There are many articles out there that provide a wide array of lofty advice about fundraising. Some of the groundbreaking tips in those articles may cause you to rethink minor details such as the order of the slides in your deck or even something as major as your go-to-market strategy. This is not one of those articles, but we do have an ebook full of stories that are sure to inspire here.
The truth is, just like building a house, getting your startup noticed by accelerators, VCs, and other investors starts with a having a solid company foundation.
So instead of sharing tales and stories of fundraising success (again, read the ebook—you won’t regret it), today, we’re going over what may seem like minute details, but are, in fact, key components you really don’t want to overlook. So, take this time to quit Powerpoint or close out of Google Slides and check off a few boxes on your fundraising to do list.
4 Fundraising Prerequisites that Don't Usually End Up in Pitch Decks but Do Stick With Most Investors
1. Incorporate Your Business
Is this one too obvious? We hope so but felt it was worth including right off the bat because it is such a vital requirement. Yes, to receive funding from anyone aside from friend and family you will need to be an actual business.
Wondering which entity type is best for your startup? From a fundraising perspective, venture capitalists, accelerators, and incubators typically prefer to invest in C Corporations because of the predictable legal structure and that C Corps can issue equity or preferred shares of stock.
Want extra points? Incorporate in Delaware. Delaware’s laws are particularly friendly to corporations and their investors (no corporate income tax!).
2. Set up a Capitalization Table
A capitalization table, or cap table, is like a map of a business’s DNA so it starts at the very beginning with you (and your co-founders if you have any). At a high level, businesses usually use a spreadsheet as their first cap table to start tracking and documenting who owns what percentage of the company. Investors will use your cap table to see the existing capital structure of the company and where they will fit in, while the founders (that’s you) will use it to forecast how new investments will dilute ownership percentages and the value of each share.
At a certain point (usually after a few rounds of funding) this spreadsheet gets a bit convoluted and takes more management. The primary word here is “management,” because keeping your cap table organized can be key to fundraising success. You will need to update it each time you take on a new investment, and a mangled, disorganized cap table can signal to investors that you didn’t have a well-thought investment strategy, or that you burned through your working capital faster than anticipated. Either situation can raise eyebrows for how well you manage your cash.
Conversely, a well-kept cap table can be to your benefit when negotiating equity with potential investors. As you take on more investment, a solution like Carta can make it easy to manage your cap table and even dish out equity to employees as you grow your team.
3. Get Organized—Financially
When you ask someone for money, be prepared to talk about money. Accounting is the language of business, but not many entrepreneurs are totally fluent. Investors, on the other hand, have usually been talking the talk for years if not decades. Before an investor even thinks about signing a check, they’re going to want to understand your financial performance to date and what your goals may be. Even if you’re just now starting to rack up your first expenses, you’ll need to be able to track and explain those costs and how they turn into revenue.
Don’t forget to ask for help!
Managing your financials yourself is only feasible for so long—you are running a company after all. In fact, if you were to ask most founders and CEOs, you would likely find that they wish they’d gotten help with accounting, bookkeeping, and taxes sooner than they did. Depending on different business models and industry, most companies benefit from delegating accounting and taxes to an outside solution at the Angel or Seed funding stages. While there are many options out there on a local and nationwide scale, if you’re looking for a financial partner that will scale with your business long term, there’s really only one choice.
4. Put Together Your Term Sheet
While your term sheet will appear very official and full of legal-eeze, it is actually a non-binding agreement that sets the basic terms and conditions for investments in your company. You’ll use the term sheet to dictate the type of investment, interest rates, and agreed-upon company valuation with interested investors. Once you have your cap table and accounting locked down, drafting your term sheet is the perfect next step toward taking investor meetings—and offers!
From doing a simple Google search, you’ll find many term sheet templates for each type of funding. These are helpful for providing the framework and setting the more formal tone of your terms for investors.
Here are some examples of the nitty-gritty details you’ll want to outline in your term sheet:
- Liquidation preferences
- Conversion options
- Voting rights
- Information rights
- Protective provisions
- Co-sale rights
- Election of directors
- Option pool
- Sale transaction
- Share purchase agreement
It Pays to Be Diligent From the Start
Just as when you’re buying a home, investors are going to look for cracks in the foundation. Taking care of these four essential pieces before you pitch helps alleviate any uncertainty and doubt in an investor’s mind.
“If someone's going to give you millions of dollars, they're going to look at everything—literally, everything. When it comes down to fundraising and doing different activities, having everything perfectly documented, filed, and ready to present makes a world of difference.” Justin DiPietro, Co-Founder & COO of SaleMove shares in The Startup Founder’s Guide to Fundraising.