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Fundraising 101 According to a VC, CFO, & Equity Pro

Chris Schwalbach  ·  September 29, 2021  ·  34 min

Access Ventures hosted a Q&A discussion on how to structure your round and cap table with experts from Carta & AVL Growth Partners. The recording and transcript are now available.

Is this your first swing at cracking VC diligence? Are you trying to figure out what type of investment vehicle to use? Are you unsure of what is an appropriate valuation?

Hear from top-notch leaders in the space about everything you need to know when raising your first round.

 

This session featured VC Kira NoodlemanBee Partners; CFO Rich FrankenheimerAVL Growth Partners; Equity Pro  Carta; and moderator and Head of Sales at AVL Growth Partners, Roman Villard.

What are investors looking for in founders?

Roman (AVL Growth Partners):

This question is around founder fit. Founder fit is something that can get overlooked by investors. Are you looking for a specific skill set or experience from a founding group? Are you looking for one founder or co-founders? What are you looking for in that leadership team of a company?

Kira (Bee Partners):

Great question. You know, it’s an exception that we’ll invest in solo founders. 

We're looking for a co-founding team, usually, two or three founders that have a yin to their yang, you know, know their strengths and weaknesses, and are really balancing that with their partner. 

I would also argue being in a founder or investor relationship is like being in a marriage. We're really looking for folks who have seen some hard times together and know, honestly, one of the biggest things is knowing how to fight. And essentially having a really shared, cohesive shared vision of where that company is going to go. 

I think with solo founders, at least for us, because we have this hands-on partnership model. And so you know, we kind of joke we're Chief Psychologist Officer, but you know, those founders will lean on this more because they really need to talk through everything. 

Being a founder, it's a team sport, you're on this journey with your family, with your friends. And so, I think I think it's harder alone, but certainly possible. It's all very contextual.

How does vision play into value?

Roman (AVL Growth Partners):

Yeah, that's interesting. I'll give you one more quick question. You talked about having that vision of where you want the company to go as a founding team. What are the things that you've identified as differentiators between a VC, investable company versus more of a lifestyle-oriented company, and what are those vision-type items that you look for relative to making investments?

Kira (Bee Partners):

Yeah, it's a good question. It's a hard one. I think of it, like, are you building a foundational business of the future? 

And so there's this concept of a stone dropping in water, and then there are ripples around it. We're looking for the stone. 

If I were to put this on paper, I'd say I'm looking at your market size, and perhaps a really easy metric, in five to 10 years could you get to $100 million in revenue? 

But I think it's just this question of like, are you swinging big enough? You know, what is the biggest and most impactful version of what this idea could really be? And also, ideas are cheap, and it's all about execution and strategy, and scaffolding to get there. So can you really make that case?

What are the primary investment structures and what should you consider during a first-time raise?

Roman (AVL Growth Partners):

That's great love that. I want to shift over to Rich here. As a CFO, you've assisted in many different forms of fundraising for your clients. Can you walk us through what the primary investment structures are and what to be aware of in those arenas? And, as a first-time founder, what should you be considering as part of a first-time raise?

Rich (AVL Growth Partners):

Sure, thanks, Roman, we could have a long discussion about these three different types, and we don't have time for all of that. 

In general, I'm assuming, since we're gearing this towards first-time founders, and the first cap raise, some people may or may not know the differences. Basically, an equity round, a price round, is going to be something that you have to put a value on the company, which becomes difficult at an early stage. The other two that we're going to talk about, seed as safe or convertible debt, you're not selling equity, so you don't have to value the company, which makes it easier. It's less expensive to do. The valuation will happen at the next round. You know, when you go to raise 2 million, 3 million, 5 million, then it can be valued. So you kind of do away with that whole valuation discussion, which can be difficult sometimes. 

As a first-time founder, you have a lot of pride in your company, you've got a great product, great market, but you don't have a lot of data points to really share with the potential investor. So a lot of times for a first-time founder and a first raise, I tend to see more going towards the safe, which is a really nice vehicle because it's very founder-friendly, a little less so for the investor (and some investors might push back on it because there are some issues that you know, what do I really own? It's not debt, it's not equity. It's kind of like what do I really have?) But, it's become so much more acceptable now. 

