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January 1, 1970
Want to grow and scale your company faster? Then, you might need to think about raising some capital. That being said, there are so many funding options available for small businesses that even considering your options can feel overwhelming.
We get it. We just closed a $27M Series B round. And before that, we raised $6.75M in Series A. And we had a lot of friendly finance folks guiding us along the way, making sure we made a smart, informed decision.
So, we wanted to pass along the favor and share with you what we learned. That way, you can step into the fundraising process (if and when you're ready), confident you'll make an informed decision.
Let's get to it:
The best time to raise capital is when you don’t need it (like getting a bank loan or line of credit). Because when you do need it, it negatively impacts your valuation.
In other words, your business commands the highest valuation when you have the biggest opportunity in the market. And if you have some valuable combination of resources that make your business harder to duplicate.
Combined resources could include having real traction with revenue as well as customers. It could be having an accelerating growth rate - which shows increasing demand. Or the fact that you’re riding a PR wave.
It could also be an incredible team with a unique operating experience (that would be nearly impossible to recruit). Or that you have a unique business model or something proprietary. Whatever makes your business valuable, be sure to strike while your valuation is hot.
When you have combined resources, you’re probably not strapped for cash. And you might not even be considering raising funding because “you don’t need it.” But this is exactly when you should think about raising capital.
At the low end, your business' valuation is whatever it would cost to reproduce. AKA how much time and money it would take for an investor to hire a team and copy you from scratch. Whatever the answer, it's a good starting point to be prepared to defend.
And at the high-end, businesses are valued by how much profit or sales they’re expected to earn moving forward.
If you're profitable, your valuation might be a multiple of profit. If you have revenue, a multiple of revenue. And if you're growing quickly, it might be worth even more. Because you can reasonably argue your business will be worth more very soon - and you don't necessarily need to raise money today.
But investors are going to do their due diligence to make sure you land on the right valuation. Not just your best guess.
For example, some investors will look at your:
And depending on the type of investor, they'll also consider the percentage of the company they would own and their initial investment. (More on that later.)
But with all that said, business valuation is subjective and varies from industry to industry. For example, SaaS companies are typically valued much higher than other industries because of their recurring revenue and fast growth.
So, rather than assuming what your business is worth, ask fellow business leaders in your industry for their thoughts. Or talk to a business broker to get some ballpark estimates. And do it before you talk to your first investor.
While raising money for Trainual's Series B, I excessively listened to the podcast Built To Sell by John Warrillow. It's basically an MBA on valuation because you learn about all sorts of deals. And by the end of each episode, you'll understand when to use certain types of deals (equity, loans, and convertible debt) and how to structure those deals.
The type of investors you seek out will depend on four things:
Here’s what I mean:
If you’re looking to raise less than $100k, family and friends are an excellent way to go. But because they usually have little investment experience, they can’t help you beyond just rooting for you.
If you want to raise anywhere between $25k to $500k, angel investors are a great option. And because they usually have more business sense, they also double as advisors.
Angel investors are more closely aligned with gamblers. Because they know they’re likely to lose it all - but they go all in, hoping to win the lottery.
Angel groups are multiple angels investing as one limited liability company (LLC). And they're a good option for raising anywhere from $50k to $2M.
Because they want to build a reputation to attract other angels, they're usually more structured and cautious with investments. And they're hoping to get a 10x return on their best investments to pay for the ones that don't work out.
Venture capital or venture capitalists (VC) are seasoned investors who are strategic and act as board members. They’re the best option if you’re looking to raise $500k to $50M. And by driving value, they hope to pay back their entire fund with one investment in their portfolio.
Pro Tip: Prepare for conversations with VC firms by knowing your data. When you create your pitch presentation, include these key numbers (and know them by heart): company revenue, expenses, profit, customer acquisition cost, and your cash balance.
Private equity firms invest in operating companies that are not publicly traded on the stock exchange. They’re known for investing large amounts of money - anywhere from $20M to over $200M. And they’re usually looking for predictable growth that will drive toward acquisition or IPO. Their goal is to get at least 2x return on their investment.
Before you start raising capital, you'll want to know what you're up against first. That way, you're in a better position to close the best deal you can get. Here's a breakdown of all the prerequisite knowledge I needed to know:
Investors are looking at three key things:
Let's break down what each of those things means (and all the related things you’ll need to know about them).
Your burn is how much money you're spending every month. And you can calculate your monthly net burn rate by subtracting your monthly expenses from your net revenue.
Meanwhile, your runway is how long your existing cash can support this burn rate. And you can calculate your runway by dividing your total cash balance by your monthly net burn rate.
So, let's say you have $100,000 in the bank. You're spending $10,000 each month, and you're currently bringing no more money in. In this case, you're burning $10,000 monthly. And you only have 10 more months of runway unless you start generating some positive cash flow.
Here's why knowing these numbers is important: Typically when you raise money, you raise enough funds for 12 to 24 months of burn. So, you need to know your burn rate and your anticipated burn rate that will get you to your next important milestone.
This one to two year period is enough time to show progress (like increased revenue, traction, number of customers, and so on) before you bring in new investors. And by extension, improve your company's valuation before possibly raising another round.
But there's a catch. You need to raise enough money for what you're trying to accomplish upfront. Otherwise, you'll likely burn through the money too quickly (meaning, before you show meaningful progress). And you run the risk of getting a flat (or reduced) valuation.
A flat or reduced valuation dilutes your existing shareholders, which includes both your investors and you! So be sure you raise enough money to set yourself up for success.
Debt is money that is owed back to a lender. It is accompanied by an annual interest rate (APR) and a period to pay the money back (such as five years).
Plus, debt comes in a lot of flavors - from credit cards to convertible notes. (Believe me - I've used most of them!) Here are some of your more reliable options when it comes to leveraging debt:
But not all these debt options will be right for everyone. So, start by looking into which ones are available to you - and how much debt you could get. Because even if you don't take all the debt, it can be a leverage point in your negotiations with investors.
