Time for Capital Fundraising - but they want so much?

Ruby,

For some background, have a read of

• Josephs recent answer on the myths of startups, specifically his point on ownership.
• my blog post on sharesplit guidelines
• there is an ownership calculator written by @AlainRaynaud which might help you play through senarios
• There was a great post on the dilution effects on founders but after a few google searches can't find it again.
• Have a look through the archives of This week in venture capital and This week in Startups, they will give you a good background from the investors side and from the negotiation standpoint.

There are no hard and fast rules about these things, only what ends up working well for both sides. There are "rules of thumb" or common patterns you see emerging that you can go by, I will speak to these for the rest of the answers.

To look at your questions

Question 1. No a valuation is a valuation, you don't make it low or high, you just get several, understand the metrics around how you came up with the valuations and these should then be seen as a guideline (though many people take them as absolutes).

I think if you're a young company and the model has a "few wins" but no solid track record the valueation "risk factor" eg $1B + or - $0.75B meaning it could go really well or it could go very wrong.

eg. Your product expansion and beliefs around the next stage of your market may be completely the wrong direction. Your key people may have a falling out and you can't get people that good again. A better backed competitor comes in (if its a good market then they will).

This is what is in the back of your potential investor's mind (or at least should be).

There are valuation companies (like PWC) who can help you put a value on your company, but they will have a series of metrics which may or may not suit your situation, and which may or may not be believable to your investor. Your problem is your personal valuation is based on your knowledge and belief in yourself and you need to hit your 30% target.

Question 2 and 3. 25% is not unreasonable for $3M in the first round generally speaking, they are taking a substantial risk that you're going to acheive the goals you have set (they aren't you and they don't know you in depth, so from their perspective its a risk).

That said 40+% feels a little unreasonable unless they are contributing marketing and opening a lot of doors to make you succeed.

Starting now on second round funding is a "safe" call so you know its there when you have it. Though I think there may be a bias from the consultants to keep their interest in there. If your first round investors have enough for second round, they are the most likely second round investors, or will find them when the time comes ... so I would balance the effort you expend in this direction.

I think you need to play through the senarios in Excel for a few hours, with the percentage ownerships of Seed investors diluted down by round 1 being further diluted down by round 2. This will give you the proper feel for what it will mean to you in the next rounds.

So it really comes down to you and your trade off Is $3M going to make the difference you need to help you achieve your "mid level or bullish" estimates? Is your remaining 75% and its subsequent dilution going to be worth more at that point than your 100% now?

You're bound to feel at a disadvantage, because this is clearly the first time you've gone through the process, and you have no idea whether you're being given good, impartial advice, or whether the firm you have hired to produce the IM are giving themselves an easy life at your expense - plus a big side-order of upside at no risk.

So in the first instance, it's their job to prove to you that their judgement is reasonable. They should be more than happy to show you a list or summary of many relevant transactions in your space (I'd expect this to have been part of their proposal), and to let you talk to recent and not-so-recent clients to give you a better ability to understand some of the issues peer-to-peer.

Then look at existing relationships. PwC constructed the forecasts - who better to give you the benefit of their experience on the best way to raise? Whether or not they wanted or would have been permitted to participate in this process, they should value you as a client and want to work with you in future as you grow.

And if you still have concerns, you need to be ready to go back a step.

On the face of it, based on the numbers you've shown your core objectives are unlikely to be met: you know you'll need to raise more, you want to keep control, and it seems high risk that the next round could squash that.

Take that concern back to your advisors. If they knew your parameters and priorities, insist they demonstrate how they will be met as this round and the next play out. And if they didn't, apologise that it's taken you a while to get fully clear in your own mind what's most important to you, lay down the rules, and ask them whether they're ready, willing and able to go back to the drawing board with you or whether they would prefer to bow out.

You're making big decisions. You need to get back to a point where you feel fully on top of the facts and in full control of events. Don't make the mistake of letting your planning timetable or the professional service provider decisions create a false sense of urgency or a need to follow through regardless of the consequences.

Good luck! I hope this works out well for you!