A safe is super easy to do. You can get it online, you can almost do it for free. And what you're doing then is raising a relatively smaller amount of money, maybe it's half a million, maybe it's a million, maybe even a million and a half. 

Convertible debt adds a little more meat to that, it becomes actual debt, you're gonna pay interest on it at some point. So there's some more value to the investor. 

And again, with all of these, there are pros and cons, right? So you don't want to raise too much with convertible debt or a safe because it will add to the dilution later. You don't want to raise three or $4 million convertible debt. You have to be prepared for the fact you're given a discount when you are doing that. So you're providing a 20% discount because their money is there today and when someone comes in later to invest, that person who came in today will get 20% off that price. That adds to your dilution. So you want to kind of limit how much you raise. 

A lot of it depends on how much you want to raise. And a lot of that has to do with how much you think you want to raise versus how much you probably should raise. So that's a whole other discussion there. And a heads up on those sorts of things. You know, it's not uncommon for a founder to say, “Hey, I need to raise $2 million.” The real question is, do they have enough traction at that point, to really justify what the value would need to be at $2 million or $3 million? 

You're going to need to have two to three times that on the value of the company, whatever you're going to raise. So it would have to be worth four to $6 million dollars? And do you really have enough information on your market, your clients, is your revenue built big enough to really justify that to an investor? And if it is great, you can look at a price round. And you know, bring in more money upfront, you don't do it again, because no one wants to go raise money all the time. 

One of the cons is that it does take more time to close a price round than it does to do a convertible debt or a safe, it might take the same amount of time to find the money. Once you find it, there's all this negotiation and paperwork and legal work that happens with the price round. It gets expensive. And you add another couple of months to the closing process, and normally at the early stage, you want to get back to work. You want to get that product finished, get some more clients, get to that next milestone so that you can have a higher value on that next round. So that's kind of the way I looked at it.

What is a safe and how does it impact investor perceptions?

Roman (AVL Growth Partners):

Yeah, that's really interesting. I suspect that as soon as you said safe equals founder-friendly, a lot of ears perked up in the audience. You mentioned safe is more founder-friendly may not be as investor-friendly. If somebody is looking to raise a safe, what are the things that they should be aware of relative to how an investor may perceive this not as investor-friendly?

Rich (AVL Growth Partners):

Yeah, so with a safe, it's basically an opportunity for a piece of paper that says you have a chance to buy some stock later at a discount. That's all it is. It’s not on the books as debt. So if something happened with the company, it's not that you're not paid back. So there's that bit of a pushback you might get from an investor. 

Also, there's no interest on it. And some people like the interest, I'm going to give you my money. I'd like to have some interest, it also creates tax issues, you have to send out 1099s. So people didn't even get money for their interest. That's a whole other thing. But so there are some issues with convertible debt where you do get the interest. And there is a little beefier document that goes with convertible debt. 

You can add some more language to it. But to answer the question really Roman, so many investors are used to a safe now, it's become much more commonplace than it was two years ago, four years ago. And it's a very nice way for a first round to happen if you can convince your investors that it's okay. 

If not, you can roll back into convertible debt. It's an easy switch, and then you make them happy and do the convertible debt. 

How much should you raise and how does valuation work in your first found?

Roman (AVL Growth Partners):

Yeah, that's great, super helpful. Shifting over to Jeff here on the equity side of things, you know, raising a first round is challenging, knowing how much to raise, the valuation, knowing how you benchmark across an industry or a peer group. What has Carta observed? What have you observed as far as benchmarks and how to think about those types of things? And what kind of resources are available in that space?

Jeff (Carta):

Yeah, for sure. I mean, I love hearing Kira and Rich's input here because it's fascinating that you're seeing these trends with more and more safes being used out there. And trends like that are things that I think you can look for, as investors or as a founder is what is acceptable out there. 

At Carta, we recently saw that the use of safes has actually been more than what you're seeing convertible notes used and it passed that the first time about a year ago, based on the data that we've seen, but there are some other benchmarking data that I think, you know, founders can be aware of, as well, especially in the early stages. It's probably a little easier to look at some of the benchmarks because in the environment right now, there's a lot of confusion on what a Series A and a Series B is. 

It used to be a Series A was a three to $5 million round. This is a long time ago. But now, here in Utah, we just had two companies this past year do $100 million seed Series A rounds. And so you know, that's a pretty good range from 5 million or to 100 million. 