That way, you can say, "why would I take $70k from you at a low valuation when I can get $100k from these other sources?" Meaning, if they want to get in, this is the price.
Pro Tip: Make sure your investors are accredited before taking any money. Meaning, they have a certain net worth or make a certain amount per year (called a "moving target"). If you take money from unqualified investors, and they make a big fuss about it, you could be the one getting in trouble.
At the end of the day, debt can be repaid. And if things go right, debt is a lot less expensive in the long run. Because you're not giving up any actual ownership in your company. However, if you take on debt and things don't go right, you don't have a partner - you just have a problem.
So, before you take on any debt, consider the following questions:
When you're still experimenting, debt can be dangerous. For example, you don't want to rake up debt to create a prototype, test an assumption, or try new marketing channels at scale.
Instead, I always prefer to fund experimentation with actual customer revenue. Such as revenue from your earliest customers, services you make up, consulting for your target customer, or a side hustle.
The point here is that going into debt for endless experiments is an easy way to get in a hole with no traction to show for it. Think about it: If an investor looks at your business with no traction versus no traction with debt - which one looks better?
Basically, you want to get early traction without relying on debt. And then, once you know what works, use debt to scale those strategies.
Equity represents the shares a person owns in a company. And each share represents how much an investor would get if (and when) the company liquidates its assets and settles its debts.
For example, if each share is worth $10 and an investor owns 500 shares, they'd get $5k in this scenario.
Unlike debt, equity is not repaid. Instead, you and the investor will agree on a valuation of the company. And the investor gets actual ownership in the business. This means if things go well, you both share in the growth. And if things don't go well, you both share in the problem.
While growing Trainual, my philosophy has been: Use cash and debt to grow the business as far as you can. Then, bring in investors. Because your customer and revenue growth directly impact the business valuation (and, as a result, how much investors are willing to, well, invest).
But whatever you decide to do, make sure you only take as much risk (in this case, debt) as you're personally comfortable with. As soon as you feel uncomfortable, bring in someone else to share the risk with you.
Similarly, you don't want to bring someone in too early! Because if you're driving most of the value, you could feel bitter later on that they got "too much" of the business.
Pro Tip: Priced investment rounds mean you are raising money at a specific valuation. Unpriced investment rounds (like a convertible note) mean there's no specific valuation today - and how much everyone will get depends on how far the business goes.
Convertible notes are a great bridge between debt and equity. They provide a note (agreement of debt) that can either be repaid in full or converted into equity later (but does not convert when the agreement is signed).
All convertible notes are made up of a few standard pieces of information, including:
But convertible notes are extremely flexible and can have any number of customized terms. Some have caps and discounts, while some have just one or the other. Some have triggers that cause the note to be repaid in full (such as debt). And others are structured to allow the company to decide whether they repay or not.
If you're investing in one, be sure to study these carefully. Because most companies will typically use the same docs for multiple investors. And if that's the case for you, make sure you work closely with an attorney to identify all the terms that are right for you.
Common shares refer to the company shares that founders and employees have. Meanwhile, preferred shares are the shares that investors typically get because they receive “preference.” Meaning, they’re repaid first when the company is sold.
This bit is important: Let’s say you raise money at a $5M valuation, and your investors get preferred shares. If you sell the company for more than $5M, the investors will likely get their “pro-rata share” of the sales proceeds. Or, in other words, investors will get the percentage they own of the full sale amount.
But, if you sell the company for less than the $5M price (that the investors bought in at), most commonly, you would have to repay the investors their entire investment before splitting up the proceeds.
Raising money does not come without its risks. First and foremost, it can be expensive to raise capital because it takes a lot of time, effort, and creativity. In fact, founders (and anyone else on your team) will spend as much as half of their time and creative energy to raise money in the early rounds. So, don’t take this step lightly.
You also have to share your valuable information with your investors. Because it takes a lot of convincing to get investors to part with their money. This information could include how much of the company you own, your market strategy, the proprietary elements of the business, and so much more.
Plus, not all money is the same, and it’s not the only thing investors have to offer. They also have experience, beneficial contacts, and a reputation to bring to the table (on top of the money). And if you bypass looking into these key details, you may end up with a bad investor.
For a founder-led private business or partnership, 50% or more ownership usually relates to control and decision-making power. In a business with professional investors, the terms of the investment will dictate whether the percentage ownership is important.
Most commonly, investors get veto rights on certain decisions. These decisions are usually related to liquidity events, founder compensation, board makeup, debt, and other important matters.
When friends and family or angels invest early in a business, founders are more likely to maintain control. But later in the fundraising process (with VCs or private equity), investors are more likely to have control.
And it's really up to what you feel is best for the company. In my case (and most cases), I held onto the majority share of my business. That way, I have more control over how the company grows moving forward.
When it’s time to present your pitch to investors, you’ll want to come prepared to answer the following questions (minimum):
Before you're first meeting with an investor, you'll want to decide whether this is a one-time fundraising event or if you plan to raise multiple rounds. Many investors have certain expectations here, and you’ll want to make sure they align with yours.
For example, convertible-note investors will likely want a future round, so their note converts. Venture capitalists will want future rounds because it helps “mark up” their investment inside their portfolio. Which looks good to all of their limited partners.
Whereas friends and family may never care if you raise money again. And if private equity is your first funding round, they may only invest if you're already profitable and don't expect to raise more money. That's because they just want you to operate profitably until an eventual exit.
An exit plan is your strategy for “getting out” of your existing investment. It’s what you plan to sell your company for - and when you plan to sell it. It could also include how you plan to exit - whether it be a merger, acquisition, initial public offering, or complete liquidation.
