Ready, Set, Go! What you need to know about raising capital. Part 3: Let’s Get Set
What’s Inside?
- Deciding on an investment structure
- What are you worth?
- Prepping the data room
- Warming up investors
- What’s next?
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Welcome back to part three of our what you need to know about raising capital series! In case you missed them, check out part one and part two, which focus on building good habits, and putting in the key prep you need to start raising.
Now, we’re moving on and getting set to raise! Remember, Standard Ledger acts as fractional CFO for numerous startups, and we have helped clients raise more than $40m in the last 5 years, so as always, if we can help let us know!
1. Deciding on an investment structure
By now you’ve got a strong sense of future plans, and know what you need to achieve them. You’ll have a good grasp on how much cash you need for plans involving people, product development and marketing, and know the sales outcomes you are hoping to achieve. And if you’re at a stage where you’re still investing heavily in product development, then remember you have non-equity alternatives like the R&D tax incentive (check out our R&D guide) or R&D loans. But let’s get back to investment.
Here’s a quick overview on the most common structures to raise funds through investment:
- Equity raise: raising capital by selling shares of ownership, allowing investors to be part owners of your business. You’ll need to figure out how much you’re raising, and at what valuation (see below) so you know how much of your company you’re giving up
- SAFE notes (simple agreement for future equity): widely used for earlier stage investments. Investors initially invest as debt that then converts to equity, with a 10-20% discount on the next equity raise.You’ll also still need to set a valuation cap loosely based on what valuation you expect at your next raise
While thinking about your investment structure you’ll likely also be firming up compensation packages with your current team (as well as planning for your future hires), and what employee share option plan (ESOP) allocations might be relevant. Check out information on ESOPs from our friends at Cake Equity, as well as our useful cap table template to help work this through.
2. What are you worth?
We know, it’s hard to think about putting a value on all your hard work! But, investors will ask how much are you looking to raise, and at what valuation. As long as you’re roughly in the money (and everything else stacks up), you’ll be able to continue discussions. Remember you’re not trying to close them on the first chat, you just want to keep the door open for future conversations.
This article talks more about setting valuations, but by far the simplest method is to note that each time you raise, you tend to give up 10-30% of your company, (e.g. if you’re at an early stage needing $500k, then giving up 20% would value you at $2.5 million) and the maths roughly still works as you keep growing. And if you’re a SaaS company, then using a (market dependent) multiple of ARR works.
Testing the valuation on any friendly investors you know is a good idea, and remember when things get serious and you’re lucky enough to get a term sheet (a nonbinding agreement showing an investment’s essential t&cs), pay attention to the other terms, not just the valuation.
3. Prepping the data room
What’s a data room? While it sounds exciting, it’s really just a fancy way of saying a ‘structured folder of information’ that you’ll share with investors as you go through the pre-investment stage, and then dive deeper into due diligence. Check out our DD checklist for a simple list of the things you’re likely to get asked for.
If you’re lucky enough to be in the dance with a couple of different investors, they’ll typically all ask for the same sort of information so it’s good to have this all in a single centralised place, and securely managed.
The data room contains static information (e.g. company details, shareholder agreements etc) that don’t change, so you should start to populate this now, as well as things like prior period tax returns, and BAS statements.
It’s also useful to have your data room structured in stages with high level information (static information, pitch decks, 2 page teasers, anonymised metrics etc) able to be initially shared, and then as things get serious, you would share deeper and possibly commercially sensitive information in subsequent stages and sections of your data room.
And remember, as you go through the investment discussions, you’ll need to keep the data room current with all the latest metrics, financials and customer information as you go so make it easy to keep up to date.
4. Warming up investors
Now’s the time to pique the curiosity of prospective investors, and give them a heads up that you’re getting ready to raise. See if you can get an expression of interest to receive more information when you launch, but remember, a clear ‘no, it’s not for us’ is just as useful so that you don’t waste anyone’s time and can focus on interested parties.
What’s next?
The getting set phase of raising capital is making sure you have a deep and thorough understanding of what you are worth and where you are headed, and having the data ready to show investors.
At Standard Ledger, we understand the challenges and opportunities that come with raising capital for startups and innovative companies. Our team of experienced professionals is here to support you every step of the way, providing strategic financial advice and guidance to help you achieve your growth objectives. Get in touch with us today to learn how we can be your partners in growth.
Read here for the next part of our series: Ready, Set, Go! What you need to know about raising capital. Part 4: You’re Ready to Go!
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