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Dear Founder,

First of all, congrats! If someone wants to invest in your business, then you’re already off to a great start. Now you just need to agree on the details, structure your round and start a positive relationship with your investor group. Here are a few things to keep in mind as you go through this process.

Do your research.

  • Read up on round structure. Many early-stage rounds are done with convertible notes or SAFEs. Do some reading to understand how these contracts work, and look up common terms like cap, discount, pro rata, liquidation preference, and MFN. The short answer is conversion_price = minimum[cap/pre_shares, equity_price*(1-discount)].
  • Do the math and create a model! Convertible note math is tricky, and the results are not intuitive. Build a simple spreadsheet to understand how conversion will work, and include all rounds through your Series A. Calculate your dilution, and look at how the share price changes from round to round (we can help on this).

Check your assumptions.

  • What is your next round? Your next stage might be a Series A, another early-stage round or profitability. Many companies raise more than one early-stage round, so experiment with this—especially if you’re raising a smaller seed round. Also ask around to estimate the size and price of your Series A (as a rule of thumb, the size will be 20-30% of the post-money valuation). Get a few data points, and don’t expect an outlier.
  • What are your milestones? Talk to some founders and investors, and try to get a sense for what it will take to get to that next stage. It might be a certain amount of revenue, usage, team or something else. Your milestones should be both realistic and sufficient: you don’t want to run out of money before hitting them, nor do you want to get there only to find out that you set your targets too low to raise the next round.
  • How much money do you need? How much time, team, and resources will you need to hit your milestones—and how much money will that take? Be conservative and leave some breathing room. Things usually go slower than expected, and raising the next round will take time too. We usually advise our companies to aim for at least 18 months of runway in a seed round. If this is not possible, focus on your milestones and add some extra buffer.

Choose a fair price.

  • Consider your dilution. Many seed rounds bear 20-25 percent dilution, meaning the seed investors will own that much of your company before the next round. Sometimes this can be as low as 15 percent or as high as 30 percent, and in unusual cases outside this range too. There are no hard rules here, but this can provide one data point on where to start.
  • Leave room for upside. Your first investors are taking a risk and supporting you early, at a stage where most companies fail. Treat them well, and set them up for success with a price increase in the next round. If you’re close to your milestones, then a small step-up might make sense. If you’re just getting started and aiming for $2M revenue in 18 months, then a bigger jump is in order. Check your model and discuss what’s fair.
  • Market pricing trumps all. Ultimately, the terms are set between you and your investors, and anything goes as long as you agree with them. If you have a lot of interest you can be choosy, and if not, you may need to take whatever you can get. Either way, try to stay within a reasonable range. You don’t want to give up too much of your company, and you also don’t want your investors to get a raw deal by paying the same price as the next round (or to have a price decrease, which can cause other issues).
  • Work together to set terms. If you don’t have significant commitments to invest in your company, keep an open mind. If you try to set terms up front on your own (or with someone who is writing a tiny check), you may create mismatched expectations. Work with your early champions to set terms that make sense for everyone, and set the tone for collaboration.

Think about the long term.

  • Choose your partners carefully. Good investors will be great partners for you in the future, and they will help you grow your company and raise future financing. Ask around about their reputation and their ability to help.
  • Prioritize what matters most to you. Some founders want mostly financial support, and others are focused on getting help and a good network from their investors. Some want to minimize dilution, and others want extra runway. Rank your priorities, and then don’t sweat the small details. If you are over-optimizing terms, be mindful of any trade-offs you may be creating.
  • It’s not a competition. If you have a friend raising money at high terms, or if you are reading articles about hot companies, it can be tempting to constantly compare yourself to them. Focus on your business. A year from now the competition will not matter, and having the right amount of capital and support will be crucial!

Best,

Jonathan