Milad Alucozai’s Post

TL;DR: Raising additional funding rounds will force you to sell at a much higher price (investors ROI) and chances of doing so are dramatically lower. Research shows that a VC-backed company will have to exit for 4-10x the valuation of a bootstrapped company if the founders are to have an equivalent payout. True story: A couple of years back, I got a call from a founder who we've worked with. This founder bootstrapped his business to $3M in ARR and then raised a $7M round and he and his founder were diluted to 35% each (~10X on the ARR and 10% ESOP). He asked my opinion if to raise another round or to sell the business. They had received offers for a $75M acquisition a few years back but it was based mainly on earnout and it wasn't a "clean" offer. He estimated he could now sell the business at 50M cash. To be fair, he wanted to raise another round ("to build something big") and I was trying to convince him to sell and not raise another round. This is the main reasons: If you sell at 50M (or even 25M), you're taking home 17.5M(or 9M). At age 30, that is generational wealth. Why risk that for a bit more? Even if all goes well (raising 20M at a 100M post), you'll have to sell the company for at least 5X the price you believe you could get today to give the investors the returns they are looking for. The chances of you actually succeeding and making 50M instead of 17.5M, are just not worth the risk. Unfortunately, he didn't listen.

Cap table is the second thing the investor would ask you after a pitch deck. 📘 It's a plain spreadsheet with shares and corresponding equity in the company attributed to each shareholder. 📘 It gives a clear understanding who owns what in the business, the previous investment rounds, and valuation. 📌 What should be there: - Number of shares of each share class for each shareholder - Corresponding equity % for each shareholder - Total number of shares - Price per share for each class - Valuation – total and for each stake - Date when last modified Sounds very simple, and it is! But (I don't know why) it's quite often forgotten. And when the request comes to share the cap table, it's done in hurry and might miss the important details. Not the greatest first impression for the investment team. 📁 Always, always keep this document up to date. Create separate versions for every update, so you can later look back and retrospectively overview the equity evolution in the company. How many shareholders were in the beginning, when preference shares were first issued or separate shares class (for example Series AA Shares) was created. All this is important for fundraising. In fact, it's important anyways for legal housekeeping. 📁 Do not forget the valuation The shares in the cap table are pointless without the valuation when you need to show the cap table to the investor. It's a must for the overall understanding of the potential stack value before any financials are shared. This is also a base for any term sheet negotiations. The more specific and accurate numbers in the cap table, the best deal you get. Put the valuation in the summary column and it's always there. 📁 Dedicated manager Dedicate one person from Legal or Finance to manage the cap table. When cap table does not have an authorized manager, it's very often messed up – different undated versions are flowing between CEO, Legal, and Finance. And the worst – when they are shared with investors believing this is the right version. Never let this happen. Put your shares in order! More insights – in the full article in comments below. #startups #captable #fundraising #equity #corporatelaw #founders #legal

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There are a lot of term sheets flying around right now with crappy clauses. Keep an eye on this list to make sure negotiations are taking positive direction. 👇🏻 If you find anything outside these general topics in your term sheet, read it more than twice, ask your lawyers and ask other fellow founders. - 1X liquidation preference: Investors are the first ones in getting back the money if things go south and the company is sold for less than the money invested. Any multiple higher that 1X means they will get profit while you probably won’t. Not cool. - Exclusivity: Pretty common for first-time founders with no previous track-record and nothing more to demonstrate that your focus on the project. - Non-compete: Don’t leave the company and go work with your competitors…! - Specific matters reinforced before the Board of Directors and/or Shareholders Meeting: This can protect shareholders from founders investing $100,000 on a “4-letter .com super cool domain” or “a van for business trips” from a $300,000 funding round. Not the first time I’ve seen this…. - Tag along & Drag-along: you can search this one on google, but in very broad terms, 1) allow minority shareholders to sell their shares under the same conditions as a major shareholder and 2) enable majority shareholders to force minority shareholders to sell their shares in a company sale. - Stock Option or Phantom Share plan: Roughly speaking, all shareholders virtually dilute themselves for a pool of shares to use them as a compensation instrument for new hires. - No interest in notes, SAFEs or any convertible instrument. If they put interests, maybe you should directly negotiate with a banker. Remember, be skeptical if you see something pesky in a relevant clause in your term sheet. Any other topic I forgot to mention? #startup #fundraising #venturecapital #entrepreneurship

