frequently make costly, avoidable mistakes [.].

Capital Market Climate Change

Ben's Blog

Had you not had the experience of raising your last round so easily, you might have seen this round coming. As if the price could never go down. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

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.

The Resetting of the Startup Industry

Both Sides of the Table

If you raised money in the past 2 years and have grown it is possible that your next round valuation might be flat (or lower) even though you have a higher revenue because investors may value your multiple differently. If you can get a round done at the price you expect – well done. Don’t assume that you can “just do a down round” if necessary. Down rounds are corrosive. The days of easy money may be slowing down.

On the Road to Recap:

abovethecrowd.com

Why the Unicorn Financing Market Just Became Dangerous…For All Involved. John was the first to uncover that just because a company can raise money from a handful of investors at a very high price, it does not guarantee (i) everything is going well at the company, or (ii) those shares are permanently worth the last round valuation. With the public markets down, these groups began writing down Unicorn valuations. Take a clean round at a lower valuation.

What Most People Don’t Understand About How Startup Companies are Valued

Both Sides of the Table

And two big changes have happened that are widely known – in the past quarter the value of some very high profile companies such as LinkedIn and Twitter have fallen substantially plus Fidelity (usually a public market investor) has written down the value of many of it’s later-stage private-company investments and made the downward valuations known. ” “Mark has a vested interest in talking down valuations of startups.” Why Inside Rounds are Difficult?

Silicon Valley Venture Capital Survey Finds That, Yes, Valuations Are Up

ReadWriteStart

The survey looks at the valuations and the terms of financing for over 100 technology companies in Silicon Valley that reported raising capital in the third quarter of this year. According to Barry Kramer, a partner in the firm and a co-author of the survey, during the third quarter, "up rounds exceeded down rounds 52% to 30% with 18% flat. The law firm Fenwick & West LLP has released its Third Quarter 2010 Silicon Valley Venture Capital Survey.

What Do Industry Insiders Think Will Happen in VC in 2016?

Both Sides of the Table

” There are a lot of data points that one can observer to get a sense of the venture capital markets – both LP fundings into venture and VC financings of startups. They point to some widely known facts: financings & valuations are up massively over the past 7 years and non-VC money has entered the system. So why the slow down all of a sudden? Most flat rounds. More down rounds. More structured rounds.

LP 202

Seed investment negotiation mistakes

NZ Entrepreneur

The following highlights some ways founders sometimes trip up in negotiating an early investment round, resulting in a deal they are unhappy with, a tainted relationship with the investor, or losing the deal altogether. For some founders, negotiating a seed investment can be difficult.

Small Investors

ithacaVC

The treatment of the friends, family and angels (FFA) as the startup matures and raises larger rounds of financing over time is interesting. Or the economy tanks or stock market tanks moving valuations down at inopportune times for the startup. So, the best thing for FFAs is to continue to invest, particularly in down rounds (where the price per share is lower than previous round).

Keep Term Sheets Simple for Quicker Cash to Spend

Startup Professionals Musings

As the company grows and the second or third group of investors comes in, the terms of each subsequent financing grow in size, scope, and the number of lawyers’ fingerprints on them. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. Remember a term sheet agreement is not a deal until the check clears.

Think ahead when raising your early investments

Berkonomics

If so, the VC will contemplate a “down round” – that is: offering an investment where previous investors find their investments instantly worth less than their original value, even if the investments were made at high risk and years earlier. No one wants to face this, but the need for money and the possible overpricing of the first rounds may have created an unsustainable valuation. How did you structure your first round? .

Spreadsheets in legal documents

The Equity Kicker

I’ve been here before too, when implementing anti-dilution clauses after down-rounds. I believe my former employer Operis have started doing this in the project finance arena, attaching complex models of entire projects to legal contracts which are referred to in clauses determining how payments change under different circumstances.

Changes in the Venture Capital Funding Environment

Both Sides of the Table

In other words, it isn’t that VCs suddenly got smart, it’s that the costs of starting a company went down dramatically. I Leaderless Rounds. With a massive increase in companies created and a huge number of sources one trend that we witnessed from 2012–2015 was the rise of the undisciplined round. Non VC Growth Rounds. The market eventually slowed down. Some examples There was an A-prime round of a high-profile deal coming together.

A Primer on Angel Investment ‘Simple Term Sheets’

Startup Professionals Musings

As the company grows and the second or third group of investors comes in, the terms of each subsequent financing grow in size, scope, and the number of lawyers’ fingerprints on them. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. Remember a term sheet agreement is not a deal until the check clears.

Current Startup Market Emotional Biases

Feld Thoughts

Bill Gurley wrote an incredible post yesterday titled On the Road to Recap: Why the unicorn financing market just became dangerous … for all involved. Fred Wilson’s daily post referred to the article in Don’t Kick The Can Down The Road. Also, they have a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees.

