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Startup Fundraising Office Hours: VC Term Sheet Edition [Video Replay + Transcript]

VC Term Sheet questions with special guest startup lawyer, Joe Daniels of McCarter & English, were the first topic at this month's MasterMinds Startup Fundraising Office Hours.

The fun, friendly live video Q&A session answered startup fund-raising and strategy questions from entrepreneurs from all over the world with FREE expert startup advice Joe and Scott Fox: Startup Fundraising Expert Free Office Hours

  • Term Sheets discussion with Joe Daniels:  what founders should watch out for in term sheets from venture capital firms and angel investors, dilution, preferred stock, liquidation preferences, stock options for employees, founder vesting, and more.

Plus, Startup Council CEO Scott Fox took questions live on camera, via YouTube chat, and LinkedIn Live comments, too: 

  • Seyi, Washington DC: Should I hire an advisor to help me build the company? How much to pay advisors?
  • Savas, Ankara Turkey: How much equity to give to co-founders?  
  • Lulu, San Francisco: LLC vs C Corps
  • Abby, NYC: Where to find help to develop investor financial models for a DTC company?
  • Richard, Miami Florida: How to value a $1M investment for a company with a $500 Billion TAM?  (TAM vs SAM vs SOM)
  • Athena, Anaheim California: How to change from a bootstrapped, solopreneur mindset to raising money from VC and angel investors?

Get your questions answered live by joining the #LIVESTREAM on the 4th Tuesday each month at Noon PT/300pm ET/~800pm UK.

Submit your questions here IN ADVANCE for Startup Council CEO Scott Fox: https://www.mastermindsforum.com/office-hours-rsvp

This free tech startup fundraising advice show is for startup founders and entrepreneurs raising venture capital and angel investor money for their startup ventures.

IF YOU LIKE VALUABLE FREE ADVICE PLEASE CLICK TO LIKE & SUBSCRIBE? 

Sign up for free email updates and free event tickets at https://StartupEventNews.com Visit http://MasterMindsWorkshops.com to attend the Startup Council's monthly MasterMinds Startup Accelerator Workshops for startup founders and friends!

To watch this month’s Startup Office Hours replay click here

And see a complete TRANSCRIPT BELOW.

MasterMinds Startup Fundraising Office Hours TRANSCRIPT for October 26, 2021:

00:00
office hours i'm scott fox it's time to
00:02
talk about startups we're here this
00:04
month again as we do every month near
00:06
the end of the month to talk about early
00:08
stage financing especially to help early
00:10
stage tech startups get a leg up in this
00:12
very competitive world the world is
00:14
apparently awash with money but it's
00:17
still hard to get if you're an early
00:18
stage entrepreneur especially if you're
00:20
pre-revenue or you haven't demonstrated
00:22
the kind of traction that angel
00:24
investors seem to demand these days so
00:26
today we're going to talk about that
00:27
especially we're going to focus on term
00:28
sheets which is a particularly
00:30
perplexing area for a lot of founders
00:33
because
00:34
well because the media covers
00:36
the business from the vc's point of view
00:38
usually right the venture capitalist
00:40
point of view so today i thought we'd
00:41
talk about term sheets particularly from
00:43
the founders point of view to help as
00:45
many of you as possible figure out how
00:47
to get the best deal for the equity in
00:49
your new company
00:51
with us we're also going to have our
00:53
good friend joe daniels from a carter in
00:55
english which is a top tier law firm in
00:57
new york city joe has done literally
00:59
billions of dollars of vc financings at
01:01
all stages of the food chain and
01:03
different industries he's going to join
01:05
me here in a minute for a few minutes
01:07
to talk about term sheets and we'll take
01:09
some of your questions as well
01:11
thanks to those of you who are tuning in
01:12
i see abby and say and
01:15
some other folks we'll get the chat
01:17
going here as well if you are
01:19
let's see let me play with my fancy
01:21
control room here um if you are on
01:24
watching us on youtube or linkedin or
01:27
facebook you can chat and the chats will
01:29
start showing up next to my face here
01:31
over here and we'll take some of your
01:32
questions live that way as well and if
01:35
you want to appear on camera with me
01:38
here's the link for that happy to join
01:40
you is always more fun when people you
01:42
know can see your face right
01:44
and it makes more of an interesting and
01:46
memorable show and education
01:48
um so uh i'm scott fox i'm the ceo of
01:51
the startup council we're a community
01:52
service group based in southern
01:54
california but really with worldwide
01:56
reach thanks to the internets and my
01:59
mission in life at least at this point
02:00
in my career is to help as many early
02:02
stage founders as possible get out there
02:04
get on the road and build some great
02:05
companies i'm a serial internet
02:07
entrepreneur a very active angel
02:09
investor a former attorney an investment
02:12
banker a startup founder
02:14
so i've done all kinds of this stuff for
02:16
many years including writing these books
02:17
behind me which
02:19
they're not i didn't write them all the
02:20
three in the middle are english and the
02:21
rest are foreign translations so if
02:23
you're tuning in from somewhere else in
02:24
the world
02:25
because you read the russian or the
02:27
japanese or the polish translation
02:29
welcome to you as well we're here every
02:30
month on the last tuesday at noon
02:32
pacific time because it's lunch time for
02:34
me so i'm sharing my lunch with you from
02:36
my office here in southern california
02:38
okay so let's get going um
02:40
let's see you can join me on camera
02:41
there let me just a little more
02:43
housekeeping here what else we got here
02:44
oh invite your friends uh if anybody
02:46
else wants to join we're here on youtube
02:48
live and streaming there and taking
02:50
questions there like i said so go ahead
02:52
and use the chat
02:54
to ask some questions and we'll put them
02:56
up on the screen and take those as well
02:57
uh quick legal notes this is being
02:59
recorded and will be shared online
03:02
it also is not legal advice although
03:04
both joe and i have law degrees this is
03:06
not official legal advice we are
03:09
preventing uh this is not to be relied
03:11
upon you should consult your own counsel
03:13
uh which might include a smart guy like
03:15
joe um and what else uh oh there it is
03:18
it's not qualified legal advice there we
03:20
go in writing okay so let's get going
03:22
here i'm gonna invite my friend joe on
03:24
camera and the rest of you who are
03:26
nearby um like i said hit the chats and
03:28
make some friends with each other and
03:30
