FUNDRAISING Jargon is quite complex for first-time founders. Here is a thread of some phrases & terms you will hear often during fundraising. Here is what they actually mean
📌 We are offering non-dilutive capital It simply means that you receive capital for your business without having to give away any ownership of your company Sometimes, these rounds can be capped or uncapped convertible notes as well. So, what are convertibles?
📌 Uncapped Convertible Note: (1/3) Convertibles are a way of investing in startups where the valuation of the startup is decided at a future date. This helps very early or pre-seed startups since it’s difficult to agree on what is the right valuation of the company.
(2/3) Let’s say a startup raises $1M as a convertible (with a $20M cap). So if the company’s next round valuation is $30M, then the startup benefits since the convertible will convert at lower of the $20M cap or $30M – thus dilution is $1M/$20M = 5% lower than the normal method
(3/3) “Uncapped” means that there is no cap on the convertible, so in the previous example, the dilution for the startup will be $1/$30M = 3.33%, which is even better.
📌 What are your pre and post – valuation? What your company is valued at before and after the funding round is what constitutes pre and post valuation. If you are raising $2Mn at $15Mn post the round then pre-money valuation is $13Mn and post-money valuation is $15Mn.
📌 Did you get the term sheet? all the basic terms and conditions of your company’s funding round are included in a document called Termsheet It has company valuations, investment amounts, the % of stakes, anti-dilutive provisions, voting rights, liquidation preferences & more
📌 Why don’t you raise through a syndicate? Angel syndicates: when a group of individual investors come together and invest in your early-stage startup, they are called Angel Syndicates. @AngelList, @letsventurein are famous platforms for good angel syndicates
📌 Did you get the shareholder agreement (SHA) This is a contract between the two parties (you and your company’s shareholders) that contains the rights and obligations of shareholders along with how the company should be operated. This comes post signing the term sheets.
📌 So, who is leading the round? it typically means that the lead investor takes charge of the round, and sets up terms for the other investors in the round to follow. Lead gets to decide on terms like valuation, liquidation preferences, etc Other investors ‘participate’.
📌 How much are you diluting? Dilution occurs when a company issues new shares that result in a decrease in existing stockholders’ ownership % of that company If 2 founders own 50% each Startup has raised $1Mn at $10Mn Post Val = 10% dilution Now the split is 45%, 45% & 10%