You’ll want to make sure you and your investors are clear on the exit plan. And if they have a timeline, double-check that it matches yours. Because you don’t want any pressure forcing you to liquidate if the investor feels like their money is trapped in your business.
Now, here comes the exciting part! AKA the time when you close the deal. And it comes with a lot of jargon that everyone's going to just expect you to know. So, here are the words you'll hear flying around in everyday English.
Some companies will raise convertible notes where they all close on the same day with multiple investors. And some companies will have a “rolling close.” Meaning, investors can invest under the same terms over a longer period (such as a month).
When you roll your close, your company can change the discount or cap as more investors come in. But it’s important to understand the limits for how much your company intends to raise in the round. That way, you don’t dilute minority shareholders repeatedly without their knowledge.
Fund size is the total amount of capital the investors have committed to giving out. But that doesn't necessarily mean you'll get it all.
Plus, it should also detail what kind of return the investors are hoping to get from their best performers.
For example, a $50M fund might get broken into ten $3M investments and leave $20M available for follow-up investments in future rounds with those companies. So, they'd like one of those companies to turn $3M into $50M (a 16x return). And that's the high end.
More realistically, they're probably expecting several of the investments to contribute a bit. For example, maybe four of the $3M investments 3x and collectively return just over $50M return mark. And the remaining $20M funds might be split between those companies.
The fund life cycle is the predetermined time limit set on an investment. It helps Venture Capitalists who raise funds from limited partners (like private investors and institutions) give their partners an approximate timeline for returning the money. Whether it’s five years, seven years, 10 years, or more.
For example, let’s say you raised a fund four years ago and plan to return the money to investors in three years. If you don’t plan to have a liquidity event for five years, you could be misaligned.
The fund life cycle is the predetermined time limit set on an investment. It helps Venture Capitalists who raise funds from limited partners (like private investors and institutions) give their partners an approximate timeline for returning the money. Whether it’s five years, seven years, 10 years, or more.
For example, let’s say you raised a fund four years ago and plan to return the money to investors in three years. If you don’t plan to have a liquidity event for five years, you could be misaligned.
Once the deal is closed, your work is not over. And you’ll need to consider the following (once you’re done celebrating):
Dilution is the reduction of a shareholder’s value when new shares get created. And it happens whenever new money gets added to the balance sheet - which the company issues in new shares. AKA when the number of shares outstanding increases, the value of the existing shares goes down.
Stock options are stocks offered at a predetermined, fixed price. And a common example is offering your employees a stock option benefit. Or, in other words, when you give team members an option to buy stock in your company at a discounted or fixed rate.
It’s common for companies to create stock option pools - which are often recommended (or required) by Venture Capitalists. Creating stock options increases the number of outstanding shares. And because those shares aren’t owned by the investor or the founders, it increases founder dilution. So, it’s an important piece of the calculation.
You’re going to have two types of capital: primary and secondary. And there’s a big difference.
Primary capital is dollars invested directly into the business. And the business issues new shares to the investors in return.
Meanwhile, secondary capital is dollars invested by purchasing existing shares from founders or employees. And no new shares are created because no money goes into the business.
Raising money will change your valuation. Because as you put more money into the business, it gets added to the balance sheet. And it’s important to know how to calculate that valuation for future investment rounds.
Let’s say your company is worth $1M today, and you own 100%. Your “pre-money” valuation is $1M because the investor hasn’t put any money in yet.
But if you’ve already raised $100k, the business is now worth $1.1M. And your “post-money” valuation is also $1.1M because it’s after the investor puts money in.
In other words, you take the original pre-money valuation plus the money added to the balance sheet. And that means if the investor owns $100k out of $1.1M, they own 9.1% of the business. And you own the remaining 90.9% of the business.
Listen, I get it! Raising money takes a lot of energy! It’s really a full-time job. But the more you know and the more you can prepare for, the likelier you’ll come out on the other end with a great outcome for you and the investor.
Join over 135K readers getting the The Manual in their inbox every Wednesday.
January 1, 1970
Want to grow and scale your company faster? Then, you might need to think about raising some capital. That being said, there are so many funding options available for small businesses that even considering your options can feel overwhelming.
We get it. We just closed a $27M Series B round. And before that, we raised $6.75M in Series A. And we had a lot of friendly finance folks guiding us along the way, making sure we made a smart, informed decision.
So, we wanted to pass along the favor and share with you what we learned. That way, you can step into the fundraising process (if and when you're ready), confident you'll make an informed decision.
Let's get to it:
The best time to raise capital is when you don’t need it (like getting a bank loan or line of credit). Because when you do need it, it negatively impacts your valuation.
In other words, your business commands the highest valuation when you have the biggest opportunity in the market. And if you have some valuable combination of resources that make your business harder to duplicate.
Combined resources could include having real traction with revenue as well as customers. It could be having an accelerating growth rate - which shows increasing demand. Or the fact that you’re riding a PR wave.
It could also be an incredible team with a unique operating experience (that would be nearly impossible to recruit). Or that you have a unique business model or something proprietary. Whatever makes your business valuable, be sure to strike while your valuation is hot.
When you have combined resources, you’re probably not strapped for cash. And you might not even be considering raising funding because “you don’t need it.” But this is exactly when you should think about raising capital.
At the low end, your business' valuation is whatever it would cost to reproduce. AKA how much time and money it would take for an investor to hire a team and copy you from scratch. Whatever the answer, it's a good starting point to be prepared to defend.
And at the high-end, businesses are valued by how much profit or sales they’re expected to earn moving forward.
If you're profitable, your valuation might be a multiple of profit. If you have revenue, a multiple of revenue. And if you're growing quickly, it might be worth even more. Because you can reasonably argue your business will be worth more very soon - and you don't necessarily need to raise money today.
But investors are going to do their due diligence to make sure you land on the right valuation. Not just your best guess.
For example, some investors will look at your:
And depending on the type of investor, they'll also consider the percentage of the company they would own and their initial investment. (More on that later.)
