Auctions Posts

Image: Pink Floyd

Update: Here’s a simpler approach I like.

Scheduling meetings with investors — this topic is so banal you may wonder why someone needs to write about it all. But since we started AngelList, we’ve been making daily introductions between investment-grade startups and top-tier investors like Satish Dharmaraj (Posterous), Jeff Clavier (Mint), and Aaron Patzer (Milo). We see a lot of first time entrepreneurs trying to schedule meetings with investors.

This is not how you do it (based on a true story):


It is a pleasure to meet you. I would love to tell you more about Yomommaco. Next week we are at DEMO but the following week is wide open. Please let me know if there is a date/time that works for a meeting.

BTW, I am big admirer of some of your investments… KISSmetrics looks very interesting. Gowalla too.

Looking forward to speaking with you,

Yngwie Malmsteen
CEO, Yomommaco


What’s wrong with this email? First, Yngwie proposes meeting in over a week — what’s wrong with right now? Second, he doesn’t propose any times to meet. Third, he doesn’t talk about the fact that he lives on the other side of the country. Fourth, he CC’ed me instead of moving me to BCC. Fifth, he makes an attempt to add a personal touch about KISSmetrics and Gowalla but he’s too colloquial (BTW?) and the touch isn’t personal at all — it’s just a list of company names.

How to do it right

This is how you do it (based on a true story):

Thanks Nivi (bcc'ed).


I'm back in SF on Wed 3/31. I could meet anytime the following day Thurs 4/1 after 3pm or Fri 4/2 before noon.

Since I won't be in SF for 10 days and we've already secured some commitments for the financing, why don't we get the conversation started with a 30 minute phone call anytime tomorrow Mon 3/22 after 2pm or Tue 3/23 after noon? My cell is 213.333.8923.

If you happen to be in Cambridge, MA anytime between now and 3/31, I could meet you there. Similarly, if you're in NYC in the next week, I could hop on a bus and make that work too.

I'm looking forward to talking.

Yngwie Malmsteem

The principles of scheduling meetings with investors.

Respond immediately and be available to meet immediately. BCC the introducer. If you don’t live nearby, find out where the investor is (Plancast anyone?) and let them know if you’re going to be there soon. If you’re not going to be near them soon, propose a phone call. Propose specific times to talk. If there’s a deadline on the financing or you’re going to be oversubscribed, politely let them know. Write less — you have no idea how busy a typical investor’s inbox is. Don’t be colloquial. Attach a copy of your deck. Use an email program like Gmail that generates narrow fucking columns. Don’t write HTML emails. Include a cell # and URL in the signature and not much more. Bonus: include one line of good news — or start the email with a substantive sentence about a mutual acquaintance or something about the investor’s portfolio or blog or whatever.

P.S. Good news: we just hired Steve Wozniak. / Barney Rubble just committed to the financing. / We just had our first $1000 revenue day. / I got hair plugs and they look great.

Seed financings get done through a positive feedback loop of social proof, scarcity and momentum. Focus on the financing, get it done, and get back to work.

bill.jpg In 4 Things to Do After You Get Your First Term Sheet, Bill Burnham, a former partner at Mobius and Softbank Capital, writes,

“I’ve recently been involved in helping a couple companies with their first major round of VC financing. It’s actually been pretty interesting for me because I have historically been on the other side of the table. In addition to generating several stories worthy of “The Funded” and getting a better appreciation of the trials and tribulations that entrepreneurs must go through when trying to raise money, I also gained a better appreciation for just how important it is to properly manage the “end game” of a VC financing.

“What is the “end game”? The End Game generally takes place after you have gotten a term sheet, but before you actually sign it. How well you manage this process can make a big difference in the actual terms and pricing you ultimately get, so it pays to approach this process as thoughtfully and diligently as you do any other part of fundraising.”

