After having given this spiel to nearly a dozen entrepreneurs face-to-face and haranguing Nivi & Naval to do it themselves in a video, I’ve finally decided to take matters in my own hands and explain to you all how to actually close your seed round on AngelList. Call it: “The Scrappy Mofo’s Guide to Raising Money.” Transcript powered by SpeakerText:
Hey. My name is Matt Mireles. I’m the founder of SpeakerText. I’m here to talk to you today about raising a seed round as an entrepreneur. In particular, raising a seed round on Angel List, which is frankly I think where everybody should be trying to raise their seed round. It’s awesome. A lot of entrepreneurs come to me and said,
“Hey, dude. I see your blog. I see your writings, your tweets about Angel List. My start-up’s on there. How does this work?” I’ve harangued Nivi and Naval, the guys who run Angel List, a lot and said, “Hey, dude. You guys need to do video. You need to put more content out there so people actually understand how this process works.” Because it’s totally not intuitive.
And so today I met with another entrepreneur, Chris, from a company called Central.ly, and he’s going to be asking me some questions about raising a seed round and hopefully you will find them useful in your own journey through this a crazy process that is start-ups.
So, to start, can you give us some thoughts on…one, how to initiate meetings through Angel List, and two, you get a meeting, you’re sitting with an investor, how do you close the meeting? How do you get that investor to invest in your company?
Right. So, here’s how Angel List works. Nivi and Naval have tried to make it this open platform where anybody puts a start-up. The reality is it’s a curated platform. And Nivi and Naval and whoever their lieutenants are these days are the curators. And so what happens is you put your start-up on Angel List.
You might get some interest. Most times you don’t. Sometimes you do and sometimes people are able to raise money through Angel List without actually getting any touch from Nivi or Naval. But typically what happens if you’re successful is Nivi or Naval reach out to you. This your company? Maybe you ping them.
And you go out on one of their email blasts. And the email blast is…that’s the curated start-ups of Angel List and that’s like the elite. And any start-up can go on Angel List; not any start-up can get on the email list. And if you’re on the email list, you actually land in the in-boxes of all the top investors in Silicon Valley and the world, quite frankly.
Guys like Mark Zuckerberg are on there. I mean, I don’t know how the hell you’d else you’d actually pitch him any other way. Including top VC’s and angels like Ron Conway and these guys that you’ve probably heard of them if you’ve read the blogs. So making friends with and getting blasted out through e-mail with by Naval is your best bet at getting intros and getting discovered on Angel List.
How often does that email list go out? I think it goes out once a week. I’m not sure. It might change. I think it’s…I think it’s once a week. They probably have a back up. I don’t know. The thing though is once you get a meeting, you know, a lot of people will ping you. A fraction of those people, you know, maybe 50% – depends, different people have different conversion rates – will actually get a meeting.
Some people will just, like, ping you and you won’t get…hear from them again after that. I don’t know why the ping you in the first place, but it happens. Some people will ping you…turn those pings into meetings. You might need a slide dac or some sort of like sendy information so people can like think about and actually understand what you’re doing beyond a little blur that you sent out in Angel List.
Then once you get the meeting, typically what happens is you’ll sit with somebody, you talk to them. You’ll explain. The first couple of meetings, I mean, if you’re lucky, they’ll go really well. Probably you’re a noob and it’ll take you some time to figure out how to actually do it right. So you’ll probably screw your first couple of meetings, but you’ll hopefully Learn how to, how to improve and what buzz words are, are right phrasing or whatever.
People will react to it. So, once you. As soon as you have an investor who’s interested. What you do is at the end of the meeting, they’re, they’re excited. You need to apt. You need to have an ask. You need to say; “All right. So, are you in?” And they’ll say, “Oh, one of the terms.” Say, “Okay, we’re raising, if you’re doing convertible debt, you know, we’re doing debt at a three million dollar cap.
Three, 6% interest, you know, 3-year term or whatever that is. You know, equities on equity terms don’t typically recommend equity for first time counter start-ups. For reasons I’ll get into, but come to terms and say, “Are you in?” And there’s a couple. A couple of things that are really not obvious about this process is that one, oftentimes, entrepreneurs think, oh.
Will ask for less money that will make my life easier because I’m not as confident. It’s a bad idea.