we'll get going here we're going to talk
03:31
about term sheets so let's see if joe's
03:34
here
03:35
that looks like joe there hey joe
03:37
hey how's it going all right good to see
03:39
you let me uh get you up here so we can
03:41
see a little bigger
03:42
let's see
03:44
no that's not gonna help
03:47
that looks
03:48
maybe there we go hey there he is okay
03:50
so this is joe daniels everybody hey joe
03:52
good to see you hey how's it going
03:55
good so here let me put that up there in
03:56
case any of you joe daniel's pretty easy
03:58
name to spell but there you go in case
04:00
it was a mystery to you um okay and he's
04:03
with mccarter in english in new york
04:04
city so we're going to talk about term
04:06
sheets for a while i know joe has to run
04:08
to a board meeting in uh 20 minutes or
04:10
so so we'll make this quick and in the
04:12
meantime you guys can
04:13
ask some questions along the way okay so
04:16
um so joe the reason for this today and
04:18
thanks for being here by the way it's
04:19
nice to see you
04:21
as i was running a masterminds group as
04:23
we do every month and you know you've
04:24
spoken at those actually and i was
04:26
talking about some term sheet points and
04:29
um
04:30
the room blew up while the virtual room
04:32
i mean people were really uh intrigued
04:34
by the things that a founder should
04:37
negotiate because it looks like most of
04:39
the articles out there are a lot of the
04:41
financial people talking to each other
04:43
about how to get the best deal from a
04:44
founder but from a founder's point of
04:46
view
04:47
there are things that they should watch
04:48
out for right and so we were talking
04:50
about um
04:51
like common versus preferred or
04:54
ratchet dilution sort of phrases vesting
04:57
for founders um and um
05:00
the i guess the reason this started let
05:02
me start with an easy one because i
05:03
think you'll agree pretty quickly to
05:05
start because of founder i'm working
05:06
with here he got hit with a term sheet
05:09
that had a bunch of fees in it and there
05:11
were two kinds of fees maybe you could
05:13
start there and just tell us what kind
05:14
of the industry point of view on this is
05:17
one was
05:18
it had a nine thousand dollar fee that
05:20
he was supposed to pay them
05:22
to pay for their due diligence which i
05:25
thought was a little odd but i'd like to
05:26
hear your opinion and then there was
05:28
another fee which may be a little more
05:30
legit was a budget of another nine
05:32
number up to 90 000
05:34
to pay
05:35
for their documentation for their
05:38
attorneys and that would be paid um not
05:41
necessarily upfront like the first 9000
05:42
but would be paid from the proceeds that
05:44
they were going to give him
05:46
what what is this this is the kind of
05:47
what was the size of the round in that
05:49
deal it was three million dollars okay
05:52
so that's a typical larger uh seed round
05:55
or you know maybe even a small a round
05:57
these and then maybe the median around
05:58
it's like 10 million these days so maybe
06:00
not in a round more like a seat so
06:03
uh the 9 000 diligence fee is is uh i
06:06
you very seldom see that in fact it
06:09
strikes me that uh that might have been
06:11
uh you know there are people who pretend
06:12
to be
06:13
able to write checks or b to be
06:15
institutional uh funding sources but
06:17
actually they're just creating an spv
06:19
and going out and raising the money once
06:21
they have the term sheet with the
06:23
founder or the company
06:24
and then they you know they don't have
06:26
the money they go and try to raise it
06:28
and and uh somebody who adds in a nine
06:30
thousand dollar diligence fee sort of
06:31
fits that uh
06:34
personality type or characteristic and
06:36
uh
06:37
the 90 grand is high
06:39
for for a c see around i usually see
06:41
that between um you know the more
06:44
expensive areas like new york and palo
06:45
alto
06:46
you know 25 to 50k
06:49
so definitely
06:50
twice the typical
06:52
spv is a special purpose vehicle in
06:55
other words they create a little llc
06:57
that they raise money into and then they
07:00
they collect management and uh
07:02
carried interest fees almost like a
07:04
small vc fund
07:05
uh what just for your deal that they
07:08
sign with you
07:09
right right excellent okay that's this
07:11
is great it's good to talk to you
07:12
because you already that gave me an
07:14
angle on this that i haven't seen so
07:15