“With that in mind I present 4 things that you should definitely do after getting your 1st term sheet:

“1. Get a second term sheet: It may sound flip, but this is the single most important thing you should do upon getting your 1st term sheet. Nothing loosens up a VC’s purse strings or makes them more flexible on a particular term than the threat of competition. Without competition (real or perceived) you have very little leverage against a VC. Now getting one term sheet, let alone two, is tough enough, but getting two must be your goal and you must not waiver in pursuit of that goal even you after you get the 1st one. The biggest problem most entrepreneurs have executing on this strategy is that they have mismanaged the sequencing of their fundraising. Many entrepreneurs make the mistake of pursuing an “in order” fundraising process whereby they take one meeting, run that process to its logical conclusion and if that doesn’t work out try to get a meeting with another VC. VC fundraising must be pursued concurrently! You must put as many irons in the fire in as short a time as possible so that all the firms start the process at roughly the same time. As firms progress through the process, you should do your best to try and “herd” them along by trying to slow down the ones pushing ahead and speed up the ones lagging behind. The ultimate goal is to ensure that when you receive your first term sheet you have several other firms that are very close (within a week or so) to potentially issuing their own term sheets. Proper sequencing ensures that you are not forced to take an inferior “bird in hand”.”

Read Bill’s great post for the rest of his suggestions. He agrees with everything we’ve been writing about, so he is obviously quite brilliant.

“We took the approach of wanting to get to know the different partners and the different possibilities and to see where there was the best fit. Partnerships take a lot of work—you want to go out on a few dates before you get married. Yes, we dated a few people but didn’t get married… and so there were a few unhappy girlfriends out there. The choice wasn’t an economic choice, it was a customer choice.”

Steve Jobs

Summary: A deal is only as good as its best alternative. Keep improving your alternatives until you have a signed term sheet. And keep developing your current offers or they will die. Finally, don’t say “shopping around”, it puts investors off their stroke.

A reader asks:

“I have spoken to only one person regarding an investment, and they immediately said they would back my company. Should I contact more than one potential investor, i.e. shop around for someone who has experience in this space, and might be capable of injecting more capital for bigger goals? The product looks good, so I’m confident I can successfully engage other potential investors.”

In your mother’s womb, you learned that a chain is as strong as its weakest link. Now, in the awesome womb of Venture Hacks, you learn that,

A deal is as good as its best alternative.

Receiving a term sheet is a significant milestone. Receiving a verbal offer or an indication of interest is also a significant milestone.

But you should keep engaging alternative investors until you sign a term sheet. Sometimes, you should keep engaging alternative investors until you close (assuming the term sheet you signed doesn’t have a no-shop).


Improve your alternatives to get a better deal.

Create a market that is filled with alternative buyers. Without alternatives, you will be stuck in a hostage negotiation with a single prospective investor. With alternatives, you will do well. In Bargaining for Advantage, G. Richard Shell writes,

“Research has shown that, with leverage, even an average negotiator will do pretty well while, without leverage, only highly skilled bargainers achieve their goals.”

Spending time developing alternatives is as good as spending time developing your current offer. It increases the chances of closing your current offer. It closes your current offer faster. And it improves the terms of your current offer. Keep this in mind if you “don’t have time” to develop alternatives.

Develop your current offers or they will die.

Keep developing your current and pending term sheets while you engage alternative investors. If you sit on a term sheet for 2+ weeks, there’s a good chance, say 33%-50%, that the offer will disappear because the investor will move on to a shiny new company and his enthusiasm for your company will wane. Not to mention that most term sheets expire after a couple weeks.

Don’t let offers cool while while you warm up alternatives. Shopping around for Gucci underwear is effective as long as stores have it in stock. It’s not effective if each store runs out of inventory while you’re visiting its competitors.

The best way to keep investors warm is to focus on fund-raising so you can (1) get all your offers at once and (2) pick the best one before any of them cool down.

Buy a little time after your first offer.

