What’s the best way to sell the right amount of equity in your fundraising round?

Dharmesh Shah (Co-founder and CTO of HubSpot)
Happy Birthday HubSpot! 9 Lessons From Our First 9 Years

Don’t minimize dilution, maximize impact. If you go out and raise outside funding, resist the temptation to worry too much about valuation (and minimizing dilution). In the grand scheme of things, as long as you’re getting a fair deal, marginal differences in dilution won’t matter. What will matter more is the degree to which you can have an impact (however you measure that). You’re probably going to be happier owning 5% of something great tha… (read more)

What’s the best way to negotiate with an investor?

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Pro-Rata Participation Right – AVC

The “pro-rata right” is the right to continue to participate in future rounds so that you can maintain your ownership. Let’s make it concrete with an example. You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you wi… (read more)

What’s the best way to negotiate with an investor?

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Because It’s Standard – AVC

I never ever say that a specific provision is “standard”. Nothing is standard. You either need it or you don’t. Explain why you need it and most of the time you’ll get it or something like it as long as both sides really want to make a deal.

What’s the best way to choose board members?

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Board Of Directors – Selecting, Electing & Evolving – AVC

In summary, the shareholders elect the Board. That is the essential truth in every company. But how they elect the directors can be very different from company to company. For public companies, it is largely the same for all. In private companies, as JLM would say “you get what you negotiate for” so negotiate the Board provisions carefully. They are important.

What’s the best way to sell the right amount of equity in your fundraising round?

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

Our rule of thumb is not to sell more than 25% in phase 2, on top of whatever you sold in phase 1, which should be less than 15%.

Sam Altman (President at Y Combinator)
Fundraising Advice for YC Companies – Y Combinator Posthaven

You should aim to sell only about 20% of the company in your seed round (though 25% is ok if you’re raising a ‘large’–say more than $2. 5 million–seed round). You should raise enough money to get to your next significant milestone.

Slava Akhmechet (Founder at RethinkDB)
57 startup lessons

If you have to give away more than 15% of the company at any given fundraising round, your company didn’t germinate correctly. It’s salvageable but not ideal.

Naval Ravikant (Founder, CEO & Co – Maintainer at AngelList)
“The Anatomy of a Fundable Startup”, by Naval Ravikant (Founder, AngelList) on Vimeo

My rule of thumb is 20% for a seed round. Anything more than that and people are going to be worried [about if] you are going to be incented after 2 or three more rounds of financing.

Mark Suster (Managing Partner at Upfront Ventures)
Founder Showcase – Mark Suster Keynote on Vimeo

VCs want meaningful ownership. The fairway for a round of venture capital is 25-33% of your company. If you’re a better negotiator, if you’re hotter, if you have more people interested you can get it down to 18%-22%.

Paul Graham (Co-Founder & Partner at Y Combinator)
The Equity Equation

Greg Mcadoo from Sequoia recently said at a YC dinner that when Sequoia invests alone they like to take about 30% of a company

Babak Nivi (Co-founder of AngelList and Venture Hacks. Previously, he was an entrepreneur-in-residence at Bessemer Venture Partners and Atlas Venture.)
The Option Pool Shuffle – Venture Hacks

If you don’t keep your eyes on the option pool while you’re negotiating valuation, your investors will have you playing (and losing) a game that we like to call: Option Pool Shuffle

Jason Lemkin (Managing Director at Storm Ventures, SaaStr.com)
Jason M. Lemkin’s answer to For a new startup, what would be the ‘acceptable’ equity percentage given to VC (Series A financing)? – Quora

Typically, Seed Stage VCs will want to write smaller checks to achieve at least a 10% target ownership. Sometimes more. If you need more money, they’ll often want to bring in a second Seed Fund to buy a second 10%.
Typically, Larger Funds will want to own as much as 25%. Themselves. And they’ll write a larger check to get it, and sometimes, pay a higher per share price.

Dharmesh Shah (Co-founder and CTO of HubSpot)
Happy Birthday HubSpot! 9 Lessons From Our First 9 Years

Don’t minimize dilution, maximize impact. If you go out and raise outside funding, resist the temptation to worry too much about valuation (and minimizing dilution). In the grand scheme of things, as long as you’re getting a fair deal, marginal differences in dilution won’t matter. What will matter more is the degree to which you can have an impact (however you measure that). You’re probably going to be happier owning 5% of something great tha… (read more)

What’s the best way to negotiate with an investor?

