235. Priced Rounds Clean Cap Tables

VC Minute
Stacking SAFEs gets messy, vs. priced rounds that clean cap tables. And having more investors can benefit you because they can make introductions to other investors.

VC Minute – quick advice to help startup founders fundraise better

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Tom McGrath:

I would say that if you can move to a priced round, even though they tend to be more expensive, it is a lot cleaner than dealing with safe and convertible notes. I think that there is an advantage towards using those safe and convertible notes early up front. But I can tell you that prior to the price round we did for a Seed, we had safe notes with caps on them. We had safe notes without caps on it. We had safe notes with discounts on them. Some that were pre-money, some that were post-money, and the reconciling of how that all transitions into equity was a bear. I’m very happy now to have a very clean cap table.

One of the big benefits that we had as a company is we didn’t have one or two major investors. We had some bigger ones, but then we had a long tail of smaller micro VC firms that did anywhere from 100 to half a million dollars. I effectively had five firms who were helping me raise the next round. I really didn’t have to do that much outbound. I had plenty of pipeline. Even SpringTime Ventures when you guys had committed and not even fully put the money in, you know, making introductions to other firms.

I think the phrase that people often use is creating an investor pool party. And I feel like that’s what we have is a pool party. There’s certainly disadvantages to having too many people on your cap table. But I think if they’re institutional firms who really understand things. And they know, they don’t want to hold things up or realize, “Hey, I’ve got 100,000 investment I’m not going to sit here and red line the terms of the Series A, because that’s not my place. Those types of investors are helpful where they just really want to be strategic and help introduce you to other people.

And I would say that that was a major reason we were able to do what we did was just the existing investors making introductions to others. And that’s another good question, actually, to ask investors is, talk to me about your relationships with other investors for subsequent rounds.” So let’s say that, for example, SpringTime Ventures. You guys do not invest past the Series A. So I would want to know. Okay, well, it’s 2 years from now time to raise the Series B, I say, “hey, Rich, who do you know?” And you know no one. That puts a lot more work on me versus if you’ve established the relationships and they also trust the diligence that you’ve done.

It’s one thing to hear from a founder, oh, look how great and awesome and wonderful we are. Versus hearing from somebody who was personally invested and has seen the good, bad and the ugly and under the hood saying, hey, this is a good investment. It’s your reputation at stake as well, and definitely builds confidence with them to have that.

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