When you receive your first offer, you can buy 1-2 weeks of time by saying,

“We’ve promised to close out conversations with a few investors and we need to honor our promise.”

“We’ve committed to a partner’s meeting next week and we need to honor our commitment.”

No investor is going to ask you to break your previous commitments. This little tactic buys you time and increases your social proof and scarcity.

You only need a few offers to clear the market.

How do you know if you’ve cleared the market? You need two or three offers from investors who make it a habit to invest in startups at your stage. These investors should create enough demand, social proof, and scarcity among themselves to improve your terms and clear the market.

Finally, receiving more than two or three offers means you will have to disappoint more investors. Turning down investors is surprisingly hard.

You’re not “shopping around”.

Finally, don’t use the words “shopping around” or “auction” with investors. Their reaction to these terms is,

“What am I, a bag of money? I can only get in this deal if I pay the most?”

You’re not “shopping around”, you’re “looking for the right partner”. While you’re talking to investors, you can define the right partner in terms of domain experience, or someone who wants to invest more/less money, or someone who has a history of backing the founders, or anything but: the guy who will pay the most.

Image Source: Visit Chandler.

“Once the term sheet is signed, the power shifts away from the startup to the purchaser. The typical term sheet will give the purchaser the discretion to step away from the deal if due diligence is unsatisfactory, or if the necessary internal approvals are not obtained.”

Suzanne Dingwall Williams, on M&A

“… there is a wide range of behavior among VCs—the group that doesn’t put a term sheet down until they are committed are at one end of the spectrum; the group that puts down a term sheet to try to lock up a deal while they think about whether or not they want to do it is at the other.”

Brad Feld

Summary: Complete business diligence and prepare for legal diligence before you sign a term sheet. Signing a term sheet early is a recipe for a hostage negotiation.

A reader asks:

“Our term sheet says ‘any obligation on the part of the investors is subject to satisfactory completion of due diligence by the prospective investors.’ How much diligence should we do before signing the term sheet?”

Whether or not your term sheet includes this term, complete business diligence and prepare for legal diligence before you sign a term sheet.

Signing a term sheet early is dangerous.

Signing a term sheet, with or without a no-shop agreement, while an investor is still conducting business diligence, is a recipe for a hostage negotiation:

You sign a term sheet, let other investors know, and go off the market while your prospective investors do diligence. After 2-4 weeks, your prospective investors say, “Uh, yeah, the results of diligence weren’t so good, we’ll still do the deal but with these (worse) terms instead.”

While you’ve been off the market, your prospective investors have been creating alternatives by looking at other companies. Every company that is raising money, not just your competitors in the marketplace, is competing for your prospective investor’s time and money. Meanwhile, the market your created before signing a term sheet has dissipated.

Even if you turn down these worse terms and approach new investors, you will have to explain why you walked away from a signed term sheet. So, before you sign a term sheet, complete business diligence and prepare for legal diligence.

Complete business diligence.

Business diligence is whatever your investor needs to make his investment decision. Some firms complete business diligence before they offer a term sheet. Other firms offer term sheets before they complete business diligence because they want to lock out the competition while they evaluate the company.

Determine whether business diligence is complete by asking:

  • Has this investment been approved by the entire partnership? Are any other approvals required?
  • Why do you want to invest?
  • Have you done your references? (And have we done our references?)
  • Are there any other steps besides legal diligence once we sign the term sheet?
  • When was the last time you or your partnership signed a term sheet that didn’t close? Why? How many times have you not closed a term sheet in the last five years? Why?
  • Do you agree with our plan for the next two/three/four quarters?
  • How quickly can we close? Under what assumptions are we coming up with this date?

Prepare for legal diligence.

After you sign a term sheet, investors conduct legal diligence, looking for reasons to not invest or reasons to revise the terms.

Legal diligence,

  1. Confirms whether your claims are actually true, e.g. your annual revenue actually is $10M.
  2. Uncovers important facts you didn’t mention, e.g. you’re being sued.
  3. Completes tasks you should have done earlier, e.g. all employees sign NDAs.