But with all that said, business valuation is subjective and varies from industry to industry. For example, SaaS companies are typically valued much higher than other industries because of their recurring revenue and fast growth.
So, rather than assuming what your business is worth, ask fellow business leaders in your industry for their thoughts. Or talk to a business broker to get some ballpark estimates. And do it before you talk to your first investor.
While raising money for Trainual's Series B, I excessively listened to the podcast Built To Sell by John Warrillow. It's basically an MBA on valuation because you learn about all sorts of deals. And by the end of each episode, you'll understand when to use certain types of deals (equity, loans, and convertible debt) and how to structure those deals.
The type of investors you seek out will depend on four things:
Here’s what I mean:
If you’re looking to raise less than $100k, family and friends are an excellent way to go. But because they usually have little investment experience, they can’t help you beyond just rooting for you.
If you want to raise anywhere between $25k to $500k, angel investors are a great option. And because they usually have more business sense, they also double as advisors.
Angel investors are more closely aligned with gamblers. Because they know they’re likely to lose it all - but they go all in, hoping to win the lottery.
Angel groups are multiple angels investing as one limited liability company (LLC). And they're a good option for raising anywhere from $50k to $2M.
Because they want to build a reputation to attract other angels, they're usually more structured and cautious with investments. And they're hoping to get a 10x return on their best investments to pay for the ones that don't work out.
Venture capital or venture capitalists (VC) are seasoned investors who are strategic and act as board members. They’re the best option if you’re looking to raise $500k to $50M. And by driving value, they hope to pay back their entire fund with one investment in their portfolio.
Pro Tip: Prepare for conversations with VC firms by knowing your data. When you create your pitch presentation, include these key numbers (and know them by heart): company revenue, expenses, profit, customer acquisition cost, and your cash balance.
Private equity firms invest in operating companies that are not publicly traded on the stock exchange. They’re known for investing large amounts of money - anywhere from $20M to over $200M. And they’re usually looking for predictable growth that will drive toward acquisition or IPO. Their goal is to get at least 2x return on their investment.
Before you start raising capital, you'll want to know what you're up against first. That way, you're in a better position to close the best deal you can get. Here's a breakdown of all the prerequisite knowledge I needed to know:
Investors are looking at three key things:
Let's break down what each of those things means (and all the related things you’ll need to know about them).
Your burn is how much money you're spending every month. And you can calculate your monthly net burn rate by subtracting your monthly expenses from your net revenue.
Meanwhile, your runway is how long your existing cash can support this burn rate. And you can calculate your runway by dividing your total cash balance by your monthly net burn rate.
So, let's say you have $100,000 in the bank. You're spending $10,000 each month, and you're currently bringing no more money in. In this case, you're burning $10,000 monthly. And you only have 10 more months of runway unless you start generating some positive cash flow.
Here's why knowing these numbers is important: Typically when you raise money, you raise enough funds for 12 to 24 months of burn. So, you need to know your burn rate and your anticipated burn rate that will get you to your next important milestone.
This one to two year period is enough time to show progress (like increased revenue, traction, number of customers, and so on) before you bring in new investors. And by extension, improve your company's valuation before possibly raising another round.
But there's a catch. You need to raise enough money for what you're trying to accomplish upfront. Otherwise, you'll likely burn through the money too quickly (meaning, before you show meaningful progress). And you run the risk of getting a flat (or reduced) valuation.
A flat or reduced valuation dilutes your existing shareholders, which includes both your investors and you! So be sure you raise enough money to set yourself up for success.
Debt is money that is owed back to a lender. It is accompanied by an annual interest rate (APR) and a period to pay the money back (such as five years).
Plus, debt comes in a lot of flavors - from credit cards to convertible notes. (Believe me - I've used most of them!) Here are some of your more reliable options when it comes to leveraging debt:
But not all these debt options will be right for everyone. So, start by looking into which ones are available to you - and how much debt you could get. Because even if you don't take all the debt, it can be a leverage point in your negotiations with investors.
That way, you can say, "why would I take $70k from you at a low valuation when I can get $100k from these other sources?" Meaning, if they want to get in, this is the price.
Pro Tip: Make sure your investors are accredited before taking any money. Meaning, they have a certain net worth or make a certain amount per year (called a "moving target"). If you take money from unqualified investors, and they make a big fuss about it, you could be the one getting in trouble.
At the end of the day, debt can be repaid. And if things go right, debt is a lot less expensive in the long run. Because you're not giving up any actual ownership in your company. However, if you take on debt and things don't go right, you don't have a partner - you just have a problem.
So, before you take on any debt, consider the following questions:
When you're still experimenting, debt can be dangerous. For example, you don't want to rake up debt to create a prototype, test an assumption, or try new marketing channels at scale.
Instead, I always prefer to fund experimentation with actual customer revenue. Such as revenue from your earliest customers, services you make up, consulting for your target customer, or a side hustle.
The point here is that going into debt for endless experiments is an easy way to get in a hole with no traction to show for it. Think about it: If an investor looks at your business with no traction versus no traction with debt - which one looks better?
Basically, you want to get early traction without relying on debt. And then, once you know what works, use debt to scale those strategies.
Equity represents the shares a person owns in a company. And each share represents how much an investor would get if (and when) the company liquidates its assets and settles its debts.
For example, if each share is worth $10 and an investor owns 500 shares, they'd get $5k in this scenario.
Unlike debt, equity is not repaid. Instead, you and the investor will agree on a valuation of the company. And the investor gets actual ownership in the business. This means if things go well, you both share in the growth. And if things don't go well, you both share in the problem.
While growing Trainual, my philosophy has been: Use cash and debt to grow the business as far as you can. Then, bring in investors. Because your customer and revenue growth directly impact the business valuation (and, as a result, how much investors are willing to, well, invest).