this folks might be essentially a blank
07:17
check these guys were looking to do a
07:19
deal but wanted the
07:21
founder to pay for their research so
07:23
they could go raise money and create a
07:24
job and an investment for them that's
07:26
kind of what yeah that's right
07:27
interesting okay that's an angle i
07:29
hadn't considered okay
07:31
and this 90k um yeah this was a new york
07:33
firm so i guess they thought they were
07:35
really expensive the punch line for
07:36
anybody that's interested including joe
07:38
of course is that i think these guys
07:40
were actually kind of predatory because
07:42
as soon as the founder here
07:44
uh wanted to start asking for references
07:47
they started demanding their nine
07:48
thousand dollars
07:50
so so that's yeah you're you're raising
07:52
your adventure
07:55
it's a bit it's a big red flag when your
07:56
investor starts asking you for money
07:58
right yeah yeah exactly especially a
08:00
friend
08:00
right right right okay cool all right
08:03
well that was a great place to start
08:05
okay so i realized in my excitement to
08:06
see you and get going and i know your
08:08
time is valuable i didn't let you
08:09
introduce yourself so now everybody
08:11
knows you know what you're talking about
08:12
you proved there you stumped me right
08:14
away so this is what daniel's you want
08:16
to talk a little bit about yourself and
08:17
then we'll get to more questions yeah so
08:20
um i'm um a partner and co-chair at
08:22
mccarter in english and mccarter is a
08:24
175 year old
08:26
full service law firm uh with sergeant
08:28
uh startup to fortune 50 clients we
08:31
basically have a business for every
08:32
every sorry a department for everything
08:34
a business needs like
08:36
corporate intellectual property
08:37
litigation real estate and tax and i'm
08:38
in the corporate department
08:40
uh we have about uh 400 lawyers and 10
08:43
offices throughout north america and
08:45
we've been representing startup founders
08:46
and investors forever from
08:48
uh thomas edison to more recently you
08:50
know his family's venture fund
08:52
and i'm i'm um uh in the i'm the
08:55
co-chair of the emerging company venture
08:57
capital practice which focuses on
09:00
formation financing growth and exit
09:01
which is so basically helping a company
09:03
decide what type of company to form uh
09:06
how to structure the equity and protect
09:08
the ip
09:09
uh raise money in successive angel
09:11
venture capital financing rounds
09:13
uh expand for acquisitions and
09:15
partnerships and commercial agreements
09:16
of every type and then
09:18
exit through an m a deal or an ipo uh
09:20
we're usually ranked as high as the top
09:23
three firms in our region and uh have
09:25
been as high as six uh and nine
09:28
nationally and globally in terms of the
09:29
number of angel and vc deals that we
09:31
close every quarter and every year in
09:33
the pitch book and you know for example
09:35
we did we've done about 180 deals now in
09:39
uh 2021
09:40
year to date for about 8 billion
09:43
um and we also have 120 uh iep lawyers
09:46
that can help with virtually every uh
09:48
scientific area technology to life
09:51
sciences and 100 litigators ready to sue
09:53
and defend
09:55
companies all over the u.s including
09:57
california for example
09:59
i've been doing this for 25 years i've
10:01
been
10:02
including eight in california during the
10:04
dot-com days i i basically joined the
10:06
group that took netscape public and
10:08
sold it to aol and i've represented lots
10:10
of big public companies like
10:13
polycom which was acquired by
10:14
plantronics and autodesk
10:17
monster worldwide the job site and uh
10:19
credit suisse and mortgage assembly on
10:20
the underwriter side of ipos so work
10:22
with a lot of you know investment
10:24
bankers like yourself and i've done 25
10:26
uh ipos and follow-ons and scores of m a
10:29
deals and finances
10:31
well there you go folks so um this guy
10:33
knows what he's talking about and he's
10:35
also a nice guy which is rare
10:37
in this world
10:39
so
10:40
anyway so thanks for being here again um
10:43
okay so we answered lulu's question
10:45
already i'll ken we'll get to yours in a
10:46
second um let's talk a little bit if you
10:48
don't mind about um
10:51
common versus preferred form
10:54
a lot of founders i think get confused
10:56
that there are different kinds of stock
10:57
and i know this is pretty basic stuff
10:59
but um can you can you just kind of
11:02
