Raising from VC for the first time — Part 2 of 3

March 16, 2023
•
Dan Marcus
•
5
min read

Raising from VC for the first time — Part 2 of 3

Dan Marcus

March 16, 2023

In my previous post I wrote about not testing the waters when launching your fundraise, being prepared, best approach to getting in front of VC’s, the timing VC’s follow in the fundraising process, and more. Here if you missed it.

But as the title of the post suggests, there’s a lot more I can share. So, here’s part 2 of my experiences and advice.


Be transparent, don’t hide anything

Sales not going quite the way you thought? That one customer not as happy as they should be? Product not quite doing what it’s supposed to yet, but it will soon? Will there be things you don’t want to share, of course! Nobody is perfect, but I’m sure you’ve done some amazing things to date, and the investors know this too.

Do not hide the bad stuff! Be open and share it, else it will only come back to bite you later. And trying to explain why you didn’t mention it can kill a deal in the final moments before closing (I’ve heard horror stories), or worse, kill your relationship with your new investor at your first board meeting. Remember, raising from a VC is a 10 year relationship, start it with trust.

We had first-hand experience of this, in the final stage of our raise, literally the final week before closing. We lost a big client, one who had already done a reference call with our VC’s. So you can imagine the stress levels! But, we were honest, spoke up immediately, and had all the information around why, and what we’d be doing to mitigate this in the future. Naturally there was concern and questions, but our investors appreciated the approach, did their own research and we continued.

The way this process was handled by our lead investor immediately demonstrated why we chose them. Early on in our raise we would ask investors how they deal with bad news — this was a great use case, timing horrific, but albeit, a great learning experience into what our future partnership would look like.


It’s a full time commitment

I can’t stress this enough, and I’ve heard many founders who didn’t take this seriously. Fundraising is HARD, and it takes a lot of time!

Fundraising will put extreme pressure on you, your business, and even your family. It’s a full time job, on top of your current load, so be ready for it.

Be sharp and responsive, investors will appreciate that. So make sure you’ve prepared everything else around you for when you start, and don’t overcommit yourself elsewhere.

It also really helped having Jan and Angus, my co-founders alongside me during the raise, not only for the pitching but for the process as a whole. This lightened the load — but their presence meant I had a shoulder to cry on and a hand to high-five. :)

The adverse argument to this if you have multiple founders, 1 should do the raise, while the other looks after the business. I’ve heard many success stories for this, but can’t talk to it as an experience. What I can say is that as a team we did exceptionally well to ensure the business continued moving forward.


VC’s talk to each other — so don’t bullsh1t them!

No matter where you are in the world, know this about the VC market: it’s small. It’s even smaller when you’re focussed on a specific sector and where you’re likely to come across a group of VC’s who invest in the same types of businesses. This means that 1. they have likely co-invested before and 2. they speak and share deals.

What’s great about this, is once you start gaining traction on your raise you’ll get a number of great inbound leads for investment, as VC’s will hear about you. BUT, this also means reputation is key. Don’t bullshit about having term sheets on the table if you don’t. Keep your story true and consistent because if you don’t, you’ll be caught out and you can say goodbye to your raise!

I know this is a little off the tone considering the above, but there are some practicalities that I wanted to share around vesting and dual bank accounts given the most recent shake-ups in the startup world.


Founder Vesting

Vesting will vary depending on which country you are raising VC from.

In case you didn’t know, generally when you raise a new round of funding from VC, the investors will require the founders to reverse vest their shares.

This protects the investment, and ensures the founders stick around to see the plan through. If you have co-founders, it also protects each of you from one of the founders leaving early, and having a chunk of equity locked up.

We raised out of the UK, and you’ll hear many different versions of what is standard. Some will say 100% of shares must reverse vest, and others a lower 50%.

How does founder vesting work:

Let’s say you agree to 75% vesting over 4 years vesting monthly with a 1 year cliff, and you own 1000 shares after the raise:

  • This means 250 shares are fully vested, and are yours until you sell them (or you lose them if you are a bad leaver — more on good/bad leavers in my next post)
    ‍
  • The remaining 750 shares are up to vest over a 4 year period, but for the first year you vest nothing until the completion of 12 months, at which point you would vest 25% of the 750 shares (187.5) and would now have 437.5 fully vested shares (250+187.5)
    ‍
  • After the first year, you would vest the remaining 75% (562.5 shares) every month which would be 15.63 shares per month (562.5 / 36 months)

What a mouthful! But it’s important to understand this, as it is a big sticking point for VC’s and founders hate to hear they can lose shares they’ve worked to death for — but remember, VC’s are generally paying a premium on the promise to achieve great things, and they need you to stick around to achieve it!


Dual Bank Account Authorisation

Something you likely haven’t thought about, well we hadn’t, is dual authorisation functionality from your bank account.

Some VC’s won’t be able to pay over the funds if your bank doesn’t offer the ability to have dual authorisation on payments over a set amount. This is not a requirement from all VC’s, but may as well be prepared just in case. The last thing you want is not being able to be paid because of this, and scrambling to setup a bank account in the week you’re supposed to be closing — we did this, it’s not fun!

And following the SVB situation over this past weekend, make sure you spread the risk and have 2 bank accounts.

You’d think I’ve shared everything by now, but there’s still more. In Part 3 (and from the comments/questions I’ve been getting their will likely be part 4,5,6,7….I’ll be covering things like dealing with Term Sheets and what to look out for, more on DD’s and cost cover, VC’s vs VCT’s, contracting and more.


Extra content

Here’s a great read on Demystifying Venture Capital Term Sheets from Jonathan Hollis and the team at Mountside Ventures— Thanks

Jamie Tomalin for sharing.