Before you sign a term sheet, help your prospective investor eliminate most reasons to not invest by,

  1. Telling the truth. (Duh.)
  2. Disclosing everything.
  3. Working with your lawyer to sign the agreements you need to sign. (If you can afford it.)
  4. Asking your prospective investor, “What diligence remains once we sign the term sheet? Which items can we complete before we sign the term sheet?” Document these items in an email to your investor. This email is normative leverage in case the list suddenly gets bigger during closing.

Desperation is no reason to rush into a term sheet.

You: “It must be great to complete diligence before signing a term sheet—but we’re desperate for money right now.”

Venture Hacks Shift Manager: That’s the worst reason to rush into a term sheet. Signing a term sheet before completing business diligence makes you more desperate, not less. A term sheet with or without a no-shop takes you off the market, dissipates your market, and places you at the mercy of your prospective investor.


Image Source: McDonald’s.

Q: What’s the biggest mistake entrepreneurs make when they’re raising money?

Entrepreneurs focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions.

Valuation is temporary, control is forever. For example, the valuation of your company is irrelevant if the board terminates you and you lose your unvested stock.

The easiest way to maintain control of a startup is to create good alternatives while you’re raising money. If you’re not willing to walk away from a deal, you won’t get a good deal. Great alternatives make it easy to walk away.

Create alternatives by focusing on fund-raising: pitch and negotiate with all of your prospective investors at once. This may seem obvious but entrepreneurs often meet investors one-after-another, instead of all-at-once.

Focusing on fund-raising creates the scarcity and social proof that close deals. Focus also yields a quick yes or no from investors so entrepreneurs can avoid perpetually raising capital.

Q: What’s the biggest mistake VCs make?

The biggest opportunity for venture firms is differentiation. VCs compete for deals, and differentiation is the only way to compete.

Most firms offer the same product: a bundle of money plus the promise of value-add. And the few firms that are differentiated don’t communicate their differentiation to entrepreneurs. Y Combinator is an example of differentiated capital with excellent marketing communications.

Venture firms that thrive by investing in game-changing businesses have barely begun to differentiate themselves, let alone changed the rules of their own game.

Note: These excellent questions are adapted from Ashkan Karbasfrooshans’s Venture Hacks interview.

Image Source: Despair.

How many similarities can you find between hacking fund-raising and hacking a car purchase? Watch this video:

The best answer gets a coveted Venture Hacks mug.

(Via Lifehacker.)

“Things are worth what people pay for them.”

– Head of M&A at a Fortune 500 Company

Summary: You need strong alternatives to hack a term sheet. Create alternatives with focus: pitch and negotiate with all your prospective investors at once. Focus compounds scarcity and social proof, which closes deals. Focus also yields a quick yes or no from investors—either way, you will soon get back to building your business.

You can’t hack a term sheet without leverage. Term sheets are negotiated on the basis of leverage, not merit. And whoever needs the deal least has the most leverage in a negotiation.

The simplest type of leverage is a great BATNA. A great BATNA might be a term sheet from another investor, an offer to buy your company, or an investment from angels instead of VCs.

Hostage negotiators learn how to negotiate with awful BATNAs where people die in a hail of bullets. If you’re not in the mood for a hostage negotiation, get a great BATNA by creating a market for your shares.

The market determines your company’s valuation.

Many entrepreneurs wonder what their company is worth. The incredible answer is: companies are worth what people pay for them.

There is no right or wrong price. The market clearing price is determined by supply and demand: how many shares you’re selling, your team, your product, your revenue, your salesmanship, et cetera.

The market determines your value, but there is no market for your shares—you must create it. How? At a minimum, get two independent, competing offers from investors who make it a habit to invest in startups at your stage.

You must focus on fund-raising to create a market.