from a founder's point of view what they
11:03
should be at the sort of high level so
11:06
um
11:07
basically preferred stock has a few
11:09
extra rights
11:11
uh as compared to common sock and it was
11:13
initially created
11:14
to to uh
11:16
fuel the silicon valley
11:18
um for the purposes of being able to
11:20
sell the preferred stock for cash let's
11:22
say a dollar per share one day and then
11:25
grant stock options on common stock at a
11:27
70 to 80 discount you know 20 to 30
11:29
cents the next day so you're t you could
11:31
be basically giving your your new team
11:34
members after raising a five million
11:36
dollar round from from excel partners
11:38
uh in the money options
11:40
uh which justifies them leaving their
11:42
job at hewlett-packard uh making
11:44
hundreds of thousands a year to you know
11:46
come on board and take a salary discount
11:48
and because there's that they're getting
11:50
like a lot of money quote unquote on
11:53
paper up front in that in that option
11:55
plus all the upside from there right so
11:57
just so people know that's the purpose
11:58
of it it's a tax driven thing
12:00
and uh and prefer stocks principle
12:04
different superior characteristics are
12:06
liquidation preference meaning they have
12:08
a right to get 1x their money off the
12:10
top generally
12:11
um of any exit
12:13
before common stock gets any and uh
12:15
they're also
12:16
blocking rights like a majority of the
12:18
preferred
12:19
after just making it simple have to
12:21
approve major corporate actions like
12:23
selling the company
12:24
dividend repurchase of stock increasing
12:26
the size of the board and they're often
12:28
uh information rights and board seat
12:30
rights and other things attached to
12:32
preferred stock
12:33
right right so that's where it starts to
12:35
get complicated and confusing for for
12:37
founders for sure can you talk a little
12:39
bit more about liquidation preferences
12:41
that that's an eye-opener to a lot of
12:43
founders uh that somebody can get more
12:45
than
12:46
more than what they put in out of the
12:48
deal and they get paid before you get
12:50
paid right even as a founder
12:53
yeah i mean uh the concept is that's
12:55
only when it's a
12:58
down round scenario like for example
13:01
let's say that
13:02
you raised 2 million on an 8 million
13:04
pre-money
13:05
and then the company sold for four
13:07
million then the preferred stock would
13:09
be able to get two million out of that
13:10
four million leaving only two million if
13:12
it's only sold for two million then
13:14
comet gets zero preferred gets
13:15
everything right it's sort of a downside
13:17
protection
13:18
and then of course if the company is
13:20
sold for 100 million they're not going
13:22
to want just their the preferred is not
13:24
going to want just their 2 million back
13:25
they're going to want the as converted
13:26
amount use preferred usually converts
13:28
one for one so they get they take their
13:30
20 or 20 million
13:32
yeah so there you go so and the
13:35
important point there is that that's in
13:36
a down scenario right so
13:38
founders can get freaked out because um
13:42
like the company the investor puts in a
13:43
million they get back their money and
13:46
more than that maybe if things go poorly
13:49
but the idea is to align your incentive
13:50
so the company grows together and
13:51
everybody makes a lot more and that
13:53
doesn't really the liquidation
13:54
preferences are really only in a
13:55
liquidation scenario right
13:58
when things go badly right
14:01
right yeah yeah not not just not just a
14:03
liquidation but also
14:04
you know a sale of the company at a low
14:06
price right right sorry yeah exactly so
14:08
so that's the my point i'm trying to
14:10
make guys is that this is if things
14:12
aren't going well yeah they're going to
14:14
claw their money back just kind of like
14:15
i don't know if you took out a loan for
14:17
a car they'll take the car back right
14:19
what if you fail to make your payments
14:21
that kind of situation but if things go
14:22
well the whole point of that is that
14:24
things go well and then things are
14:26
exciting and everybody makes extra extra
14:28
money okay
14:30
so what about um joe the
14:32
stock options and what are the current
14:35
standards for founder um
14:37
uh not for the founder but for this the
14:39
pool for the founders and the early team
14:41
uh the idea is that people set aside a
14:44
chunk of stock
14:45
so that um and investors want to see