Very interesting thoughts Yuliia Verhun about the number of shares to issue at the outset for a start-up. Also important to bear in mind the Cap table can help with legal requirement to create and maintain in Canada a register of Individuals with Significant Control (for shareholders), plus to file the ISC with the corporate annual returns.

Cap table management is sometimes undervalued. However, it's always the first thing to check when you join the company as the in-house lawyer. And create it if it's not done yet. Read the full article with more insights here: https://lnkd.in/djcYt-Ty

A process that comes up often - navigating 409A valuations. Dive into the world of 409A valuations and unlock the key to competitive equity compensation and long-term growth for your startup. https://bit.ly/4eAMQ7a

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If you’re an early-stage, first-time founder, let me help you nail the basics of 𝘁𝗲𝗿𝗺 𝘀𝗵𝗲𝗲𝘁𝘀. I have personally learned it the hard way. A term sheet outlines the terms and conditions between a company's founders and potential investors. 📜 It sets the stage for what’s to come in your funding journey, so it’s in your best interest to understand every piece of information. My #1 advice is to CONSULT A LAWYER before signing or committing to anything. Priority #2 is talking to other founders who have raised VC before and diving into the specifics of term sheet negotiations: what went right, what went wrong, and why.   Below is a chart by HSBC Innovation Banking highlighting the most common terms included in a typical VC term sheet by stage in 2023. 𝗠𝗼𝘀𝘁 𝗰𝗼𝗺𝗺𝗼𝗻 𝘁𝗲𝗿𝗺𝘀 𝗶𝗻𝗰𝗹𝘂𝗱𝗲𝗱 𝗶𝗻 𝗦𝗲𝗲𝗱 𝘁𝗲𝗿𝗺 𝘀𝗵𝗲𝗲𝘁𝘀:  ➡️ Company Warranties: statements about the company that the investor relies on. If they are untrue, investors can seek compensation ➡️ Non-participating preference shares, which entitles VCs to either:  a) Preferential liquidation payment and not a share in any remaining proceeds or b) The amount VCs would receive if they had converted to common stock. More info on participating vs. non-participating preference shares: https://lnkd.in/d2hZ3kUa  ➡️ Drag along provisions, which entitle a majority shareholder to force a minority holder to join in the sale of a company ➡️ Investor consent rights, which give VCs less control than a Board Seat but still the right to block critical decisions like:  - Issuing further shares - Amendments to the articles - Variation of rights attaching to the shares - A sale and the payment of dividends. If you’re precisely at this point in your startup’s funding journey, I’d be open to jumping on a 1-1 call to help you further. My DMs are open! 💬 #startups #founders #termsheet #venturecapital #vc

In my 30 years of helping companies get the money they need to grow, there is one thing I have seen that frustrates entrepreneurs the most: loss of control.   Maintaining ownership not only could mean a larger share of the profits, but also having a greater say in how the company is run. It’s this vision and purpose that can propel founders through the improbable journey to a successful exit.   To be clear, venture equity is a critical source of capital that young companies need. And we’re proud to partner with many VC firms to mutually support incredible founders. But the debt funding that we provide, especially to late-stage companies, is often used to propel companies to further growth (or to an exit) – without additionally diluting their ownership.   I discuss this concept quite a bit in my book, “All Money Is Not Created Equal,” and it’s something that I think deserves more attention. Founders need different sources of capital at different points in their journey, and regardless of what they choose or who they work with, they need to be aware of the profound implications of each.