Pitch all your prospective investors at the same time. Negotiate with all interested investors at the same time. You can’t clear the market in series, you can only clear it in parallel. Learn from Adam Smith at Xobni:

“Our series A didn’t happen quickly. We excited the people we met with, but we were timid about getting started having recently closed a $100k angel round. One firm had interest, so we thought “We better talk to someone else to make sure we’re getting a good deal.” That incremental approach went on for a few months. We were always in late stages with one investor but just beginning the dialogue with another. Deciding to raise money should be an atomic decision; don’t try to just dip your toe in.”

Jump on your desk, kick something, and declare a start to your fund-raising. Don’t negotiate consecutively, negotiate concurrently—you can’t create a market by meeting investors one-at-a-time. The only way to clear the market is to focus on fund-raising and talk to a lot of investors at once.

On eBay, everybody bids at the same time, over a short and arbitrary period of time. That drives the price up. They don’t bid one-at-a-time over a timespan of ‘whenever’.

Let's raise some fucking money.

Five fund-raising milestones.

The next few hacks will cover the five major milestones of fund raising:

  1. Get first meetings.
  2. Get partners meetings.
  3. Get the first term sheet.
  4. Sign a term sheet.
  5. Close the deal.

Your leverage goes up at each milestone—that is, your interest in new prospective investors goes down at each step.

Focus compounds scarcity and social proof.

Investors move in herds that are steered by scarcity and social proof. Scarcity is “hurry up or the deal is going to disappear.” It engenders urgency. Social proof is “everyone else wants to invest, don’t you?” It engenders validity.

Scarcity and social proof make people crazy. Scarcity and social proof close deals. Focusing on fund-raising creates a positive feedback loop of scarcity and social proof:

If one investor wants to invest, you get a little bit of scarcity and social proof. That raises the interest of a second investor and creates more scarcity and social proof. Which raises the interest of a third investor…

Learn more about the psychology of negotiation in Bargaining for Advantage. It combines the negotiation principles of Getting to Yes with the psychological principles of Influence. Chapter 6 of Bargaining for Advantage, “Leverage”, is free money.

Creating a market is (relatively) quick.

Focusing your fund raising on a short period of time (about 4-8 weeks) means you will raise money quickly. Or you will fail quickly and start working on getting past no. Either way, you’re no longer raising money, you’re back to building your company and serving your customers.

Related: You can’t clear the market in series.

Image Credit: Noah Angeja

Summary: Angels make more introductions than VCs because angels need co-investors. You can’t clear the market in series–you can only clear it in parallel. Tranches are dumb–they have zero upside and catastrophic downside. Two investors aren’t always better than one. Finally, a ‘very special’ message to graduating Y Combinator founders: don’t do deals on D-Day and feel free ping us if you want additional help.

Adam Smith from Xobni, a Y Combinator company, calculates that angels made 5 times as many intros as VC investors while Xobni was raising a Series A:

“We spoke with 16 angels and 12 VCs. Angels made 24 introductions; VCs only made four. The average angel introduced us to 1.5 other investors, but the average VC only introduced us to 0.33 other investors. That’s a 5x difference!

“So angels can be helpful even if you’re raising a mostly VC round.”

Read the rest of his great letter to graduating Y Combinator (YC) companies: Raising Money, Some Data and Tactical Advice.

Why do angels make 5x more introductions?

First, angels usually take a small piece of a Seed or Series A. If they like the company, they need to make introductions because they need co-investors. VCs usually don’t want or need co-investors–if they like a company, they want to buy as much as they can.

Second, some angels are followers, not leaders. They find a company they like but they don’t want to lead the investment. So they introduce you to a top-tier firm like Blue Shirt Capital and say to themselves,

“If Blue Shirt wants to invest, the company must be good. Plus, Blue Shirt will do all the work, and I’ll go along for the ride. I know Blue Shirt won’t cut me out since I introduced them to the company—firms that cut out the middleman stop getting intros.”