An Inside Scoop on the Funding Environment and What it Might Mean for You

Both Sides of the Table

Six firms had expressed strong interest, two had strong champions already trying to test price and round size and one had made it clear they were planning to submit a term sheet the following week. With “uncertainty” taking hold, rounds were taking longer to complete. Investors had grown too used to the idea that any deal you funded would get marked up to a higher valuation in the next round and that’s clearly not always true. Great companies get financed.

Venture Capital Q&A Session

Both Sides of the Table

The A round was done in February 2000 (end of the bull market) and my B round was done in April 2001 (bear market). As a result I had to do a down round. Down rounds are psychologically really difficult on companies and can make it harder to do later rounds. Most importantly we talked about my good friends at Okta who were financed by Andreesen Horowitz.

Why Startups Should Raise Money at the Top End of Normal

Both Sides of the Table

If you invested in the first angel round of a startup company it is usually very hard to sell your stock – usually for many years if ever at all. Ah, but you say that for a normal-sized angel check or A round check one shouldn’t worry about the ultimate exit because he or she is getting in really early and at a cheap enough price so who cares whether one pays $5 million pre-money or $15 million pre-money – you just have to make sure you back really big companies.

Why Raising Too Much Money Can Harm Your Startup

Both Sides of the Table

I understand this instinct for more capital and I have two very different personal experiences: In my first company we raised an A-round of $16.5 There is a general guideline of how much investors want to own in order to invest in your company and the norm is 15–30% with the most common range 20–25% per early stage round. And if you raise the “5 on 20” and don’t grow into your next-round valuation you’re stuck because venture investors HATE doing down rounds.

Premature scaling at Series B

The Equity Kicker

It all comes down to probabilities in the end – anyone can get lucky – the trick is getting a handle on how lucky your plan requires you to be… The article describes how it goes wrong in two ways, firstly: Your company is growing and scaling well, often on little invested capital. Investors who paid up for your financing are not happy. PandoDaily has an article up entitled The Series B trap , that’s about the dangers of premature scaling.

Startup Valuations – Again….

ithacaVC

This morning I was reading one of my favorite daily compilations of articles (called Innovation Daily, subscribe here ) and came across another great short article on startup valuations called “ Seed Rounds: How to Pick a Valuation “ Joseph Walla, who I don’t know, wrote it. A founder is about to raise their first round and asking me how to value their company. [1]. Hopefully, it’s in high demand for good reasons, otherwise you risk a down round in the future.

Wasted time is money lost.

Berkonomics

Many of the start-ups my various angel funds have financed died a slow death, not because of poor concept but because of poor execution, wasting fixed overhead and draining the financial resources from the company coffers. It is not a strong bargaining position for the CEO to ask for money to complete a product promised for completion with the previous round of funding. Close. There is a relationship between time and money that is more complex than most managers think.

VC and Marking Investments to Market

ithacaVC

Luckily, I am not in charge of the internal finance function at our fund. My easy solution for VC firms would be to mark up or down the valuation of investments based only on new independently led outside rounds of financing. An inside round could only result in a mark down (if the new inside round was a down round), but not any mark ups (if the new inside round was an up round).

Does your business need money? Read this!

Berkonomics

Some businesses require very little capital and the founder can self-finance the enterprise and retain 100% of its ownership and control from ignition through liquidity event (startup through sale). I’ve arrived at a significant number of companies that were looking for additional growth capital after a “friends and family” round, and had to “clean up” the cap table more than a few times over the years.

Keep Term Sheets Simple for Quicker Cash to Spend

Gust

As the company grows and the second or third group of investors comes in, the terms of each subsequent financing grow in size, scope, and the number of lawyers’ fingerprints on them. Venture capitalists and later round investors like the preferred convertible shares. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. Remember a term sheet agreement is not a deal until the check clears.

Think ahead, if you will need more money later.

Berkonomics

If so, the VC will contemplate a “down round” – that is: offering an investment where previous investors find their investments instantly worth less than their original value, even if the investments were made at high risk and years earlier. No one wants to face this, but the need for money and the possible overpricing of the first rounds may have created an unsustainable valuation.

What I *Would Have* Said at TechCrunch Disrupt

Both Sides of the Table

I used an analogy I heard from Michael Dougherty (founder of Jelli) recounting what First Round Capital told him, “sometimes you’re on the local train and sometimes you’re on the express train. The express train represents raising a large VC round before you’ve figured out whether you can be big.&# I agree. What micro VCs need to consider is what happens when several of your companies want to grow and require VC financing?