And so for some benchmarking data, sometimes you have to kind of look at that by the amount that you're raising, and not just go off of stages. But I did, I pulled up some information - as you can imagine, Carta has over 20,000 companies using the software. So there's a lot of data, you can kind of pull out of that. One of the interesting things I saw with this was in regards to pre-seed, so companies that are raising less than a million dollars, you're actually seeing that there is there's something in the safes, called a pre-money safe or a post-money safe. And that can be, you know, very different. 

It's important for founders to understand the differences there. But Y Combinator, which is where the safe came from, originally, they have taken away the pre-money safe, which actually can be a little bit more founder-friendly. 

And the post-money safe, which can be a little bit more investor-friendly, especially if you've got multiple safes on top of each other, the usage of that you would expect that it would now just be like 90%, everybody's using the post-money safe, because that's all that's available on YCS C's website. But you're actually seeing that 65% of safes are still the pre-money safes, which is kind of surprising. But what it says is that most attorneys or most law firms still have those documents and that's what they're pushing because they can be more founder-friendly. So the other thing that I don't think we did cover on the safes was the valuation cap. 

So even though we're not setting a valuation, the company it is very common to have a valuation cap associated, whether it's a safe or a convertible note. And one of the things that we have seen is that those valuation caps are increasing. And so I think you can look at it one of two ways: one, valuations are going up, which they tend to be right now, but also I think investors are getting more comfortable with safes and higher valuation caps and doing larger amounts on a safe and those are two trends that you're kind of seeing, just in terms of benchmark data for kind of that specific area, if you're raising, you know, kind of a less than a million dollars, the median valuation cap that we're seeing is $5 million. Again, this isn't something to just put out there and say, “Oh, well, that must be our valuation cap,” or whatever. But that is a good data point to kind of benchmark things against. When you look at the 25th percentile. I wrote this down, it was $4 million, and evaluation cap, and at the higher end on a 75th percentile, it is seven and a half million. So I mean, if you kind of look at a Florida seven and a half million dollar valuation cap that seems to be in line with the benchmarking data that we're seeing there. 

And then you can kind of take that up and say, “What does a typical seed round look like?” And then you start to get into things like when you're doing a seed round, what percentage of companies are doing a price round versus a convertible round? And right now, for rounds that are one to $5 million that you're raising we're actually seeing that 26% are priced rounds, and 74% are a convertible, so either a convertible note or a safe instrument. So it’s interesting data and it's kind of fun. As a founder, you're able to access some of this data through benchmarking tools like Carta, or Pitchbook, and things like that.

Roman (AVL Growth Partners):

Yeah, and that data is so valuable at that stage just to be able to crowdsource knowledge about how to, you know, effectively go to investors in a way that they're accustomed to that it's relatable that they can really envision investing in so that's super helpful. We have a couple of questions here in chat. I've got a couple more off to the side. First, it looks like Robert may replace his attorney with you Jeff because it looks like you and Robert’s attorney were saying the same thing, so it's good to have some affirmation.

Jeff (Carta):

I better clarify, I do not give legal advice. So anything I say is not legal advice.

What constitutes "readiness" for growth?

Roman (AVL Growth Partners):

That's great. We had a question come across from Kiera, you mentioned when you're ready to grow when you're ready to take that next step of investment, can you characterize what it means what you guys look for when a company is ready to grow?

Kira (Bee Partners):

Yeah, it's so contextual on the company so we'll get a lot of deep tech and what it might mean is they have a base product, and they're exploring, maybe trying to get seven different applications lined up to really test that product, for example. So that's not even growing into market, right, a lot of deep tech you’re years and years from getting to market, but you have some proxy for that and a way to show meaningful progress. I think another way to back into this is if you're given a chunk of money, and if it's a pre-seed, you know, to me (I'm going to qualify for you guys if you want the way I'm thinking about pre-seed and A) but I see tech or market risk as evident, and we're buying one of those. You're super early, and so what are you de-risking, and then I would say you should be 18 to 24 months where you’re meaningfully de-risking where that translates to your next round of financing. So if you can define that and have a clear path to get there, that's very compelling.