14:47
this sometimes too right they set aside
14:48
a bunch of chalk of stock for the
14:50
founders but also for early hires can
14:52
you talk a little bit about that and how
14:54
much is a current in these days
14:57
yeah uh yeah you hear a lot of talk
14:59
about equity pools or equity plans
15:02
uh option plans um and you know
15:06
simply put i don't you generally don't
15:08
need that until you do a priced equity
15:09
round
15:11
because that's when you need to go and
15:13
get a you know because because of the
15:15
tax issues you can no longer give people
15:17
restricted stock
15:18
um so in short uh prior to the uh price
15:21
equity round you can you can there's a
15:24
cat like right in front of me here
15:25
because it's just this is the perfect
15:27
time to uh come
15:29
in on my in front of my keyboard
15:33
yes we need to get our webcam
15:36
i mean short answers we usually issue
15:37
restricted stock
15:39
even after selling notes and saves
15:42
in a in a startup uh at uh close to zero
15:45
to to incentivize not only founders but
15:47
also people who are joining after the
15:49
founders
15:51
but before the price equity round and
15:52
then you grant then you create that
15:53
equity plan and you grant options after
15:55
that it's usually 10
15:57
uh to 15 um
16:01
of the fully diluted outstanding
16:03
okay
16:04
so lulu this basic question priced
16:06
equity round is basically a lot of money
16:08
is raised early on based on a we'll
16:11
figure it out later basis a convertible
16:13
note or a safe type of thing which
16:14
you're not sure what the company is
16:16
worth
16:17
so joe's saying when the first time you
16:18
actually set the price for the company
16:20
it's going to be 5 million or 10 million
16:21
or whatever it is that's when all the
16:23
convertible notes convert and you want
16:25
to lock all that stuff down including
16:27
the option pool that he was just talking
16:29
about is that fair characterization joe
16:32
exactly right yeah okay
16:34
okay cool uh you're watching the startup
16:38
fundraising office hours i'm scott fox
16:40
and we do this once a month to try to
16:41
help early stage founders our guest
16:42
today is joe daniels from mccarter in
16:45
english in new york city he's sharing
16:47
some of his insights after working with
16:48
many many startups at the early stage if
16:51
you have questions and you want to type
16:52
them in the chat room we'll start doing
16:53
those and let me put the on camera link
16:56
as well if you'd like to join us on
16:57
camera
16:58
be happy to have you come on and talk to
17:00
us directly as well
17:01
let's try going to savas here sava says
17:04
i'm the founder of shop local my product
17:06
is at the market we're starting to get
17:07
customers company has 100
17:10
mine oh and i would like to give some
17:12
stock to my managing team what is your
17:14
suggestion okay so early this is this
17:16
right on target sabas thank you for
17:17
participating
17:19
um so what kind of incentive uh program
17:21
would you suggest there uh joe what's
17:23
typical
17:26
some stock to my managing team huh so i
17:29
mean it depends on what basically
17:31
what what roles are each of those people
17:33
going to play
17:34
um uh i you know i would generally
17:36
recommend that the uh before the first
17:39
price equity round you're you're still
17:40
keeping about 70 percent of the company
17:43
so
17:44
that leaves 30 that you could give to uh
17:46
co-founders and other people joining uh
17:49
most people will get less than 10 when
17:51
they join but you know it depends it
17:54
depends on their basically the stage of
17:56
where the startup's at uh which means
17:58
you know you'd give people in in the
17:59
earlier stages more later stages less
18:02
and the the skill set and experience
18:05
level of the person joining
18:07
and the amount of time they're going to
18:08
work
18:09
whether it's full-time part-time or an
18:11
advisor you know a couple times a month
18:13
yeah this is a constant it's a good
18:16
question because it's a constant moving
18:17
target like joe said there's a lot of
18:19
variables there right but there are in
18:21
the last few years there have emerged
18:23
standards for this kind of thing so you
18:25
could look around just a little googling
18:26
and find some articles i think sebastian
18:28
would at least give you some ballparks
18:30
about you know are you talking about 2
18:32
or 20 because depending on where you are
18:34