You can’t clear the market in series. #

Adam writes:

“Our series A didn’t happen quickly. We excited the people we met with, but we were timid about getting started having recently closed a $100k angel round. One firm had interest, so we thought “We better talk to someone else to make sure we’re getting a good deal.” That incremental approach went on for a few months. We were always in late stages with one investor but just beginning the dialogue with another. Deciding to raise money should be an atomic decision; don’t try to just dip your toe in.”

You can’t clear the market in series. You have to do it in parallel. You can’t create an auction by meeting investors one-at-a-time. The only way to get a market clearing price is to meet a lot of investors at once.

On eBay, everybody bids at the same time, over a short and arbitrary period of time. That drives the price up. They don’t bid one-at-a-time over a timespan of ‘whenever’.

As for how to create an auction, here’s the short version:

Jump on your desk, kick your laptop across the room and declare a start to your fund-raising; set up 10 investor meetings for the same week; you will probably end up meeting only 4-6 of them due to scheduling conflicts; tell them “We plan to sign a term sheet in 6 weeks, if we don’t have an offer by then, we’re going back to using sweat equity to build the company“; signal your valuation by saying “We want to raise $X from n investors with no more than Y% dilution, including the option pool,” (Y = 15%-25% per investor plus a 10%-20% option pool dilution). In a tight process with VCs, there are three meetings; one with the original partner you were introduced to; next, you meet the original partner with a few other partners; finally, you go to a partner’s meeting; there may also be an intermediate meeting where some of the partners come to your office to refactor your code and eat your food; if some investors are being slow while others are moving along, tell the slow ones, “By the way, we are on second meetings with three funds.” If things go well, you should receive 2-3 term sheets; reject the ones that explode the next day: “We told other investors that they have until the end of the week to send us term sheets, we can’t break our promise.” Negotiate the offers over the next 2-3 days and get your favorite investor to the terms you want. During closing, keep your other prospective investors warm in case the deal blows up; but don’t break any binding no-shop or non-disclosure agreements in the process.

(We’ll elaborate in a future hack; with apologies to Paul Graham.)

Auctions and artificial deadlines create a positive feedback loop of social proof (“Other people want to invest, don’t you?”) and scarcity (“Hurry up or the deal is going to disappear”). That’s what closes deals. Auctions also force you to fail or succeed in a few weeks. Either way, you will soon get back to creating value for your customers.

Finally, don’t use the a-word (‘auction’) when you’re raising money. Investors don’t like it. Auctions are “taboo” when you’re selling part of your company to an investor, yet perfectly dandy when you’re selling your whole company to an acquirer. Don’t say, “We’re running an auction to get the best deal”, say “We’re looking for the right partner to help build our business.”

Tranches are dumb.

Adam writes:

“Traunching is bad for the company. If your investors exercise the traunche(s) then it means that the company is now worth more than they’re paying you, so you’re leaving value on the table. You might want to raise a smaller round and go to the market again when your valuation is higher.”

Tranches are generally stupid. They have zero upside and catastrophic downside.

At best, tranches give your current investors a right to invest at yesterday’s valuation if your company is doing well. If your company is doing poorly, your investors will figure out how to get out of their obligation to invest. The tranches will probably have material adverse change clauses that allow your investors to get out of their obligation. Almost all tranches are call options for the investors, not put options for the company.

If your investors back out of a second tranche, you will need to figure out how to manage the negative signal that your current investors don’t want to invest in your company, even at yesterday’s valuation. Remember the Golden Rule:

“He who has the gold rules.”

Get the gold while you can. If your prospective investor wants tranches, say:

“Currently, we’re focused on raising this round, not the next one. Let’s negotiate the next round at the next round.”

Two investors aren’t always better than one.

We disagree with one claim in Adam’s article:

“… you want to have more than one major investor. If one firm is out of line then the other firm will be there to say “This is unreasonable”. You’ll get more varied inputs. Having more than one major investor means you’ll take a little more dilution, but I think it’s worthwhile.”