But whatever you decide to do, make sure you only take as much risk (in this case, debt) as you're personally comfortable with. As soon as you feel uncomfortable, bring in someone else to share the risk with you.
Similarly, you don't want to bring someone in too early! Because if you're driving most of the value, you could feel bitter later on that they got "too much" of the business.
Pro Tip: Priced investment rounds mean you are raising money at a specific valuation. Unpriced investment rounds (like a convertible note) mean there's no specific valuation today - and how much everyone will get depends on how far the business goes.
Convertible notes are a great bridge between debt and equity. They provide a note (agreement of debt) that can either be repaid in full or converted into equity later (but does not convert when the agreement is signed).
All convertible notes are made up of a few standard pieces of information, including:
But convertible notes are extremely flexible and can have any number of customized terms. Some have caps and discounts, while some have just one or the other. Some have triggers that cause the note to be repaid in full (such as debt). And others are structured to allow the company to decide whether they repay or not.
If you're investing in one, be sure to study these carefully. Because most companies will typically use the same docs for multiple investors. And if that's the case for you, make sure you work closely with an attorney to identify all the terms that are right for you.
Common shares refer to the company shares that founders and employees have. Meanwhile, preferred shares are the shares that investors typically get because they receive “preference.” Meaning, they’re repaid first when the company is sold.
This bit is important: Let’s say you raise money at a $5M valuation, and your investors get preferred shares. If you sell the company for more than $5M, the investors will likely get their “pro-rata share” of the sales proceeds. Or, in other words, investors will get the percentage they own of the full sale amount.
But, if you sell the company for less than the $5M price (that the investors bought in at), most commonly, you would have to repay the investors their entire investment before splitting up the proceeds.
Raising money does not come without its risks. First and foremost, it can be expensive to raise capital because it takes a lot of time, effort, and creativity. In fact, founders (and anyone else on your team) will spend as much as half of their time and creative energy to raise money in the early rounds. So, don’t take this step lightly.
You also have to share your valuable information with your investors. Because it takes a lot of convincing to get investors to part with their money. This information could include how much of the company you own, your market strategy, the proprietary elements of the business, and so much more.
Plus, not all money is the same, and it’s not the only thing investors have to offer. They also have experience, beneficial contacts, and a reputation to bring to the table (on top of the money). And if you bypass looking into these key details, you may end up with a bad investor.
For a founder-led private business or partnership, 50% or more ownership usually relates to control and decision-making power. In a business with professional investors, the terms of the investment will dictate whether the percentage ownership is important.
Most commonly, investors get veto rights on certain decisions. These decisions are usually related to liquidity events, founder compensation, board makeup, debt, and other important matters.
When friends and family or angels invest early in a business, founders are more likely to maintain control. But later in the fundraising process (with VCs or private equity), investors are more likely to have control.
And it's really up to what you feel is best for the company. In my case (and most cases), I held onto the majority share of my business. That way, I have more control over how the company grows moving forward.
When it’s time to present your pitch to investors, you’ll want to come prepared to answer the following questions (minimum):
Before you're first meeting with an investor, you'll want to decide whether this is a one-time fundraising event or if you plan to raise multiple rounds. Many investors have certain expectations here, and you’ll want to make sure they align with yours.
For example, convertible-note investors will likely want a future round, so their note converts. Venture capitalists will want future rounds because it helps “mark up” their investment inside their portfolio. Which looks good to all of their limited partners.
Whereas friends and family may never care if you raise money again. And if private equity is your first funding round, they may only invest if you're already profitable and don't expect to raise more money. That's because they just want you to operate profitably until an eventual exit.
An exit plan is your strategy for “getting out” of your existing investment. It’s what you plan to sell your company for - and when you plan to sell it. It could also include how you plan to exit - whether it be a merger, acquisition, initial public offering, or complete liquidation.
You’ll want to make sure you and your investors are clear on the exit plan. And if they have a timeline, double-check that it matches yours. Because you don’t want any pressure forcing you to liquidate if the investor feels like their money is trapped in your business.
Now, here comes the exciting part! AKA the time when you close the deal. And it comes with a lot of jargon that everyone's going to just expect you to know. So, here are the words you'll hear flying around in everyday English.
Some companies will raise convertible notes where they all close on the same day with multiple investors. And some companies will have a “rolling close.” Meaning, investors can invest under the same terms over a longer period (such as a month).
When you roll your close, your company can change the discount or cap as more investors come in. But it’s important to understand the limits for how much your company intends to raise in the round. That way, you don’t dilute minority shareholders repeatedly without their knowledge.
Fund size is the total amount of capital the investors have committed to giving out. But that doesn't necessarily mean you'll get it all.
Plus, it should also detail what kind of return the investors are hoping to get from their best performers.
For example, a $50M fund might get broken into ten $3M investments and leave $20M available for follow-up investments in future rounds with those companies. So, they'd like one of those companies to turn $3M into $50M (a 16x return). And that's the high end.
More realistically, they're probably expecting several of the investments to contribute a bit. For example, maybe four of the $3M investments 3x and collectively return just over $50M return mark. And the remaining $20M funds might be split between those companies.
The fund life cycle is the predetermined time limit set on an investment. It helps Venture Capitalists who raise funds from limited partners (like private investors and institutions) give their partners an approximate timeline for returning the money. Whether it’s five years, seven years, 10 years, or more.
For example, let’s say you raised a fund four years ago and plan to return the money to investors in three years. If you don’t plan to have a liquidity event for five years, you could be misaligned.
The fund life cycle is the predetermined time limit set on an investment. It helps Venture Capitalists who raise funds from limited partners (like private investors and institutions) give their partners an approximate timeline for returning the money. Whether it’s five years, seven years, 10 years, or more.
For example, let’s say you raised a fund four years ago and plan to return the money to investors in three years. If you don’t plan to have a liquidity event for five years, you could be misaligned.