Startup Funding – A Comprehensive Guide for Entrepreneurs

ReadWriteStart

If you are facing any problem you can always check out this: Business Loan vs. Equity Financing. But, in subsequent rounds of funding inflated valuation will be normalized resulting in a down round. I have often been asked about Startup Funding by entrepreneurs.

Startup Fairy Tales and Other Tall Tales That Venture Capitalists Tell

Growthink Blog

The typical wisdom regarding the appropriate financing course for a new company goes as follows: 1. Through connections, or through a chance meeting at a networking or social event, an angel investor hears the entrepreneur's story, likes them and their technology, and on the spot, writes a check to provide the company with its first outside financing.

Bad Notes on VC

Gust

We raised a seed round. You’ll find out the minimum when the next round is raised. Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. It’s like we need a finance 101 course for entrepreneurs. How will you price the next round? Your A round?

A Notable Omission

Bryce Dot VC

“Why the Unicorn financing market just became dangerous…for all involved.” The only hint of how customers play into this Unicorn funding frenzy comes in the following advice: Buckle down and do whatever it takes to get cash-flow positive with your current cash balance. Perhaps the answer to the Unicorn dilemma isn’t to take the down round or the dirty term sheet. That was the title of the bombshell dropped on silicon valley last night.

On Bubbles … And Why We’ll Be Just Fine

Both Sides of the Table

And so on down then line. New investors hate down rounds. So I’m not advocating panic or a need to rush your funding round. Or worse yet they may never get financed. Raise at “ the top end of normal &# but not so high that future financings in a corrected market become impossible. An obvious example is Google who may have gotten less market attention if there would have been 8 well-financed competitors during the 2001-2005 timeframe.

Some Thoughts and Models Around Ownership Targets

This is going to be BIG.

If you’re a first check lead VC for pre-seed rounds in New York, you can keep your head on when it comes to price, but in SF if you’re trying to fund companies from YC, good luck with your price discipline. If you raise $100mm, you can’t put it all to work upfront because the rounds aren’t big enough—so you have to raise more capital. Funds that lead Series A, B, and C rounds have serious capital needs. It doesn’t take into consideration options, down rounds, or recaps.

LP 93

Venture Outlook 2016

Both Sides of the Table

On the chart below, 78% of the rounds of 80 $1bn+ companies were led by non VCs. Here is a chart to show you the median valuation of late stage private tech companies compared to traditional growth rounds of capital led by VCs and also vs. the public markets. ” In just two years the median round sizes for deals with mutual funds has more than tripled and the same phenomenon holds for hedge funds. 25% “down rounds?

LP 327

Using warrants to pump up your VC valuation

www.mattbartus.com

You have a 20% option pool, so you know this will take your ownership down from 80% to 60%, and the VC will get 25%. I just worked on a financing for a company that received a term sheet from a group of VCs at a $7 million pre-money valuation. So they sold all the shares at a $10 million pre-money, but gave the investors enough warrants to drive down their effective pre-money valuation (as closely as possible) to $7 million. Home About Matt Client references Contact.

How to Find the Perfect Startup Job: Part III "Selecting the Right Venture"

Genuine VC

Which VC firm provided the most recent funding round and when was it? And there are many reasons why a not-as-blue-chip investor would be in a company with real promise: prior relationships he has with the entrepreneur, specific domain expertise/understanding of a sector, capital requirements for the business, or other dynamics around the round (price, hustle). Employees should ask to find out how much longer the company will ride without the infusion of another round capital.

To Follow On or Not to Follow On

This is going to be BIG.

That wasn't a bubble bursting issue--that was a poor financing strategy issue of people getting caught with their pants down, hands in the cookie jar, and all the metaphors you can think of at once. That's why I constantly remind companies that when you do an outsized financing price or size-wise, you expose yourself to getting hit bad in a downtown unless you're conservative about how you use the money. Down from what?

In Venture Capital, Should You Be a Momentum or a Value Investor?

David Teten

Likely signs of a Momentum investment: the round is oversubscribed and the entrepreneur has more negotiating leverage than VCs during the closing process. . Likely signs of a Value investment: the company has challenges in filling out the round; the investors have more negotiating leverage than the founders during the closing process; the company has significantly better metrics (e.g. The reverse also holds: a Value investment can become Momentum, and then follow with a down round.

Capital Market Climate Change

Ben's Blog

Had you not had the experience of raising your last round so easily, you might have seen this round coming. As if the price could never go down. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Yes, we did a down round.

Wasted time is money lost. (And another story of lost opportunity.)

Berkonomics

Many of the start-ups my various angel funds have financed died a slow death, not because of poor concept but because of poor execution, wasting fixed overhead and draining the final resources from the company coffers. . It is not a strong bargaining position for the CEO to ask for money to complete a product promised for completion with the previous round of funding. There is a relationship between time and money that is more complex than most managers think.