Yes and no. There are good arguments for bringing on one or two investors. We don’t have a strong opinion either way.

If you have two investors, you can play them off each other during closing if one of them is being slow or demanding, you can split them on the board so one of them votes your way, you can split them when they vote their protective provisions, et cetera.

But, the additional dilution of two investors is usually significant, about 10%-15%. And you don’t need two investors to remove the unreasonable terms that Adam wants to avoid, you can just run an auction:

“We have an offer that doesn’t include [egregious term X]. I hope there is some flexibility on your side because I would really like to work with you but I have a fiduciary duty to our shareholders.”

It’s easier to remove unreasonable terms when investors are fighting to win a deal–they’re more likely to collude if they’re co-investing.

Graduating YC Founders: Don’t do deals on D-Day.

Me: Dude, we should offer to help the Y Combinator companies with their term sheets.

Naval: Don’t we already have a blog for that?

Me: Yes, I’m sure both of our readers are well educated by now.

Naval: It doesn’t matter anyway… the good YC companies will get snatched up on demo day–savvy investors will force quick decisions.

Me: What’s the rush? The YC founders should spend a week to get multiple offers. Good investors compete with their merits, not exploding offers.

Naval: Why are you telling me? Get the word out…

Presenting… a very special message from Venture Hacks to YC founders:

  1. Take your time. If you can get one offer, you can get two. And a better deal.
  2. Send any questions to nandn at venturehacks dot com. We’ll keep them in confidence and help as much as we can.
  3. We’ll hold office hours on Friday August 17th to discuss fundraising–details are coming.

Good luck! And let us beseech the blessing of Adam Smith upon this great and noble undertaking.

“You cannot clear the market in series.”

– Office Hours

“Investors move in herds that are steered by scarcity and social proof.”

– Office Hours

Summary: This article includes audio and notes from our first office hours. Topics include selling 51% of the company, dead equity, and setting good terms with angels.

Yesterday, we held our first office hours via teleconference. Office hours are an opportunity to ask questions and discuss raising capital.


Here is an edited MP3 of the discussion:

Venture Hacks Office Hours, June 7 2007 (mp3) (length: 18:43)

The questions and discussion were great. We had to stop early due to technical difficulties. Next time, we will do it via Skypecast which I hope will be flawless. We will post the time, date, and link for the next meeting soon. Please submit any ideas for office hours in the comments.

Finally, here are some edited highlights of the discussion. Please excuse any bad grammar, these are rough notes.


Entrepreneur: We have an offer of $1M for 51% of the company. What do you think?

Venture Hacks: I wouldn’t take the 51% deal. At that point it is no longer your company. You are an employee. And you are no longer doing a startup. And you killed the entrepreneurial drive.

Investors who would like to buy 51% of your company don’t know how to invest. Especially if it is early stage. They think they are buying an asset that someone is going to run for them. But what they have done is killed the entrepreneurial drive.

Reject that deal out of hand. I would rather go back to eating Ramen noodles and working out of my parent’s basement. It is equivalent to selling your company for a little bit of money and going to work for your investors. Continue looking for another deal.

Don’t even talk to these 51% guys if they come back with a better offer. They have already made their intent to own 51% of the company clear.


We want to raise $1M for 20% of the company or raise $2.5M for 30%-40%. How do we do it?

I don’t know what your company is worth. That is driven by the market. There is no right or wrong valuation. It is driven by your team, product, market, salesmanship, etc.

If you’ve hit 10 investors who make it a habit to invest and you haven’t gotten good responses and you can’t get a term sheet or verbal terms, you aren’t likely to get a term sheet if you talk to 20 more people. There is probably something wrong with the company and you should take a look in the mirror.

The #1 reason people are not able to raise money at the valuation they want is because the team is incomplete or does not appear up to the task. And that is tough feedback for a prospective investor to give. And if it isn’t the team, it is the product or traction.