Roman (AVL Growth Partners):

That's fascinating. I'm not sure that I've ever seen a slide on a pitch deck addressing precisely when a company is de-risking, but it could be a very interesting data point to put forth as part of your fundraising pitch. That's awesome. A question was to Rich and Jeff from Robert here, can you combine a safe with straight equity, and is this commonly seen?

Combining a safe with straight equity: common or no?

Rich (AVL Growth Partners):

Well, they'd be obviously two different investments, and the terms would be different. So combining a safe with a price round, I have not seen that. I've seen a safe, and then a priced round right after it. And the safe would roll into the priced round because you raise money quickly, and you raise the safe late, but you had some people who wanted to do the bigger round, you couldn't quite get there. So you almost bring suit with a quick, safer convertible debt. That's not uncommon at all to do that. It doesn't mean you know, as Kira said, it's great to raise for 12-18-24 months. But sometimes you just need that bridge to get you to the milestone, that's going to give you the opportunity to go out and get a price round. So raising a quick $250 or $500,000 on a safer convertible debt and then, you know, a couple of months later, you've got everyone lined up for your other round, good for you. You know, that's great, but it would roll. I haven't seen it where the safe would stand alone with a priced round. I've seen a safe after priced round, or convertible debt, again, as a bridge to the next priced round. So that I've seen, but doing one where it doesn't roll into the other, you know, there are thresholds normally that are outlined what qualified financing is, and you may not have hit that qualified financing with the price round. That could happen, you know, normally it says qualified financing is anything greater than 1 million or $2 million. So maybe you did a small priced round that fell under that. You could keep the safe out there and have your small priced round. I'm just throwing out some different combinations that might account for what the person's asking. But normally it comes in, one would roll into the other.

Jeff (Carta):

Yeah, I was going to say the same thing, they might, you might see a bridge. I mean, I've invested in companies where, you know, three months later, you do a safe note, and you get a 20% discount. And three months later, they do a price round and you know, you're in great shape. In that case, you don't really need a valuation cap, because I mean it triggers it so fast, which is great. But on other ones I've also seen deals where they've done a safe. In fact, I just saw a deal where they did a safe agreement for early investors, they've got a discount in there. But they did put a cap on there, fortunately, because the company then raised, it was like a $100 million safe round. I mean, it was a huge safe round. I've never even seen one that big, but if you look at that, now that first save, no, it's not going to convert until now down the road a ways later. And so it's a good thing that they had a valuation cap on there. Otherwise, they're just hanging out there for it with a 20% discount for who knows how long. So interesting dynamics and things that can happen with safes.

How does equity work with accelerators and incubators?

Roman (AVL Growth Partners):

Yeah certainly. We've got a question from Abdulah here, asking about going through an incubator accelerator program, and as part of that, they've taken a percentage of equity in the business for services. The question really revolves around, is that pricing of the value of the company even though they haven't really started operations or how does equity typically work at the accelerator or incubator stage to the panel?

Kira (Bee Partners):

That’s an important question. A lot of you are probably considering accelerators. An easy benchmark varies from this, but, you know, YC offers 120k for 7%. You know, you've got, like, what is that 22 million cap really. So it really prices you at a pretty low value. And then if you compare, so do a pre-seed from like, Bee Partners will give you 750k or a million dollars, and will expect to take 10% of your company. 

So, you know, accelerators are much more expensive. And then maybe on the other side, pre-seed firms are pretty hard to find. A lot of folks who say they're pre-seed, really are seed, and they want some traction. And also, it's hard to find folks that will lead rounds. I mean, we lead 70% the time, but like, a lot of folks, they leave and they don't so I think there's a lot of ways to weigh it, and I think it should be about strategically, what are you missing at this point? What do you need support with? Do they have domain expertise that really helps you out? Are they going to get in there with you and just, you know, build the guts of the company? Startup 101? And is it programmatic? And I think it's a little bit like you'll get what you make of it. I certainly know plenty of founders have gone through YC and TechStars but it's a bit of a free-for-all where you really have to manage up and take advantage of the resources when they arise and build your relationships with mentors, and so on. So there's value to be had. And I don't know, in a firm like ours, I mean, we write seven checks a year. So you have so much of our attention. So yeah, you know, it's just pros and cons. And, I think an accelerator could be if you're still doing customer discovery or just have some key building blocks that aren't quite there. That accelerator could be the path. But I would argue if you're set with what you're trying to do, then VCs are a better bang for the buck.