Once the deal is closed, your work is not over. And you’ll need to consider the following (once you’re done celebrating):
Dilution is the reduction of a shareholder’s value when new shares get created. And it happens whenever new money gets added to the balance sheet - which the company issues in new shares. AKA when the number of shares outstanding increases, the value of the existing shares goes down.
Stock options are stocks offered at a predetermined, fixed price. And a common example is offering your employees a stock option benefit. Or, in other words, when you give team members an option to buy stock in your company at a discounted or fixed rate.
It’s common for companies to create stock option pools - which are often recommended (or required) by Venture Capitalists. Creating stock options increases the number of outstanding shares. And because those shares aren’t owned by the investor or the founders, it increases founder dilution. So, it’s an important piece of the calculation.
You’re going to have two types of capital: primary and secondary. And there’s a big difference.
Primary capital is dollars invested directly into the business. And the business issues new shares to the investors in return.
Meanwhile, secondary capital is dollars invested by purchasing existing shares from founders or employees. And no new shares are created because no money goes into the business.
Raising money will change your valuation. Because as you put more money into the business, it gets added to the balance sheet. And it’s important to know how to calculate that valuation for future investment rounds.
Let’s say your company is worth $1M today, and you own 100%. Your “pre-money” valuation is $1M because the investor hasn’t put any money in yet.
But if you’ve already raised $100k, the business is now worth $1.1M. And your “post-money” valuation is also $1.1M because it’s after the investor puts money in.
In other words, you take the original pre-money valuation plus the money added to the balance sheet. And that means if the investor owns $100k out of $1.1M, they own 9.1% of the business. And you own the remaining 90.9% of the business.
Listen, I get it! Raising money takes a lot of energy! It’s really a full-time job. But the more you know and the more you can prepare for, the likelier you’ll come out on the other end with a great outcome for you and the investor.
January 1, 1970
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Want to grow and scale your company faster? Then, you might need to think about raising some capital. That being said, there are so many funding options available for small businesses that even considering your options can feel overwhelming.
We get it. We just closed a $27M Series B round. And before that, we raised $6.75M in Series A. And we had a lot of friendly finance folks guiding us along the way, making sure we made a smart, informed decision.
So, we wanted to pass along the favor and share with you what we learned. That way, you can step into the fundraising process (if and when you're ready), confident you'll make an informed decision.
Let's get to it:
The best time to raise capital is when you don’t need it (like getting a bank loan or line of credit). Because when you do need it, it negatively impacts your valuation.
In other words, your business commands the highest valuation when you have the biggest opportunity in the market. And if you have some valuable combination of resources that make your business harder to duplicate.
Combined resources could include having real traction with revenue as well as customers. It could be having an accelerating growth rate - which shows increasing demand. Or the fact that you’re riding a PR wave.
It could also be an incredible team with a unique operating experience (that would be nearly impossible to recruit). Or that you have a unique business model or something proprietary. Whatever makes your business valuable, be sure to strike while your valuation is hot.
When you have combined resources, you’re probably not strapped for cash. And you might not even be considering raising funding because “you don’t need it.” But this is exactly when you should think about raising capital.
At the low end, your business' valuation is whatever it would cost to reproduce. AKA how much time and money it would take for an investor to hire a team and copy you from scratch. Whatever the answer, it's a good starting point to be prepared to defend.
And at the high-end, businesses are valued by how much profit or sales they’re expected to earn moving forward.
If you're profitable, your valuation might be a multiple of profit. If you have revenue, a multiple of revenue. And if you're growing quickly, it might be worth even more. Because you can reasonably argue your business will be worth more very soon - and you don't necessarily need to raise money today.
But investors are going to do their due diligence to make sure you land on the right valuation. Not just your best guess.
For example, some investors will look at your:
And depending on the type of investor, they'll also consider the percentage of the company they would own and their initial investment. (More on that later.)
But with all that said, business valuation is subjective and varies from industry to industry. For example, SaaS companies are typically valued much higher than other industries because of their recurring revenue and fast growth.
So, rather than assuming what your business is worth, ask fellow business leaders in your industry for their thoughts. Or talk to a business broker to get some ballpark estimates. And do it before you talk to your first investor.
While raising money for Trainual's Series B, I excessively listened to the podcast Built To Sell by John Warrillow. It's basically an MBA on valuation because you learn about all sorts of deals. And by the end of each episode, you'll understand when to use certain types of deals (equity, loans, and convertible debt) and how to structure those deals.
The type of investors you seek out will depend on four things:
Here’s what I mean:
If you’re looking to raise less than $100k, family and friends are an excellent way to go. But because they usually have little investment experience, they can’t help you beyond just rooting for you.
If you want to raise anywhere between $25k to $500k, angel investors are a great option. And because they usually have more business sense, they also double as advisors.
Angel investors are more closely aligned with gamblers. Because they know they’re likely to lose it all - but they go all in, hoping to win the lottery.
Angel groups are multiple angels investing as one limited liability company (LLC). And they're a good option for raising anywhere from $50k to $2M.
Because they want to build a reputation to attract other angels, they're usually more structured and cautious with investments. And they're hoping to get a 10x return on their best investments to pay for the ones that don't work out.
Venture capital or venture capitalists (VC) are seasoned investors who are strategic and act as board members. They’re the best option if you’re looking to raise $500k to $50M. And by driving value, they hope to pay back their entire fund with one investment in their portfolio.
Pro Tip: Prepare for conversations with VC firms by knowing your data. When you create your pitch presentation, include these key numbers (and know them by heart): company revenue, expenses, profit, customer acquisition cost, and your cash balance.
Private equity firms invest in operating companies that are not publicly traded on the stock exchange. They’re known for investing large amounts of money - anywhere from $20M to over $200M. And they’re usually looking for predictable growth that will drive toward acquisition or IPO. Their goal is to get at least 2x return on their investment.
