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 — speaking to investors, finding valuable connections and continuing to grow your business at the same time is a lot to juggle.
If you’re unsure where to begin — or just want to make sure you’ve covered all bases before you start trying to convince investors to part with their cash — here’s a round up of everything a first-time founder heading out to fundraise needs to know. This advice first appeared in Sifted's Startup Life newsletter — sign up here for a weekly hit of wisdom from Europe's founders and operators.
Finding the perfect angel investor
Angel investors can 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 cheques for startups — were often founders or worked in startups themselves, and their advice can be an invaluable resource.
The first step to finding the right angel is to figure out what your needs are: are you looking for someone who’s built a startup before? Or are you looking for someone with experience and expertise in a particular industry? No matter what’s on your shopping list, finding someone who believes in the company, will introduce you to crucial connections and will spread the word is key.
Founders are often wary of sending potential angels a "cold" message — but Karoli Hindriks, cofounder and CEO of immigration startup Jobbatical, says there’s nothing wrong with a hopeful LinkedIn message. Having somebody in your network doing a "warm" introduction is ideal, but that’s not always possible so don’t be afraid to reach out yourself. Avoid sending your entire pitch deck straight away: introduce yourself and your company, outline why you chose to reach out to them and invite them to meet you in person first.
Not only does a coffee chat give investors a chance to hear about the company in person, but it’s also a great way to suss out the people you contact. Hindriks reckons that one of the biggest red flags is when an angel investor doesn’t understand equity or asks for an extortionate share, which can indicate a lack of experience (or an abundance of greed…). Anyone who sounds like they’d want to take over running the show should also set off alarm bells. “If an angel tries to make demands regarding management, company decisions or use of the funds in early discussions, this is also a red flag,” says Hindriks.
If it all goes well, be sure to seek legal counsel before you sign any deal to make sure everything is in order and your business will be protected.
Structuring your cap table
Once the people with shares in your company expands beyond the founding team, it’s time to have a look at the cap table — the document which outlines who owns how much of a company.
The team at 10×10 Capital, a firm for Black founders, suggests that you keep it simple. Investors will only be interested in who has money involved, how much they’ve put in and the type and quantity of shares each person or fund owns.
Don’t worry about the number of names on the list — "party rounds" with lots of investors don’t have the negative rep they once did, and it’s fine to have multiple angels on board.
But you do need to keep a close eye on how much equity you’re giving away — to your cofounders, employees, advisers and investors — to ensure that there’s enough of the pie left for VCs when you go to raise money further on down the line.
Keep your option pool under control — that’s the portion of shares in the company set aside to be offered to your team. Allocating about 10% of the shares in the business for employees is a good way to start. Ensure any advisers you have don’t get more than 5% collectively. Decide the length of the vesting period — how long people need to work for the company to own the full amount of their share — from the beginning (four years is standard).
Investors who’ve put in more capital might be annoyed if they see smaller investors with a better share option
Remember to reserve the majority of equity for the founding team — by Series A, there should still be 60 to 65% to split between the founders. But don’t set these shares in stone; if roles change and one founder ends up contributing more to the business than another, equity should be adjusted accordingly.
Deciding which type of shares each investor has also matters. Shares come in several varieties — ordinary, common and preferred. People with preferred shares are promised a return on investment before the others. Investors who’ve put in more capital might be annoyed if they see smaller investors with a better share option.
How to budget for raising a round
Fundraising is also, unfortunately, not free. Startups need to cover their legal fees — and potentially those of your incoming investors. In the UK, that can cost between £10k and £100k. Double check who is expected to take on those costs; some VCs with deep pockets might shoulder the bill.
Once investors start wiring you the money, June Angelides, investor at Samos Investments, recommends using a fundraising platform like Odin or Vauban to pool your incoming cash into one place. These platforms aren’t free — but they can also help keep your cap table clean, so are often worth paying for.
Be selective with where you splash your cash, though. Angelides suggests using a CMS to track the conversations you have with investors and DocSend to safely share your pitch deck and other confidential documents. She recommends that early-stage founders should never pay for pitch training, someone to pitch 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 nobody on the team is particularly design-inclined, be ready to pay around £200 for a pro to fix it up for you.
Finally, that your time is money — think about who’s going to watch the fort while you’re connecting with investors and check in with the senior team to make sure they’re coping with the extra load.