Thursday, June 04, 2015

Know your Funding Rounds if you want to hold on to your Equity

Great insights by Steve Baxter in BRW this week

As an innovator in the tech world- who doesn't want to be that billion dollar multinational?

These magical and mystical creatures even have their own name in start-up land:unicorns, says Steve Baxter - entrepreneur and investor, founder of co-working space River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia

Earlier this month, Heidi Roizen a Silicon Valley venture capitalist, wrote a great blog post on how to build a billion dollar company and walk away with nothing

One thing that I learnt 12 years ago from my friend and mentor Jerry Engel - a Professor of Business at HAAS  School of Business at Berkeley University in the Valley - was that the average successful startup could expect to be diluted to 2% of the company once there is a final exit, however very often, the founders and management will also get a percentage (up to 20pc of management and founder stock). 

Savvy investors know how important is to "keep the soul" of the business alive!
As a startup with a great idea - know  what equity you should hold on to as you grow your business. Understand the process and begin with the end in mind.

On Shark Tank, week after week, we have entrepreneurs ask for crazy amounts of cash for their business, or offering a shareholding that will see future fundraising eating into their ownership. And as an investor, if the founder doesn’t have enough skin in the game to justify the blood, sweat and tears they need to grow their business, it’s game over. And that’s no fun for anyone- says Steve.

So below is Steve’s 4 gems before doing a Cap Raise and starting the process of raising capital

1. Have a funding game plan and know your numbers 
Understand that there will be multiple raisings as the business grows - remember "exponential growth invariably means "cash burn"

A successful startup will often have a seed round, a series A, B and C round.

Every time you sell more of your business, you and your existing partners will get diluted - but remember , 15pc of a $100m is more than 100 percent of $1m!
Be upfront to your FFF investors (fools family and friends ) about what is likely to happen to their stake in the business as you hit your targets and continue growing.
From voting classes to vesting, discounts to dilution clauses, loan funding, government grants, convertible notes, backdoor listings etc etc – there are many different ways to manage how you get funds into your business.
Convertible notes are popular - a loan that converts into equity at a discount to a later valuation, which can allow for greater flexibility. 

2. Know the tricks of the trade
Investment is never straightforward.

Do your homework - the 5 day management course at HAAS Berkeley University is gold.

3. Get yourself a Team 
A team or advisory board who can help you with the process - a great innovation lawyer, patent attorney and investment banker or a Venture Capitalist that you know like and trust is gold! 

(Contact me and I will give you a referral to a few in Australia, Silicon Valley and Boston.)

Do your homework before you speak to any investors, and get an idea of the tools and ways that you can ma

4. Don’t be led by ego
Column inches or start-up buzz is fantastic to build your start-up into a business worth hundreds of millions, or even that billion-dollar figure. But don’t let ambition cloud your mind. Your value on paper is just that - and being perceived as too big too soon isn’t always a good thing.

Often, when tempted by a large valuation, a founder can lose sight of the real value of their equity holding.

But remember the plan, focus on the fundamentals, raise money with the Exit in mind. Hopefully, when you find yourself exiting your business, you’ll be well rewarded for your hard work.

Steve Baxter is an entrepreneur and investor, founder of co-working space River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia. Shark Tank airs on TEN every Sunday at 9pm.

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