Before you start raising capital, you'll want to know what you're up against first. That way, you're in a better position to close the best deal you can get. Here's a breakdown of all the prerequisite knowledge I needed to know:
Investors are looking at three key things:
Let's break down what each of those things means (and all the related things you’ll need to know about them).
Your burn is how much money you're spending every month. And you can calculate your monthly net burn rate by subtracting your monthly expenses from your net revenue.
Meanwhile, your runway is how long your existing cash can support this burn rate. And you can calculate your runway by dividing your total cash balance by your monthly net burn rate.
So, let's say you have $100,000 in the bank. You're spending $10,000 each month, and you're currently bringing no more money in. In this case, you're burning $10,000 monthly. And you only have 10 more months of runway unless you start generating some positive cash flow.
Here's why knowing these numbers is important: Typically when you raise money, you raise enough funds for 12 to 24 months of burn. So, you need to know your burn rate and your anticipated burn rate that will get you to your next important milestone.
This one to two year period is enough time to show progress (like increased revenue, traction, number of customers, and so on) before you bring in new investors. And by extension, improve your company's valuation before possibly raising another round.
But there's a catch. You need to raise enough money for what you're trying to accomplish upfront. Otherwise, you'll likely burn through the money too quickly (meaning, before you show meaningful progress). And you run the risk of getting a flat (or reduced) valuation.
A flat or reduced valuation dilutes your existing shareholders, which includes both your investors and you! So be sure you raise enough money to set yourself up for success.
Debt is money that is owed back to a lender. It is accompanied by an annual interest rate (APR) and a period to pay the money back (such as five years).
Plus, debt comes in a lot of flavors - from credit cards to convertible notes. (Believe me - I've used most of them!) Here are some of your more reliable options when it comes to leveraging debt:
But not all these debt options will be right for everyone. So, start by looking into which ones are available to you - and how much debt you could get. Because even if you don't take all the debt, it can be a leverage point in your negotiations with investors.
That way, you can say, "why would I take $70k from you at a low valuation when I can get $100k from these other sources?" Meaning, if they want to get in, this is the price.
Pro Tip: Make sure your investors are accredited before taking any money. Meaning, they have a certain net worth or make a certain amount per year (called a "moving target"). If you take money from unqualified investors, and they make a big fuss about it, you could be the one getting in trouble.
At the end of the day, debt can be repaid. And if things go right, debt is a lot less expensive in the long run. Because you're not giving up any actual ownership in your company. However, if you take on debt and things don't go right, you don't have a partner - you just have a problem.
So, before you take on any debt, consider the following questions:
When you're still experimenting, debt can be dangerous. For example, you don't want to rake up debt to create a prototype, test an assumption, or try new marketing channels at scale.
Instead, I always prefer to fund experimentation with actual customer revenue. Such as revenue from your earliest customers, services you make up, consulting for your target customer, or a side hustle.
The point here is that going into debt for endless experiments is an easy way to get in a hole with no traction to show for it. Think about it: If an investor looks at your business with no traction versus no traction with debt - which one looks better?
Basically, you want to get early traction without relying on debt. And then, once you know what works, use debt to scale those strategies.
Equity represents the shares a person owns in a company. And each share represents how much an investor would get if (and when) the company liquidates its assets and settles its debts.
For example, if each share is worth $10 and an investor owns 500 shares, they'd get $5k in this scenario.
Unlike debt, equity is not repaid. Instead, you and the investor will agree on a valuation of the company. And the investor gets actual ownership in the business. This means if things go well, you both share in the growth. And if things don't go well, you both share in the problem.
While growing Trainual, my philosophy has been: Use cash and debt to grow the business as far as you can. Then, bring in investors. Because your customer and revenue growth directly impact the business valuation (and, as a result, how much investors are willing to, well, invest).
But whatever you decide to do, make sure you only take as much risk (in this case, debt) as you're personally comfortable with. As soon as you feel uncomfortable, bring in someone else to share the risk with you.
Similarly, you don't want to bring someone in too early! Because if you're driving most of the value, you could feel bitter later on that they got "too much" of the business.
Pro Tip: Priced investment rounds mean you are raising money at a specific valuation. Unpriced investment rounds (like a convertible note) mean there's no specific valuation today - and how much everyone will get depends on how far the business goes.
Convertible notes are a great bridge between debt and equity. They provide a note (agreement of debt) that can either be repaid in full or converted into equity later (but does not convert when the agreement is signed).
All convertible notes are made up of a few standard pieces of information, including:
But convertible notes are extremely flexible and can have any number of customized terms. Some have caps and discounts, while some have just one or the other. Some have triggers that cause the note to be repaid in full (such as debt). And others are structured to allow the company to decide whether they repay or not.
If you're investing in one, be sure to study these carefully. Because most companies will typically use the same docs for multiple investors. And if that's the case for you, make sure you work closely with an attorney to identify all the terms that are right for you.
Common shares refer to the company shares that founders and employees have. Meanwhile, preferred shares are the shares that investors typically get because they receive “preference.” Meaning, they’re repaid first when the company is sold.
This bit is important: Let’s say you raise money at a $5M valuation, and your investors get preferred shares. If you sell the company for more than $5M, the investors will likely get their “pro-rata share” of the sales proceeds. Or, in other words, investors will get the percentage they own of the full sale amount.
But, if you sell the company for less than the $5M price (that the investors bought in at), most commonly, you would have to repay the investors their entire investment before splitting up the proceeds.
Raising money does not come without its risks. First and foremost, it can be expensive to raise capital because it takes a lot of time, effort, and creativity. In fact, founders (and anyone else on your team) will spend as much as half of their time and creative energy to raise money in the early rounds. So, don’t take this step lightly.