How do I get a market clearing price?

You cannot clear the market in series. You have to do it in parallel. Set up 10 meetings to all happen in the same week. Some of them will flake out and you will end up meeting with 4-6 of them. Tell them all that you plan to sign a term sheet in 6 weeks and if don’t have an offer by that time, we are going to go back to the drawing board and using sweat equity to build the company.

You have to create that time limit.

If you go to market, go to market. The only way to get a market clearing price is to talk to a lot of people at once. I often see people go down the path with one or two investors. That is a mistake. Focus on the fund raising and get it done or go back and fix what is wrong with the company.

Don’t use the word “auction” with your investors but you need to run an auction. An auction is a double win for you. First, you focus your fund raising on a short period of time so you can get back to your customers. Second, it creates a positive feedback loop of scarcity and social proof. Those are the things that close deals.

Check out a book called Influence. Scarcity means “Hurry up or the deal is going to disappear.” Social proof means “Other people want to invest, don’t you?” Investors tend to move in herds that are steered by scarcity and social proof: “Sequoia is investing? I’m in.”

Dead Equity

If one founder has a (non-patented) idea and doesn’t add much value beyond the idea and the other founder does all the work, how do you split the founder’s equity?

It ranges from 1% – 10% of the founder’s equity. If someone has the idea, follow the Einstein maxim that “Genius is 1% inspiration and 99% perspiration” and give them 1% of the equity. If someone is active and helps you get started and has industry connections and stays active over time, you can give them closer to 10%.

Ideas are a dime a dozen. There are more good ideas than time. Ideas constantly change and you almost never end up doing what you started doing.

50-50 splits are unstable and the company falls apart. 2 years after the founding, one guy is still in the garage and says “Oh my God I’ve put in all this work, the idea has changed 5 times, and this other guy who is doing nothing has 50% of the company.” It is dead equity.

The percentages we are talking about here are the split between the founders.


I probably need $.5M to get my company off the ground. How do I set my terms with angels so it doesn’t screw me up down the road?

First, don’t give a huge discount if you expect to raise your Series A soon after the seed round. VCs don’t want to pay a big markup between the seed and the Series A unless time has passed (say 6 months) and traction has occurred. Typical discounts are between 20%-40%. Put time and traction between your financings.

Second, if you raise equity from angels they will probably have to approve the Series A. If you have a nasty angel, a “fallen” angel, who is trying to make money on just this one deal and doesn’t have a reputation to protect, he can try to hold you hostage on the Series A and veto your Series A until you give him some kind of good deal such as letting him put more money in at a good price. That’s a rare scenario but it does happen and the only way around it is to pick your angels carefully. If you raise debt, don’t give debt holders veto rights on the next financing.

Third, don’t give your angels perpetual warrants that don’t expire. If the company is a big hit, you don’t want your angel to come in right before the IPO and dilute everybody 10% at a very low cost. Avoid warrants in general, but if you do use them, set a short expiration.

A really clean debt agreement between you and experienced angels is the best way to get the company going. It leaves you with a ton of control. Check out Yokum Taku’s debt term sheet.

Approaching Investors

How do I approach VCs and angels?

You approach investors through people who know them. The best approach is through an entrepreneur whom they have backed and been successful with. Next best is probably someone who works with them such as an angel, or someone who sends deal to them, or someone who is associated with the industry. Third is probably your accountant or lawyer.

Fund-Raising Schedule

How do I time the fund raising?

In short, focus. Hit all the contacts at once. In your head, declare a start to the fund raising. Set up all your first meetings to happen in the first week.

If some investors are being slow while others are moving along, tell the slow people, “By the way, we are on second meetings with three funds.”

In a tight process, there are three meetings. One with the original guy you made contact with at the firm. Second, you meet the original guy and some of his partners. Third, there will be a partner’s meeting. There may be an intermediate session where some of them come to your office.

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