What to know about the friends and family round.

Roman (AVL Growth Partners):

Super helpful. I hope that answered the incubator question there. Rich, a question posed to you from Jimmy, in relation to initial traction. So not everybody, most folks don't have a network of high net worth individuals that are willing to throw money at a friends and family round. So the question revolves around how much traction should you expect to get out of a friends and family round ahead of looking at a five to $700,000 pre-seed?

Rich (AVL Growth Partners):

So are we talking about, you don't want to go for the pre-seed yet so you just want to bring in some money to see how far you can get is that? 

Roman (AVL Growth Partners):

Just trying to explore how much runway should you look for out of a friends and family around ahead of a seed round.

Rich (AVL Growth Partners):

So I mean, you certainly want to have your product, I mean, ideally, when you're going into your pre-seed round, you want to have your product ideally out the door, and you have some people buying it. So you know, getting enough money from friends and family to get to that point is ideal, you still could be pre-revenue, but you can have clients, and so you're showing traction with your clients. So getting your product done is kind of a key thing. Sometimes, you know, it depends on what your product is, you've got to have the money to get the product out the door. So you need that pre-seed just to get the product out the door, you can be pre-revenue. And, you know, you could really be pre-product out the door, and you can still raise, you know, a pre-seed round for sure if the concept is good and the market fit is right and the team is there like Kira was saying. You have all those elements then that could work. But you know, ideally, you've got your product done so if you need to raise money to hire some developers to finish your app or whatever you're doing, then I would say that's the best way to go. 

The real question is, how do you reward your friends and family that come in? That's a question, is it alone, do you do something? You know, you see a lot of different things done under the table with friends and family that have to get sorted out by the time you do that first round so you have to be a little careful with that. But you know, we'll have pride if you price it and say, “Hey, if you give me $100,000, I'll give you 10% of business because I haven't even started,” the real question is, is that going to come and bite you when you go to do any sort of value on the next round. 

And again, if you're doing a convertible debt after that, it shouldn't really play into it. You know, you could have had a semi-priced little friends and family round. And then you do your convertible debt or safe. There's no valuation, there is a valuation cap, which Jeff talked about, but it's kind of a soft valuation versus a hardcore valuation that happens with the price rallies. That's the way I looked at it. And that $1 million valuation that happened when you gave them 10% for their 100,000 kind of gets forgotten, by the time you do your real price round, it shouldn't hurt you too much. I don't know if that helps.

How far along should my product be?

Roman (AVL Growth Partners):

I think another point to that, too. And Kira, feel free to chime in on this since this is your area of expertise. But I don't know that there's an expectation to have a fully developed product or service at the pre-seed stage, because investors are looking at the founding team to Kira's point, and they're looking at the potential of the product or service. So you don't have to have a fully iterated suite of products or services with a perfect product-market fit at that point in time.

Kira (Bee Partners):

I mean, to chime in there that, you know, if it's built upon the foundation of product-driven network effects, to kind of more of market risk and attack risk so like less deep tech, I'd say we want to see your vision of your MVP, kind of like your plans laid out. But honestly, no, we don't need you to have a product out the door. We don't need you to have customers, none of that. To Rich's point, I would put us in the angel friends family stage. And so there's not so many of these things at play there. But, pre-product is certainly fine for us.

Jeff (Carta):

You know, one of the things I've seen founders struggle with is getting to that product-market fit. I think that's so key. And they have to at least be thinking they’ve been talking to customers and knowing that they've got a problem that they can solve. And I love what Kira said about the problem founder fit. Have they defined a big enough problem? And have they validated that there is an actual problem that needs to be solved? And are they the ones to solve it? And in order to do that, you have to talk to potential customers. And so it's the founder’s responsibility to go out and talk to customers, validate the problem, and then demonstrate that they are the ones to solve that problem. Not early stage, I think that is so key. And I again, I love what Kira said about that.