You also have to share your valuable information with your investors. Because it takes a lot of convincing to get investors to part with their money. This information could include how much of the company you own, your market strategy, the proprietary elements of the business, and so much more.
Plus, not all money is the same, and it’s not the only thing investors have to offer. They also have experience, beneficial contacts, and a reputation to bring to the table (on top of the money). And if you bypass looking into these key details, you may end up with a bad investor.
For a founder-led private business or partnership, 50% or more ownership usually relates to control and decision-making power. In a business with professional investors, the terms of the investment will dictate whether the percentage ownership is important.
Most commonly, investors get veto rights on certain decisions. These decisions are usually related to liquidity events, founder compensation, board makeup, debt, and other important matters.
When friends and family or angels invest early in a business, founders are more likely to maintain control. But later in the fundraising process (with VCs or private equity), investors are more likely to have control.
And it's really up to what you feel is best for the company. In my case (and most cases), I held onto the majority share of my business. That way, I have more control over how the company grows moving forward.
When it’s time to present your pitch to investors, you’ll want to come prepared to answer the following questions (minimum):
Before you're first meeting with an investor, you'll want to decide whether this is a one-time fundraising event or if you plan to raise multiple rounds. Many investors have certain expectations here, and you’ll want to make sure they align with yours.
For example, convertible-note investors will likely want a future round, so their note converts. Venture capitalists will want future rounds because it helps “mark up” their investment inside their portfolio. Which looks good to all of their limited partners.
Whereas friends and family may never care if you raise money again. And if private equity is your first funding round, they may only invest if you're already profitable and don't expect to raise more money. That's because they just want you to operate profitably until an eventual exit.
An exit plan is your strategy for “getting out” of your existing investment. It’s what you plan to sell your company for - and when you plan to sell it. It could also include how you plan to exit - whether it be a merger, acquisition, initial public offering, or complete liquidation.
You’ll want to make sure you and your investors are clear on the exit plan. And if they have a timeline, double-check that it matches yours. Because you don’t want any pressure forcing you to liquidate if the investor feels like their money is trapped in your business.
Now, here comes the exciting part! AKA the time when you close the deal. And it comes with a lot of jargon that everyone's going to just expect you to know. So, here are the words you'll hear flying around in everyday English.
Some companies will raise convertible notes where they all close on the same day with multiple investors. And some companies will have a “rolling close.” Meaning, investors can invest under the same terms over a longer period (such as a month).
When you roll your close, your company can change the discount or cap as more investors come in. But it’s important to understand the limits for how much your company intends to raise in the round. That way, you don’t dilute minority shareholders repeatedly without their knowledge.
Fund size is the total amount of capital the investors have committed to giving out. But that doesn't necessarily mean you'll get it all.
Plus, it should also detail what kind of return the investors are hoping to get from their best performers.
For example, a $50M fund might get broken into ten $3M investments and leave $20M available for follow-up investments in future rounds with those companies. So, they'd like one of those companies to turn $3M into $50M (a 16x return). And that's the high end.
More realistically, they're probably expecting several of the investments to contribute a bit. For example, maybe four of the $3M investments 3x and collectively return just over $50M return mark. And the remaining $20M funds might be split between those companies.
The fund life cycle is the predetermined time limit set on an investment. It helps Venture Capitalists who raise funds from limited partners (like private investors and institutions) give their partners an approximate timeline for returning the money. Whether it’s five years, seven years, 10 years, or more.
For example, let’s say you raised a fund four years ago and plan to return the money to investors in three years. If you don’t plan to have a liquidity event for five years, you could be misaligned.
The fund life cycle is the predetermined time limit set on an investment. It helps Venture Capitalists who raise funds from limited partners (like private investors and institutions) give their partners an approximate timeline for returning the money. Whether it’s five years, seven years, 10 years, or more.
For example, let’s say you raised a fund four years ago and plan to return the money to investors in three years. If you don’t plan to have a liquidity event for five years, you could be misaligned.
Once the deal is closed, your work is not over. And you’ll need to consider the following (once you’re done celebrating):
Dilution is the reduction of a shareholder’s value when new shares get created. And it happens whenever new money gets added to the balance sheet - which the company issues in new shares. AKA when the number of shares outstanding increases, the value of the existing shares goes down.
Stock options are stocks offered at a predetermined, fixed price. And a common example is offering your employees a stock option benefit. Or, in other words, when you give team members an option to buy stock in your company at a discounted or fixed rate.
It’s common for companies to create stock option pools - which are often recommended (or required) by Venture Capitalists. Creating stock options increases the number of outstanding shares. And because those shares aren’t owned by the investor or the founders, it increases founder dilution. So, it’s an important piece of the calculation.
You’re going to have two types of capital: primary and secondary. And there’s a big difference.
Primary capital is dollars invested directly into the business. And the business issues new shares to the investors in return.
Meanwhile, secondary capital is dollars invested by purchasing existing shares from founders or employees. And no new shares are created because no money goes into the business.
Raising money will change your valuation. Because as you put more money into the business, it gets added to the balance sheet. And it’s important to know how to calculate that valuation for future investment rounds.
Let’s say your company is worth $1M today, and you own 100%. Your “pre-money” valuation is $1M because the investor hasn’t put any money in yet.
But if you’ve already raised $100k, the business is now worth $1.1M. And your “post-money” valuation is also $1.1M because it’s after the investor puts money in.
In other words, you take the original pre-money valuation plus the money added to the balance sheet. And that means if the investor owns $100k out of $1.1M, they own 9.1% of the business. And you own the remaining 90.9% of the business.
Listen, I get it! Raising money takes a lot of energy! It’s really a full-time job. But the more you know and the more you can prepare for, the likelier you’ll come out on the other end with a great outcome for you and the investor.
Organize Chaos, published daily and hosted by Chris Ronzio, covers the playbooks, the people-powered strategies, and productivity hacks SMB leaders need to take their team to the next level.
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