So, what happens is that investors want to be a certain percentage of your round. So, let’s say you have investor who will put in 100 to 250k. And you say,”Okay, I’m gonna raise 500k.” Tell them your going to raise 500k. So, you say, “Okay. We’re raising 500k on a 3-cap.” They say “Okay. 500k. Well, I only wanna be x percentage.
So, with 100k. Well, 250, 250. I don’t want to be that much of a percentage.”
So, I, recommend entrepreneurs, when you’re going out raising money, always say you’re raising at least 750k, 750 to a million because people write you bigger checks. It is just as hard to get a big check as it is to get a small check. In fact, sometimes the smaller checks are even harder to get than bigger checks because.
Often times, the people who have less money, they’re more afraid and they’re less diversified in their portfolio. So, their 10k check – that’s like a bigger percentage of their net wealth or their investment capital than someone who has butt-loads of money and can write a 100k check and not even think about it.
And so, you’ll end up having to spend a lot more time going through the process of some of these smaller investors trying to get big checks. Somebody says “Okay, Im in for 25”. Say “Okay, could you do a 50?” And they say they’re in for a 100. See if they could do 200, a 150 or 250. Fund-raising is a gigantic time suck and a huge pain so you’ll want to make it as painless as possible and the best way to do that is to get bigger checks.
That said, not all investors are created equal, unfortunately because of norms in the investment community. You can’t charge people different prices. You should be able to because not everybody is as valuable. You know, a dollar is not a dollar is not a dollar, because it’s what comes with that dollar that’s valuable.
But let’s say you have some really brand name investor, or even somebody who’s just really helpful and specific to your field and they, but they’re not going to put a lot of money. The value of that person as a signal or as an actual, like, adviser can be very high, can totally warrant giving them maybe a special deal or taking in, like, a small investment.
If you say, some big, you know, big name dude who writes like a 10k check, but it’s a big named dude, say big named dude is in my round. That’s, that’s gonna be perceived and that’s going to signal very well to the market. So, there’s not. As much as I’m trying to give you the rules and the norms there’s not really a ton of rules in the process.
The other thing is, you know some people are going to waste your time and that’s hard to discern on a couple fronts. So, newer angels, who have not been doing it as long, in my experience, make decisions faster and don’t read the docs as closely.
Older Angel investors, especially people who’ve been through the bubble and the burst, they tend to take more time to read the docs and to make you do due diligence. And that means more of your time. So it’s kind of a pain, but some of these people they’ve been through the stuff and so they actually know what’s going on and they can be really helpful and really smart.
So, newer angels, younger angels decide really fast, but may not have as much experience. Older angels tend to take more time, and they also tend want equity over debt. I don’t totally understand what is going through their mind there, but I think it has something to do with going through the bust.
And, so and yes, that’s actually another good topic I want to get into, debt versus equity. What’s the advantages there? So, the thing with convertible debt is that it’s debt that converts to equity at a later date, typically when you raise a series A. And what it allows you to do, is just kind of, you know, typically nowadays you do debt with a cap, so it converts, you know.
It is a discount on the series A, with some cap on the conversion price. That cap, effectively, not necessarily, but is viewed by the market and by most people as a valuation, even though it’s not technically. So if you say you raising convertible debt with a three mill cap, that typically kind of means that you are valuing your start-up as a 3 million dollar pre-money evaluation.
The thing is, is that there’s a lot of other terms that go into investment that will be decided in the series A that you don’t understand. I am assuming you are “newb”, and as a “newb” there’s a ton of terms that you will learn about maybe down the road if you’re successful, that can screw you. Whether they are good for you or bad for you, or you just don’t understand.
Hopefully you have a lawyer who really knows what their doing, and doesn’t just know what their doing but actively explain stuff to you.
And if you don’t hound them and make sure every time an investor wants to say “oh, I want this I want that term, I want this representation, I want this warrant”, say “hey, how can this screw me in this series A, how is this going to affect me down the road?”
Most investor lawyers they know this but for whatever reason they don’t tell it you. I’ve been lucky to have a really awesome lawyer named Heather Miles, who’s been awesome educating me, as an entrepreneur, about, as there nothing, is. lawyers are, can be your best friend in the negotiation, because you can say, “Oh Mr. Investor, I mean I’d love to give you that term, but my lawyer say’s it’s going to screw me in the series A, or it will make me look bad, or make me look weak in the series A.” And so, from what I understand, what happens is when you, this is what Heather Morris is telling me, is that basically series A is on term sheet and then they start looking through all your docs and they say, “Okay how, can this guy be pushed around?” You know, if you give a ton of stuff they’ll have a ton of reps and warrants and whatever and your seed round then they say, “Okay.