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

If someone makes you an acceptable offer, take it. If you have multiple incompatible offers, take the best. Don’t reject an acceptable offer in the hope of getting a better one in the future.

Y Combinator (a startup accelerator based in Mountain View, CA.)
The Handshake Deal Protocol

Silicon Valley runs on handshake deals. A handshake deal is a verbal commitment to a transaction. The actual transaction comes later, when documents are signed and money changes hands. Why do we need handshake deals? Why not just wait till the actual transaction? Because things can happen fast in the startup world.

Y Combinator (a startup accelerator based in Mountain View, CA.)
The Handshake Deal Protocol

We’re going to start using this within YC, and we hope it will spread to the rest of the startup community. The protocol defines an offer as an amount to be invested, plus a valuation or valuation cap (or no cap), plus an optional discount. Here are some example offers: $100k at $5 million pre-money. $100k at a $5 million cap. $100k uncapped. $100k uncapped with a 10% discount. According to the protocol, you have a handshake deal if and only if t… (read more)

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

[Get the investor’s] yes/no before valuation.

Ryan Howard (Founder @ Practice Fusion)
Transcript: Protecting yourself as the founder; Ryan Howard | VatorNews

For me, one of the things I think is really key is to always think about your downside. If this all ends today, not even if you’re fired, if the company goes out of business today, what do I have left, what do I have in my bank account? Can I get any liquidity from the equity? What’s really key here is that California is at-will so effectively, once you form your company, you start taking on investors and you no longer have control of the board. … (read more)

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

If you’re experienced at negotiations, you already know how to [negotiate well]. If you’re not, there’s a trick you can use in this situation. Just confess that you’re inexperienced at this and ask how their process works and where you are in it.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

Many investors will ask how much you’re planning to raise. This question makes founders feel they should be planning to raise a specific amount. But in fact you shouldn’t. It’s a mistake to have fixed plans in an undertaking as unpredictable as fundraising.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

If you’re surprised by a lowball offer, treat it as a backup offer and delay responding to it. When someone makes an offer in good faith, you have a moral obligation to respond in a reasonable time. But lowballing you is a dick move that should be met with the corresponding countermove.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

Another advantage of having one founder take fundraising meetings is that you never have to negotiate in real time, which is something inexperienced founders should avoid. One YC founder told me: Investors are professional negotiators and can negotiate on the spot very easily. If only one founder is in the room, you can say “I need to circle back with my co-founder”

Paul Graham (Co-Founder & Partner at Y Combinator)
Investor Herd Dynamics

One reason investors like you more when other investors like you is that you actually become a better investment. Raising money decreases the risk of failure. Indeed, although investors hate it, you are for this reason justified in raising your valuation for later investors. The investors who invested when you had no money were taking more risk, and are entitled to higher returns. Plus a company that has raised money is literally more valuable.

Paul Graham (Co-Founder & Partner at Y Combinator)
Investor Herd Dynamics

Only raise the price on an investor you’re comfortable with losing, because some will angrily refuse.

Paul Graham (Co-Founder & Partner at Y Combinator)
Investor Herd Dynamics

VCs will sometimes ask which other VCs you’re talking to, but you should never tell them. Angels you can sometimes tell about other angels, because angels cooperate more with one another. But if VCs ask, just point out that they wouldn’t want you telling other firms about your conversations, and you feel obliged to do the same for any firm you talk to

Paul Graham (Co-Founder & Partner at Y Combinator)
Founder Control

A lot of VCs still act as if founders retaining board control after a Series A is unheard-of. A lot of them try to make you feel bad if you even ask—as if you’re a noob or a control freak for wanting such a thing. Founders retaining control after a Series A is clearly heard-of.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Doing Business On A Handshake – AVC

I often wish we could do business on a handshake.
I’ve been thinking about it more and more these days. We negotiate a sophisticated set of documents when we invest in a company and for the most part, those documents never come into play. Many times when things go badly, we rip up the documents and decide what to do based on an honest discussion among the interested parties. When things go well, all we need are the stock certificates.

