{"id":7701,"date":"2020-08-25T15:37:02","date_gmt":"2020-08-25T15:37:02","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/?p=7701"},"modified":"2021-03-05T06:54:28","modified_gmt":"2021-03-05T06:54:28","slug":"how-to-raise-a-round","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/how-to-raise-a-round\/","title":{"rendered":"How to raise a round"},"content":{"rendered":"

Raising a round of financing can be one of the most critical\u2014and challenging\u2014steps you will take as an entrepreneur in the early days of your startup. Venture capital money can fuel product development and team growth faster and more efficiently than bootstrapping on your own. However, fundraising is notoriously difficult, particularly for first-time founders. How do you get started? What do you need to do to get the capital you need? And what do you need to know about the strings attached when you accept that money?\u00a0<\/span><\/p>\n

With the help of some experts, including two-time founder<\/span> Sean Byrnes<\/span><\/a>, we\u2019ve summarized the basics below. Need more? You can always check out our <\/span>webinar series<\/span><\/a> to dive deeper.\u00a0<\/span><\/p>\n

Preparing for your round<\/h2>\n

First, figure out how much you want to raise.\u00a0<\/strong><\/p>\n

Understanding your fundraising target is both a science and an art. You\u2019ll want to consider everything from market comparables (who else is doing something similar?) and the potential market opportunity to your immediate goals for your business.\u00a0<\/span><\/p>\n

For example, you might start with a general benchmark\u2014the average size of a seed round in 2019 was around $2.5 million\u2014and then make adjustments to that number based on the factors above. If you\u2019ve got a working product in an industry with a huge market opportunity but need to hire engineers, product managers, and marketers to scale, you might increase that number to account for the large salaries and marketing spend ahead. If, on the other hand, you just need a small seed round to develop your product, you might want to scale back your initial goal to protect yourself and your investors from unnecessary dilution.<\/span><\/p>\n

In either case, you should intend to put the money you raise to work. Investors do not want to see their capital sitting idle for a rainy day.<\/span><\/p>\n

Keep in mind that while your seed round helps you start out, a Series A is often your first big institutional check. As a result, Series A investors are generally more seasoned and demand more of your company in exchange. Your pitch deck is an essential part of this process. (More on that later.) For a real-world example, check out <\/span>how we raised our Series A<\/span><\/a>.\u00a0<\/span><\/p>\n

Second, determine the right financing instrument for your business.\u00a0<\/strong><\/p>\n

The two common fundraising options for early-stage companies are <\/span>convertible instruments<\/b>\u2014like Simple Agreements for Future Equity (SAFEs) and convertible notes\u2014and <\/span>priced rounds<\/b>.\u00a0<\/span><\/p>\n

A convertible note is debt, which means it includes an interest rate and maturity rate (like a bank loan would). A SAFE is not debt, so it\u2019s usually simpler and shorter and does not have an interest or maturity rate. Essentially, these convertible instruments operate like loans, only instead of being paid back, they convert into priced equity in the future.<\/span><\/p>\n

At earlier stages, <\/span>you\u2019ll often see more SAFEs and notes<\/span><\/a>, which experts recommend for their flexibility. If you\u2019re considering a SAFE or convertible note, check out our free <\/span>calculator<\/span><\/a> to help you understand their future impact on dilution once they convert to equity.\u00a0<\/span><\/p>\n

As you continue scaling your company, you may be required to give away some equity in exchange for fundraising dollars. In these <\/span>priced rounds<\/span><\/a>, an investor gives you money in exchange for <\/span>preferred stock<\/span><\/a> in your company at a price per share determined by your valuation. Priced rounds can be a great option if you are confident in the worth of your company, are willing to negotiate that worth with investors, and need to raise a lot of capital\u2014recognizing you will need to cede some control.\u00a0<\/span><\/p>\n

Third, decide when should you be raising\u2014and with whom.<\/strong><\/p>\n

Realistically, you should always be in pitch mode\u2014ready to jump on opportunities that arise.<\/span> That being said, investors tend to take meetings at certain points of the year: typically mid-January through mid-summer, and after Labor Day through early November. That doesn\u2019t mean you should ever stop building relationships, networking, or preparing to take meetings.\u00a0<\/span><\/p>\n