Kira (Bee Partners):

And if it’s helpful, I'm happy to share kind of like, you know, to the points made earlier, it's very variable to help folks define a seed versus pre-seed and so on. But, I think a pre seed like zero to one, you know, pre-product, everything we've said, I would call that sub $1.5 million is a full round, I'd say seed is sort of like just you've got some early traction, but your pre-product-market fit and your seed round is made so that you can secure that product-market fit. And I would say that round’s between two and $4 million. And then talking about the Series A, it's $5 million and above, it's interesting because it's such a range. One of our companies is raising a $25 million, Series A, it's like, the numbers get wonky, but 5 million and above and you know, you're at the growth stage, you've found your product-market fit, and you want to press go and scale.

Getting honest feedback for your first round.

Roman (AVL Growth Partners):

And I think it's important when we're talking about product-market fit that you have to escape your own echo chamber of friends and family in order to garner that feedback from the outside world and potential customers. It's so easy to fall into the trap of listening to your friends and family say your product is great, your service is great because my mom would tell me that my product is great all day long. But I need to validate that with consumers in the marketplace.

Rich (AVL Growth Partners):

I was just gonna say with the friends and family which you know, it's unusual to find a group like Bee Partners, which it's super great to see a group like that coming in at a truly an early stage because as Kira was saying, most people say they’re seed round or pre-seed. I mean, normally, you're not having institutional investors do pre-seed, and seed or A and so that's great. So sometimes it really is friends and family. And you have to be a little bit careful how you price that friends and family round if you do it because it's easy to convince your friends and family that you're worth a lot of money. You could overprice it, they put the money in, you got to do that next round. And now you're kind of stuck with that potential down round or awkward situation. So just because you can sell it at a certain price doesn't mean you should, it depends on the investors. So the more sophisticated the investor, the more pushback they'll give you and professional pushback on the valuation. So just be a little careful of that. That's good.

Roman (AVL Growth Partners):

We've got about nine minutes and four questions so we're going to quick-fire these. So Jeff here’s a question, discounts or valuation caps on safe, so you see one is more common than the other?

Are discounts or valuation caps on safes common?

Jeff (Carta):

Yeah, it doesn't have to be one or the other. You can have both and I, the ones that I've seen again, it goes to the investment opportunity, if I'm going to de-risk an investment as an investor, I'm going to probably put a valuation cap on it. I want something out there to protect me, especially with a safe because there's not a maturity date with it, I'm going to feel a lot more comfortable with a valuation cap that says, Okay, if these guys don't raise for another two years, you know, I've at least got a valuation cap that is helping me participate in some of the growth they see over that period of time. If I've just got a discount, I'll just speak as an angel investor if I put in an investment into a company, and I've just got a 20% discount, if that company doesn't raise a round within six to nine months, that's not a super appealing investment in general, for me. So it kind of helps protect on the timeline, I as an investor from an investor standpoint, I'd like to see a cap and a discount, and then I'd take the better of the two.

Roman (AVL Growth Partners):

It's great. I love this question from Jericho coming across, related to what are the two most important skills to develop as a new founder? And then how do you develop those skills? And tied in with that, how much importance do you place on an advanced degree or a B school certification? Any thoughts on that?

What are the important skills and credentials for founders and how do you develop them?

Kira (Bee Partners):

Well, skills I mean, you know, founders come in all shapes and sizes, I think that's the beauty of entrepreneurship. We’ll invest in folks that spent their Ph.D. developing technology we’ll invest in first-timers that came out of school and just had a really keen sense of their market. I think what we look for is sort of an earned insight we call it a deep market insight, something that you know better than everyone else and you know it's a problem and it's on the cutting edge in some fashion. So, pedigree, I wouldn't put that on the list. Actually, one of our founders at one point in his life was homeless. So, I mean, skill-wise, though, I think the job of the founders, and particularly the CEOs is to be a resource magnet, you're attracting capital from folks like us, you're trying to get customers, your first customers are always the hardest, you're trying to sell your vision just as much as you are to the investors to early employees. So I think that can take so many forms. But that, to me, is the key recipe of what makes a good founder is just this resource magnetism.

Roman (AVL Growth Partners):

Resource magnetism, I'm taking a note on that, that's great. And just the philosophy that you’re selling. You're selling a product or service, you're selling to future employees to join the company, you're selling to investors. And that's a good skill set.