Bruce Gibney (Former Partner @ Founders Fund)
Peter Thiel’s CS183: Startup – Class 8 Notes Essay

Be careful about your voting structures, as well; these too are hard to change.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
My First Investment – AVC

That deal taught me a few big lessons. The first is to avoid complicated deals. It seemed like such a smart deal structure but it really wasn’t. The second is to avoid fast talking salesy entrepreneurs who don’t know how to operate a business. That more or less described the entrepreneur who was running SDC when we did the initial deal.

Paul Graham (Co-Founder & Partner at Y Combinator)
High Resolution Fundraising

Different terms for different investors is clearly the way of the future. Markets always evolve toward higher resolution. You may not need to use convertible notes to do it.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Pro-Rata Participation Right – AVC

The “pro-rata right” is the right to continue to participate in future rounds so that you can maintain your ownership. Let’s make it concrete with an example. You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you wi… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Because It’s Standard – AVC

I never ever say that a specific provision is “standard”. Nothing is standard. You either need it or you don’t. Explain why you need it and most of the time you’ll get it or something like it as long as both sides really want to make a deal.

Sam Altman (President at Y Combinator)
Before Growth – Sam Altman

When I invest (outside of YC) I make offers with the following term sheet. I’ve tried to make the terms reflect what I wanted when I was a founder. A few people have asked me if I’d share it, so here it is.

Y Combinator (a startup accelerator based in Mountain View, CA.)
The Handshake Deal Protocol

Investors will sometimes try to make a deal to invest, say, $50k to $150k. If a startup agrees to that, they’re obliged to save $150k of space but the investor is only obliged to invest $50k. An offer to invest a range of money is really two separate things: an offer to invest the bottom end of the range, plus an expression of interest in possibly investing more. So we suggest startups respond to each separately: do a handshake deal for the botto… (read more)

What’s the best way to choose board members?

Ryan Howard (Founder @ Practice Fusion)
Transcript: Protecting yourself as the founder; Ryan Howard | VatorNews

Dial in your EQ, watch for dysfunctional behaviors. Everyone here is a cognizant human being that’s alive. You’re picking up lots of data all the time. Fast talkers, anxiety, twitches, things like that, germ-phobes, one of my favorite board members wouldn’t shake anyone’s hands. How do you think that person reacted when we told her we were off our finance plan? Head spun around backwards like the Exorcist. Those things can be quite challenging.

Sam Altman (President at Y Combinator)
Board Members – Sam Altman

Great board members, with a lot of experience seeing companies get built, are the sort of people founders should want thinking about their companies every day. There are a lot of roles where experience doesn’t matter in a startup, but board members usually aren’t one of them. Board members are very useful in helping founders think big and hire executives.

Matt Blumberg (Co-Founder, Chief Executive Officer & Chairman @ Return Path)
The Board Of Directors: Guest Post From Matt Blumberg – AVC

Top 5 things that make an awesome Board member:
They are prepared and keep commitments. They speak their minds. They build independent relationships. They are resource rich. They are strategically engaged but operationally distant.

Matt Blumberg (Co-Founder, Chief Executive Officer & Chairman @ Return Path)
The Board Of Directors: Guest Post From Matt Blumberg – AVC

My interview/vetting process for Board members:
Take the process as seriously as you take building your executive team. Source broadly, get a lot of referrals from disparate sources, reach high.
Interview many people, always face to face and usually multiple times for finalists. Check references thoroughly and across a few different vectors. Have a finalist or two attend a Board meeting so you and they can examine the fit firsthand. Give the p… (read more)

Scott Kurnit (Founder & CEO @ Keep)
The Board of Directors: Guest Post From Scott Kurnit – AVC

And it’s the unwillingness to depart from traditional norms by those around the table that stop them from happening. 1. Your best friend should be on the Board, and 2. No one who works in the company other than the CEO should be on the Board. Ideally, your best friend has industry or financial or board expertise – but even if not, having someone who has your back… who tells you the unvarnished truth… that you believe in an instant… is in everyone… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Board Of Directors – Selecting, Electing & Evolving – AVC

In summary, the shareholders elect the Board. That is the essential truth in every company. But how they elect the directors can be very different from company to company. For public companies, it is largely the same for all. In private companies, as JLM would say “you get what you negotiate for” so negotiate the Board provisions carefully. They are important.