This guy is not a good negotiator. We can really push hard enough.” So, look. They’re constantly looking for signs of weakness. And, there’s kind of two extremes of entrepreneur, some who are like, constantly, they’re like, kind of afraid of investors, and they don’t want to upset them,they don’t want to push back on terms, they think they should be like constantly kissing their butt, and there’s others who are saying, “Okay I’m going to leave this.” And they kinda take a stronger…a stronger tack and really drive terms.
I would recommend that you take a stronger tack, ’cause you’ll ultimately represent your interests better. And it’s gonna prep you for any negotiations you do later with later investors and, frankly, with customers. You know, if you are a strong negotiator, you’re going to, you know…you’re gonna to be more successful in business most likely.
If you’re a weak negotiator, you’ll probably get bulldozed by customers, employees, co-founders, and later investors. So don’t let that happen. All that said, if you have a awesome investor who wants to give you money, like, this dude is awesome…work with him. Don’t try to over optimize on price or be nit-pick, especially if, you know, your lawyer’s telling you that the terms or market aren’t crazy.
But sometimes investors will ask for weird things. And, you need to know what that is, and you’re not going to know yourself, so you have advisors and the lawyer can tell you what terms of market. So, yes, push back, get your lawyer to educate you, they’ve done this a lot. Although, they may not be used to actually explaining everything to you and that’s really really important.
Great! So in terms of valuing your company, what are some recommendations for coming up with the valuation of your company and any resources that you recommend.
Yes, so I recommend it, a guy named Jordan Cooper, he’s a, a VC at a Seed fund in New York called Leher Adventures, he wrote a seed stage evaluation guide which is the best document on the level that I’ve seen. Just Google Jordan Cooper Seed Stage Valuation Guide. Basically, what he says is that. Market is anywhere from a one to five, pre-money, one to five million dollar pre-money evaluation.
Why, why, why that, why these numbers? In a way, they are kind of made up. Typically you want to opt for between 10 and 25 percent dilution in a round. Those numbers kind of get you there. You know, if you are in a market where a lot of people want to buy and you know, you can go higher. If nobody wants to buy then you might have to go cheaper.
The higher valuation you ask for, this slower typically it will take to close your route. So you know, and trust me, raising money is just, it, it’s the biggest distraction your, your gonna have. And the seed stage it’s not like you have a ton of employees, where you know the distraction of fund raising is diluted by everyone else being productive.
If, you know, like, I remember for us we had one car in the company And,and as my co-founder who did not let anybody else drive it. So, if we were going to pitch an investor, we, all of us had to get in the car and drive there. Huge time suck, nothing got done, it was stupid. You know, we’re broke, so it’s not like you know, we were like paying ourselves every other month.
So it’s not like we could really like, let’s buy a car or something. You’re probably broke too, so pricing things to move is, is, is good, as Nivi and Naval liked to say. When you are in the valley, you’re going to get a higher price typically, than the same company would in New York. Unless you’re a super hot company, in which case you’re going to get the same terms anywhere.
But generally, a Valley company has higher valuation because there’s more, a greater supply of capital. Even though, there is, there is greater demand. Venture, you know, capital is mobile, venture capitalists are lazy, you know. So, they probably want to meet at the coffee around the block from their house, in Palo Alto.
That’s life. That might be a good reason move to the valley, at least go the the valley when you raise money. So I started this quiet company in New York. What I advise every entrepreneur who is in New York whose talking and thinking about raising money I say “Go to the valley to raise.
There’s some great investors in New York, Jordan over at Lereh Ventures, Chris Dixon at Founder Collective, great companies. But there’s not a lot of them. Not a lot. VCs, early stage VCs, there’s a handful. Anyway so, go to the valley, you’ll get the best price and fill out the round where ever locally.
That’s the best way to optimize your price.
That also means going on a plane and coming to the valley, which is going to be more distraction and more time. So, and time is critical, so factor that in…only you can make that decision as an entrepreneur was.
so that’s good. There’s one other thing that you didn’t mention that was pretty valuable from our topic before, talking about using the same note, and giving out advisory shares.
