June 26, 2014 | 4-minute read (629 words)
We recently participated in a panel discussion and workshop at Ubifrance. Nicolas L. Baze, Partner at Partech Ventures, Carlos Diaz, CEO at Kwarter, and EGFS’ Chief Strategy Officer Glenn McCrae covered raising funds, how-to pitch VCs, and potential sticking points around valuation. Check out the full video or read my take for some of the highlights.
1. The role of a CEO — As an entrepreneur, in addition to setting and communicating your vision and mission, one of your main roles is selling your company to investors.
2. Valuation — Know what these terms mean:
Fully-diluted — This includes all issued stock and anything that could be converted into common stock (typically after an acquisition or IPO), such as your stock option pool.
Pre-money valuation — The value of the company prior to investment, calculated on a fully-diluted basis.
Option Pool — An important piece of your hiring and compensation strategy, this is a reserve where you designate equity for key talent (typically 1-2% each). This is a delicate dance. The larger the pool, the more dilution you face, but it needs to be big enough to attract and compensate staff. In Silicon Valley, 20% is pretty typical during Series A funding but the range is from 10-20%, with an average of 15%. Negotiate the size and keep in mind that it will change over time.
3. Negotiating Strategy — Weigh realistic comparables, your relative bargaining leverage, and your acceptable valuation range against the fund’s investment rationale. For example, understand potential investors’ objectives in terms of desired stake (This varies, but for Series A investments, a VC might want to own a 15-25% stake) and the amount they can put to work.
For me, this also plays into milestone funding. That is, identify your milestones and calculate how much capital you need to achieve them before you seek funding. You’ll raise only what you need and minimize your dilution. Investors like this approach too, because it allows them to tie their funding to concrete targets.
4. 409A valuation — A requirement of Sarbanes-Oxley, this is a Fair Market Value analysis of a private company’s common stock. It will ultimately affect every employee who receives options and the members of your company’s board. So put in the effort to get it right. For details on the process and what goes into setting a valuation, read my prior post.
5. Your investors will become part of your board — It’s really important to pick the right partners: those who’ll be both a good fit and deliver value-added beyond money. Look for:
And don’t limit your interactions to board meetings. Proactively communicate and engage them whether it’s to keep them updated on business developments or for advice.
- Ability and willingness to make key introductions
- Advice on strategy and tactics
- Relevant expertise
Have more questions on funding or need help with valuation? Tell us about it in the
comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.
UBIFRANCE, "the French Trade Commission in the USA," offers a comprehensive range of products and services including consulting, introductions, and assistance with promotional efforts to French-based companies seeking to expand internationally. The team comprises 85 export professionals in 6 locations: Atlanta, Chicago, Detroit, Houston, New York City and San Francisco.