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how to fund a startup
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how to fund a startup
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With an apparently inexhaustible sum of money sitting safely in the bank, the founders happily set to work turning their prototype into something they can release. How much stock do you give early employees? That varies so much that there's no conventional number. If you get someone really good, really early, it might be wise to give him as much stock as the founders. The one universal rule is that the amount of stock an employee gets decreases polynomially with the age of the company. In other words, you get rich as a power of how early you were. So if some friends want you to come work for their startup, don't wait several months before deciding.
A month later, at the end of month four, our group of founders have something they can launch. Gradually through word of mouth they start to get users. Seeing the system in use by real users-- people they don't know-- gives them lots of new ideas. Also they find they now worry obsessively about the status of their server.
By the end of month six, the system is starting to have a solid core of features, and a small but devoted following. People start to write about it, and the founders are starting to feel like experts in their field.
We'll assume that their startup is one that could put millions more to use. Perhaps they need to spend a lot on marketing, or build some kind of expensive infrastructure, or hire highly paid salesmen. So they decide to start talking to VCs. They get introductions to VCs from various sources: their angel investor connects them with a couple; they meet a few at conferences; a couple VCs call them after reading about them.
Armed with their now somewhat fleshed-out business plan and able to demo a real, working system, the founders visit the VCs they have introductions to. They find the VCs intimidating and inscrutable. They all ask the same question: who else have you pitched to? VCs are like high school girls: they're acutely aware of their position in the VC pecking order, and their interest in a company is a function of the interest other VCs show in it.
One of the VC firms says they want to invest and offers the founders a term sheet. A term sheet is a summary of what the deal terms will be when and if they do a deal; lawyers will fill in the details later. By accepting the term sheet, the startup agrees to turn away other VCs for some set amount of time while this firm does the "due diligence" required for the deal. Due diligence is the corporate equivalent of a background check: the purpose is to uncover any hidden bombs that might sink the company later, like serious design flaws in the product, pending lawsuits against the company, intellectual property issues, and so on. VCs' legal and financial due diligence is pretty thorough, but the technical due diligence is generally a joke.
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