Oh, yes, OK, yes, this is a good hack actually. So here’s this whole idea of high fidelity fundraising. Paul Graham, founder of Y-Combinator, wrote an essay about this last September, around that time, September or October. So, P.G. wrote this essay, if you don’t read Paul Graham, Please, please, please, this guy is really, really smart.
He’s one of the smartest people out there.
He wrote an essay called “High Fidelity Fundraising.” He has a bunch of essays about raising capital, how did you learn, how much you think about it”. I recommend reading all of them, if you’re not already. You should be and if you’re not you probably don’t know. You don’t have a clue until you…There’s a whole thing about just reading and absorbing as much information guys like Paul Graham and Chris Dixon and Fred Wilson and Mark Sustor, so get him for me.
Paul Graham, great dude. The whole point is he had this whole thesis of high fidelity fundrasing. What that is that different investors get different terms depending on when they come in and how valuable they are.
My understanding is that some Y-Combinator companies have been able to do this. And P.G.’s theory was “Okay, this is going to become a norm in the broader start of community” and I don’t see that happening. Because, while a handful of super hot YC companies can do it, investors hate it.
Not all investors are created equal, not all, dollar is not a dollar is not a dollar. But, unfortunately the investor community does not like, they have norms and like it or not unless you are super hot you have to abide by those norms. So high fidelity fundraising, great idea, it doesn’t really work in practice.
My experience personally in talking about those start ups. That said there is some hacks you can do. So the first money you get is gonna be the hardest and later investors are going to be easier it’s like, at the very least they’re like, well, I’m not going to be the only dumb ass investing in this company.
So, the first guy, typically this guy, the first person to invest, their the hardest to get. Now, they might want a cheaper price, and you want a higher price, obviously, so what do you do? they say, say “I want a three million dollar treatment evaluation, three million account”, say “I want one and a half” and so what you can do as a good little hack, is you can give away advisory shares…and so you give them a three million dollar cap on the note but then they get common stock as advisory shares to give them a lower effective valuation.
Not every investor is going to go for this, for good reason common stock can, they can be deluded, they’re not going to have control, it’s going to be deluded by later investors. So, there’s a bunch of reasons why common stock is less valuable than preferred stock, but some investors might go for it and it’s a good hack because the thing that you will learn is that every investor wants the same terms as the last guy.
Nobody wants to pay more in a round, and so, it is in your interest to get the first investor to commit at the highest price possible,and we do a bunch of acrobatics to get that price to be as high as possible. And advisory shares is one way to do that, not always go for it though, so just a heads up.
Because man, that’s everything.
Let’s see here, I got some other stuff. That’s all the notes I have.
Oh, closing. How to close.
So, in terms of how to close, you mentioned this thing called Tout.
Okay. So here’s one more important thing actually, how to close… actually close investors. So you say, “Okay.” They say, “Okay. I’m in for, you know, 50k, 100k, whatever.” So what do you do? Close immediately. And so how do you do that? So get…hopefully you have a good lawyer. Use a well-known, established firm.
Just never ever use a firm that’s like not one of the top firms unless it’s like people who came from the top firms. There’s norms around start ups that, even though lawyers are smart, you know, if they don’t understand, they haven’t been in the world, they’re…it’s gonna be bad. So like stuff like vesting, always vest your shares.
Anyway, so if you’re using a firm like Gunderson, which is a well-known and well-respected firm, Although with that said, remember the Demesius [sp?] give them more business than you will and so there’s ultimately a conflict there, but that’s the nature of the game. So, Gunderson have a form document.
So, you go to Gunderson and you say to your lawyer, you say, here look, I want the Gunderson form docs. The form Gunderson note and the most, you know, Vanilla, you know, founder friendly form note, and so you say, okay. Hey, investor. It was great meeting you today. Please confirm that you’re in for 50k and you are a California resident, you know, the note, the note purchase agreement is attached and the form, and the note purchase agreement and the form note is attached.
Please sign and return. And be sure to, you know, CC you know our awesome lawyer, you know, joeschmoe@gunderson or whatever .com. You know, CC’ed.and you send it to them in the email include the wire instructions and so literally all they have to do is just print something out, sign it and then wire you the money, and do that immediately.
And that’s another valuable thing about doing convertible debt. Is it debt you don’t have to wait until anybody else isn’t around or anybody else is committed, just say “you wanna close, you want in?”…ok, now…invest now, get money now Otherwise, you know, the market crashes, things happen, someone’s wife you know, the wife divorces them, whatever, and that money you thought you had can disappear.