Jeff (Carta):

I've worked with companies where they've had a CEO that wasn't very good at sales. And it's hard for them to attract employees. If they can't present their vision, it's hard for them to attract employees, attract the top talent around them, and investors. I think one of the best skills you can develop is presentation and sales skills because as a CEO, or as a founder, it's just critical. Or to compensate for that lack of skill that you might have with some of your other co-founders or something like that.

Roman (AVL Growth Partners):

It's interesting thinking about that resource magnetism, I think about WeWork and the founder of WeWork and just that cult-like following and his ability to sell people to join the company to sell to investors to reach this insane valuation. But on the back end, you have to be able to deliver on that, and you have to be able to follow through with what you're selling.

Kira (Bee Partners):

I couldn't agree more. And, you know, I talked about this yin yang between founders. Often one is the more vision in the right way, head in the clouds, like, almost delusional with what the future can be and then you've got someone who's just like an operational ninja, or it comes in the same person. But essentially, it's really those are the two different hats. And I think they're both equally important and I think teams actually really struggle to find the balance and having enough presence of both.

Which business models are a good fit for VC funds?

Roman (AVL Growth Partners):

That's great. A couple of minutes left here, and one thing that I think might be helpful to hit on is why are VC funds good for some business models and why are they not good for other business models, and what are different differentiators there. Jeff, you're biting?

Jeff (Carta):

Yeah, definitely. I think in general if it goes back to what Kira said early on, is, if you're not swinging big enough, VC is probably not the right thing. And there's a lot of great companies that it doesn't make sense. As soon as you take venture capital, you are now on a timeline and you're going to get pushed. And if that's not what you want, if you don't want to be pushed to say, I need to have a 10x return in the next, you know, five, seven years, on this company, it needs to go from a 5 million to a 50 million-plus 100, probably $100 million-plus company, the venture’s probably not the right path. But you shouldn't feel bad about that. Because, you know, you could have a $10 million company in the next seven years, and own a big chunk of that, and be way better off than owning, you know, 3% of a huge, huge company.

Rich (AVL Growth Partners):

I can't agree more, Jeff. It's easy to go down the path that all your friends and acquaintances are doing, and you get kind of railroaded into this raising capital and giving up 20-30% of your company, and then another 15 to 20% of your company, and then you're gonna raise another round. And do you really want to scale it that big? And to Jeff's point, you can have a great company at 5 million-10 million. You can have a service business where you shouldn't really have to raise any money if you have a service business, so those sorts of things work just fine. So I think you really have to think about what you want out of your company and do some math on it to see what the future looks like owning you know, 80% of the business or 90%, and you give 10% to your employees and what that could mean to the bottom line to you versus do I really want to make something big, which is awesome. You know, that's really great to do, it's just two different things. You don't have to be forced on one or the other. Think through that a little bit.

What is the #1 piece of advice you have for founders?

Roman (AVL Growth Partners):

That's awesome, Rich. So wrapping up here, I got about a minute left. I would love to end with a question to each of you in one to two sentences, what would be the number one bit of advice you would give to a new founder?

Jeff (Carta):

I tell this to all the founders I work with, to make sure you have an experienced and great startup attorney, or advisor because that will save you. I mean, set things up right from the beginning. And keep things simple and standard. A good startup attorney will help you to do that.

Roman (AVL Growth Partners):

Awesome, Rich.

Rich (AVL Growth Partners):

I was going to say the old “be prepared” because it's easy to go out a little too early and try to raise your money and you haven't really done your homework. You think you have until you get to someone who knows the market better than you and they challenge you on things and you look foolish and you realize you just have not done the hard work that's free to do, it doesn't cost any money to do the work. Go do the work and then be prepared and that really comes out when you talk to investors. 

Roman (AVL Growth Partners):

Awesome. And Kira.

Kira (Bee Partners):

Yeah, I'd say make decisions that give you optionality. And what I mean by that is you'll have more options down the road. Yeah, I’d keep that as your Northstar.

Roman (AVL Growth Partners):

That's great. You definitely need to be trademarking some of these things and wrapping up here, Kira, Rich, and Jeff, thank you guys so much. For those of you that have added any questions we haven't gotten to, find us on LinkedIn. Certainly, feel free to send messages and get connected with us that way, and thank you all for joining. 

This Q&A on how to structure your found and cap table for first-time fundraisers and founders occurred on August 24, 2021.

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