One of the best ways to find investors is to leverage your network. Build relationships early\u2014and often. Join entrepreneurship communities, attend networking events, and ask for introductions to friends-of-friends in the venture capital community. When you are ready to start fundraising, reach out to investors who offer a strong strategic fit for your business (those focused on your industry, specialty, or geographical location, for example).<\/span><\/p>\n

When bringing on investors, remember that your <\/span>company\u2019s cap table matters<\/span><\/a>: you have the ability to enrich and empower a potential investor with your business. Think carefully about the investor you want to bring on. Can they give you the amount you want? Do you align on values? Can they help your brand or build your network? Remember that a big firm may not always be the best option if you want more time and attention as you grow.<\/span><\/p>\n

Developing your pitch<\/span><\/h2>\n

Whether you\u2019re fundraising in a down economy or a booming one, the process for honing your pitch remains the same: develop a compelling, short pitch and practice, practice, practice. Make sure you have a tight narrative as to why you need this funding now and what that funding will help you accomplish.\u00a0<\/span><\/p>\n

Remember: investors don\u2019t want to know what you\u2019ve done in the past\u2014they want to see where you\u2019re going. For your pitch deck, <\/span>we recommend<\/span><\/a> spending two slides explaining what you do and the opportunity; the next three to eight slides on your business model, competition, and team; and the last two slides conveying why your vision is realistic and the milestones you\u2019ll hit moving forward. Just remember to adjust your flow while pitching based on questions asked (instead of sticking to a rigid structure based on your slides).\u00a0<\/span><\/p>\n

At the end of your pitch, make sure you get feedback and leave with action items.\u00a0<\/span><\/p>\n

Locking it in<\/span><\/h2>\n

Move quickly (but don\u2019t rush).<\/strong><\/p>\n

If you decide to go with notes or SAFEs versus a priced round, the process is slightly different. Notes and SAFEs are usually logistically easier\u2014and quicker\u2014to execute, and you can usually close them individually. Priced rounds require term sheets, additional due diligence, long-form documents, and a formal closing between multiple investors. Given the lengthiness of that process, they\u2019re usually more expensive to execute (especially with legal fees).\u00a0<\/span><\/p>\n

If you pursue a priced round, remember that time can kill deals. Drive toward closing, and make sure your attorneys are equipped to move as quickly as possible. But it\u2019s also important to stay vigilant: this first priced round term sheet will impact your future funding. Make sure you look for terms that indicate economics and control. Be aware of red flags, including <\/span>anything above a 1x liquidation multiplier<\/span><\/a> and participating preferred stock. Make sure you understand how your voting rights will change under the new arrangement as well.<\/span><\/p>\n

Be prepared to facilitate a due diligence process.<\/strong><\/p>\n

Investors begin due diligence by looking at your cap table\u2019s structure, rights and preferences, and promised grants. For a simple way to manage the administrative part of the diligence process, check out Carta\u2019s <\/span>data room<\/span><\/a>. If you have 25 or fewer stakeholders and have raised up to $1 million, <\/span>Carta Launch<\/span><\/a> can help you maintain an accurate cap table that updates with every transaction for free.<\/span><\/p>\n

 <\/p>\n

Congrats!<\/strong><\/h3>\n

Once you\u2019ve signed the deal, you\u2019re now in a long-term relationship with your investor. All that\u2019s left to do is use the funds you\u2019ve raised to create value for everyone\u2014your customers, employees, and investors alike.<\/span><\/p>\n

\nDISCLOSURE: <\/span><\/i>This communication is on behalf of eShares Inc., d\/b\/a Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.<\/span><\/i><\/h6>\n","protected":false},"excerpt":{"rendered":"

Fundraising is notoriously difficult, particularly for first-time founders. We break down the basics around how to raise a round.<\/p>\n","protected":false},"author":77,"featured_media":7702,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[19],"tags":[398,106,397,292,396],"acf":[],"_links":{"self":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/7701"}],"collection":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/users\/77"}],"replies":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/comments?post=7701"}],"version-history":[{"count":0,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/7701\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media\/7702"}],"wp:attachment":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media?parent=7701"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/categories?post=7701"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/tags?post=7701"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}