Or competitor launches and lots of, lots of reasons why you need to close immediately. Another thing is, once you have money in the bank. you’ll have more leverage going into later investors. Real leverage and psychically, you’ll have the cash in the bank. I mean, you’re, like, dude, I got the cash.
You know? if you don’t want it, I’ve already got the cash, so you are just gravy already on top of what I have and you end up being more confident and that plays in the negotation. Those cues people read, so as soon as someone commits, email them the note, wire instructions, cc the lawyer, tell them to sign, ask if they have any questions.
Don’t be a jerk. These are investors, people. You have a long term relationship with them for the same time. You need to be strong and to lead. Now sometimes or often sometimes your dealing with one of the micro VCs, like a Roger Ehrenberg out of New York or a Michael Dearing out of – In the valley, Harrison Metal Capital.
Oftentimes, these guys will want to do equity, and. they will want to set the terms and they will really want to lead the round, but they will probably put in at least five hundred k in the round, for doing 750 or a million. That is a big chunk right there and these really awesome, good dudes and, and they have a name and a reputation and so, they’re going to want to lead the round and I would say you’d be ill advised to say no, that you want to lead in that situation.
What I’m talking about is the self-led round which is very common when we are dealing with small angel investor. Leading a round is a big pain for an investor so most of them dont want to do it. And so I am assuming that you will not have a lead in this round, and so you lead the round and you can do it in ways that are optimality friendly to you.
You never want to screw an investor. Like these. people, your being an entrepreneur, it’s not just a short term game. You’re starting a career in entrepreneurship. So you are making a name for yourself in the valley and people are going to know you, they are going to work with you, and they are going to say “yeah youre legit, this dude is smart” You always need to keep promises and, and act honorably. But that said, it is business and you do need to advocate for your own interests, and, leading the discussion and closing quickly is a very good way to do that. Actually, that makes me think about one other thing.
The value of convertible debt and why convertible debt is good. So there is a question – convertible debt, equity? People, investors tend to like equity, entrepreneurs like debt, and there’s a couple reasons for that. Historically people would say debt allows us to push the valuation discussion later.
Well with the rise of the capped convertible note it effectively sets valuation, not technically their situations in which it doesn’t happen. But generally, it kind of sits by valuation. So what? Well, there’s a lot of terms that you’re not going to understand, like liquidation preferences. Like representations and warrants.
And, when you do equity, there’s just a ton more diligence. It’s in a much, much slower process, and then you have to get really close on the same day, and it’s just a huge administrative hassle that’s eating into your time. And assuming that you are one hundred percent to thirty percent of your company, or thirty three percent of your company, losing thirty three percent, or fifty percent productivity to the company for weeks and months is a horrible, horrible thing to do. So debt closes faster.
Another thing that people don’t talk about is founder issues. Often times a seed sage company, or some founder who you know–Founders leave, they quit, they get fired. If you are a single founder, you brought on other founders. You know, you realized like oh, wow. This person is really awesome and I want to give them more equity than, than we initially negotiate it.
By having debt, you can do that. and you have total flexibility around that. You don’t have to, you know, worry about investor, you know, because investors, their shares will convert later on Series A. And by the time Series A happens it’s going to be, you know a tidy situation. So, if you have a founder leave or something and you know you need to issue more shares because it’s bad blood or something and you have to pull the Zuckerberg on them or, you know, you have a new founder.
Yes. That’s bad. That’s the worst case, a downside or onside cases, you bring on a founder. At the end, they’d be more valuable than you usually thought and you want to give them more equity. Well if you have existing investors. I mean you want to issue more shares, that can be very complicated then you’ll have to explain to them, you know, and then it could lead to awkward conversations.
But with that you can just be. You know you can deal with it, you know, and then once the problem is solved you e-mail the update to the investor. by the way, we had this problem once upon a time. Problem solved. You know, and I say,” oh, okay, problem solved. Alright? Great”. So it gives you a lot more flexibility there, and that’s really valuable because teams do chang,e and founders leave and new founders come on all the time in these companies.
You want to give yourself as much flexibility as possible in those situations. Anyway, I’m, like I said, I’m Matt Mireles, the founder of SpeakerText, and hopefully you’ve found this a useful guide for raising money on AngelList today. Cheers.