In the meantime, follow these people, they are an epic source of incredible content:

‍

In my previous post I wrote about not testing the waters when launching your fundraise, being prepared, best approach to getting in front of VC’s, the timing VC’s follow in the fundraising process, and more. Here if you missed it.

But as the title of the post suggests, there’s a lot more I can share. So, here’s part 2 of my experiences and advice.


Be transparent, don’t hide anything

Sales not going quite the way you thought? That one customer not as happy as they should be? Product not quite doing what it’s supposed to yet, but it will soon? Will there be things you don’t want to share, of course! Nobody is perfect, but I’m sure you’ve done some amazing things to date, and the investors know this too.

Do not hide the bad stuff! Be open and share it, else it will only come back to bite you later. And trying to explain why you didn’t mention it can kill a deal in the final moments before closing (I’ve heard horror stories), or worse, kill your relationship with your new investor at your first board meeting. Remember, raising from a VC is a 10 year relationship, start it with trust.

We had first-hand experience of this, in the final stage of our raise, literally the final week before closing. We lost a big client, one who had already done a reference call with our VC’s. So you can imagine the stress levels! But, we were honest, spoke up immediately, and had all the information around why, and what we’d be doing to mitigate this in the future. Naturally there was concern and questions, but our investors appreciated the approach, did their own research and we continued.

The way this process was handled by our lead investor immediately demonstrated why we chose them. Early on in our raise we would ask investors how they deal with bad news — this was a great use case, timing horrific, but albeit, a great learning experience into what our future partnership would look like.


It’s a full time commitment

I can’t stress this enough, and I’ve heard many founders who didn’t take this seriously. Fundraising is HARD, and it takes a lot of time!

Fundraising will put extreme pressure on you, your business, and even your family. It’s a full time job, on top of your current load, so be ready for it.

Be sharp and responsive, investors will appreciate that. So make sure you’ve prepared everything else around you for when you start, and don’t overcommit yourself elsewhere.

It also really helped having Jan and Angus, my co-founders alongside me during the raise, not only for the pitching but for the process as a whole. This lightened the load — but their presence meant I had a shoulder to cry on and a hand to high-five. :)

The adverse argument to this if you have multiple founders, 1 should do the raise, while the other looks after the business. I’ve heard many success stories for this, but can’t talk to it as an experience. What I can say is that as a team we did exceptionally well to ensure the business continued moving forward.


VC’s talk to each other — so don’t bullsh1t them!

No matter where you are in the world, know this about the VC market: it’s small. It’s even smaller when you’re focussed on a specific sector and where you’re likely to come across a group of VC’s who invest in the same types of businesses. This means that 1. they have likely co-invested before and 2. they speak and share deals.

What’s great about this, is once you start gaining traction on your raise you’ll get a number of great inbound leads for investment, as VC’s will hear about you. BUT, this also means reputation is key. Don’t bullshit about having term sheets on the table if you don’t. Keep your story true and consistent because if you don’t, you’ll be caught out and you can say goodbye to your raise!

I know this is a little off the tone considering the above, but there are some practicalities that I wanted to share around vesting and dual bank accounts given the most recent shake-ups in the startup world.


Founder Vesting

Vesting will vary depending on which country you are raising VC from.

In case you didn’t know, generally when you raise a new round of funding from VC, the investors will require the founders to reverse vest their shares.

This protects the investment, and ensures the founders stick around to see the plan through. If you have co-founders, it also protects each of you from one of the founders leaving early, and having a chunk of equity locked up.

We raised out of the UK, and you’ll hear many different versions of what is standard. Some will say 100% of shares must reverse vest, and others a lower 50%.

How does founder vesting work:

Let’s say you agree to 75% vesting over 4 years vesting monthly with a 1 year cliff, and you own 1000 shares after the raise:

  • This means 250 shares are fully vested, and are yours until you sell them (or you lose them if you are a bad leaver — more on good/bad leavers in my next post)
    ‍
  • The remaining 750 shares are up to vest over a 4 year period, but for the first year you vest nothing until the completion of 12 months, at which point you would vest 25% of the 750 shares (187.5) and would now have 437.5 fully vested shares (250+187.5)
    ‍
  • After the first year, you would vest the remaining 75% (562.5 shares) every month which would be 15.63 shares per month (562.5 / 36 months)

What a mouthful! But it’s important to understand this, as it is a big sticking point for VC’s and founders hate to hear they can lose shares they’ve worked to death for — but remember, VC’s are generally paying a premium on the promise to achieve great things, and they need you to stick around to achieve it!


Dual Bank Account Authorisation

Something you likely haven’t thought about, well we hadn’t, is dual authorisation functionality from your bank account.

Some VC’s won’t be able to pay over the funds if your bank doesn’t offer the ability to have dual authorisation on payments over a set amount. This is not a requirement from all VC’s, but may as well be prepared just in case. The last thing you want is not being able to be paid because of this, and scrambling to setup a bank account in the week you’re supposed to be closing — we did this, it’s not fun!

And following the SVB situation over this past weekend, make sure you spread the risk and have 2 bank accounts.

You’d think I’ve shared everything by now, but there’s still more. In Part 3 (and from the comments/questions I’ve been getting their will likely be part 4,5,6,7….I’ll be covering things like dealing with Term Sheets and what to look out for, more on DD’s and cost cover, VC’s vs VCT’s, contracting and more.


Extra content

Here’s a great read on Demystifying Venture Capital Term Sheets from Jonathan Hollis and the team at Mountside Ventures— Thanks

Jamie Tomalin for sharing.

In the meantime, follow these people, they are an epic source of incredible content:

‍

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