Recently an entrepreneur reached out asking for help around raising money for his startup. I obliged and requested a list of questions. Here are the questions and my answers:
- What is the deal structure normally put in place?
Investors typically want preferred equity where they get their money back first in the event of a sale along with protective provisions (more on common vs preferred stock, learning startup investor speak, and the current market for liquidity preferences and dividends).
- How much equity should we expect to give up?
Startups typically sell between 20 and 35% of the company in each funding round (I’m a fan of selling less and minimizing dilution). Also, you’re selling an asset, not giving it up.
- What are acceptable funding targets in this day and age (it’s a B2C social app)?
- There’s very little appetite for consumers apps unless they have traction. On the consumer side, investors want to see at least 100,000 active users (see five categories of initial traction milestones for startups). If you raise money, it’ll be from friends and family that believe in you, not your idea.
- How much influence do investors have over the product or is that still pretty much ours?
None. Investors will offer up advice but have no influence.
- Is there care and feeding of investors involved, and what form does that take — a newsletter/group email about progress, etc.?
Yes, you’re potentially taking large sums of money from people. They should be updated at least monthly on your progress via email and a few times per year via a meeting.
- Is there anything I should be looking out for in terms of red flags in deal structures or people?
Yes, understand what’s common in a term sheet and what’s not. Stay away from the uncommon stuff. On the people front, check references and only do business with people that you like working with and see a long-term future of collaboration.
What else? What other advice do you have for a first-time entrepreneur raising money?