Raising funds : less is more
When you raise funds for your start-up, the valuation question [FR] is key. Despite what you can read pretty much everywhere, you’re goal shouldn’t only be to have the biggest “pre”. First, this can easily be tricked by some obscure mechanisms that you’re VC will require if you want an higher valuation (Ratchet, bonds…). Second, as I said before, money always comes with investors, and you’d rather have good investors with a bigger portion of the equity, than bad investors with less equity. Finally, whoever your investors are, you want them to be committed to your start-up… if you have less equity, it means that they have more, and, the more they have, the more they’ll do everything for you to succeed!
Let’s take a basic example. The founders are raising money from 2 good investors and received 2 different term sheets. One offers $2M, on a valuation of $5M, while the other offers $3M on a valuation of $6M. In the first case, the founders will end up with 71% of the equity and the end of the round, and, in the second case, they will end up with 66% only. Which one would you choose? I will definetly take the one that dilutes me more : the 2nd one!
First, let’s notice that you abandon 5% of equity for 1 more million! This is very cheap money; if by any chance you have to make another round later on, there is little chances that you can get such a deal! Second, you have to imagine that you are in the investors shoes. Let’s assume that your start-up is performing ok, but not as good as it should. As an investor you could definitely give a few phone calls, refine the strategy, work on a revised business plan… If you have $3M involved in the deal, you would definitely do it more “seriously” than if you had only $2M in it : it’s a easier to “abandon” a $2M investment than a $3M one!
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