in this process you might not even have
18:35
an idea right of the range
18:37
and the trick is always to balance that
18:39
against that person's expectations
18:41
because a lot of people think that they
18:42
can work with you for three weeks and
18:43
they don't should own half the company
18:45
right so this is as much psychological
18:47
as as it is legal
18:49
it's a negotiation basically uh lulu
18:51
says that percentage of the founders
18:53
position or of the company this is a
18:54
common misconception
18:56
companies don't start with a limited
18:58
number of shares and then they
19:01
reapportion them as they go they issue
19:03
more shares along the way so if you have
19:06
a million shares to start and a company
19:08
comes in and invests you will issue them
19:09
more shares so you might have a million
19:11
five or two million after that
19:12
transaction then another investor comes
19:14
in you issue more shares so it dilutes
19:16
you
19:16
it doesn't replace or take the shares
19:18
that a founder has that's a big thing i
19:20
even struggled with that back when i
19:22
raised my first round um okay let's see
19:26
what would you randy let's check randy
19:27
here uh what would you suggest on the
19:29
term sheets to issue as a startup for
19:31
200 000 seed money when looking forward
19:33
at the next round of 2 million
19:35
also the term sheep for 2 million okay
19:37
we're going to have to figure out what
19:38
he means there joe what would you
19:40
suggest on term sheets to issue
19:43
so you're a founder you want to you want
19:45
to raise 200 000 what would what should
19:47
you ask for in your term sheet
19:49
knowing that you're going to have
19:50
another round of 2 million coming i
19:52
think that's
19:53
what he's saying
19:54
um
19:56
oh very sorry there's a clarification
19:57
founder has 10 million common shares and
19:59
pre-money for 2 million dollar run is 10
20:01
million okay so we've got some math
20:03
there can you do that on the fly
20:09
maybe you can't see the chat um okay let
20:12
me let me restate that
20:14
randy is asking about issuing a two
20:15
hundred thousand dollar uh he wants to
20:18
raise two hundred thousand dollars
20:22
and then he wants to raise two million
20:23
later
20:24
uh at 10 million
20:26
okay asking what should his 200 000
20:30
initial seed money term sheet look like
20:33
okay right so that's a pretty general so
20:35
this is like
20:36
with that amount of money and and
20:37
everything depends on where the
20:38
company's at but usually you would sell
20:40
a safe
20:41
in in the um you know uh bay area new
20:45
york boston in the tech centers of the
20:46
world um because that's just the uh
20:50
instrument that investors are most
20:51
accustomed to investing in at that stage
20:53
and it's a good deal for the company and
20:55
as safe as a simple agreement for future
20:57
equity that converts into the next
20:58
equity round
21:00
either at a discount
21:02
um uh
21:04
the round the lower the round price or
21:05
the cap
21:06
uh or both
21:08
and i'd always recommend discount only
21:10
or cap only
21:11
uh 2 million for 20
21:13
what's what is that question is that a
21:15
statement i think he's clarifying
21:18
he's yeah
21:19
there's a 10 million free so
21:22
2 million
21:23
in that second round he's talking about
21:26
oh
21:27
yeah 2 million for 20 is 218 right so 10
21:30
million post
21:31
um
21:33
so okay so so for example you you'd uh
21:35
want to set the safe where the investors
21:37
would want the safe if you're really
21:39
planning on this and that's what your
21:41
story uh makes it sound like you're
21:42
actually going to do then they would
21:44
obviously want their cap to be less than
21:47
eight million right
21:49
uh it would you know depending upon how
21:51
far away that two million dollar raise
21:53
is
21:54
maybe uh it makes sense would make sense
21:56
for the cap to be 5 million right
21:59
but you'd have to give me all the facts
22:01
12 million posts that's not that's not
22:02
20 2 over 12
22:04
is not 20 right it's uh
22:08
16.67
22:13
okay
22:14
so um
22:15
yeah 12 million posts that's right randy
22:17
exactly okay um joe you've got to go in
22:20
just a couple minutes here right is that
22:21
still operative at 12 30 yeah okay okay
22:25
so we'll probably do one more question
22:27
um and joe is reachable obviously what's
22:29
the best way to reach you joe um
22:31
probably just j daniels at mccarter.com
22:34
my email yeah
22:36
emma carter.com there you go
22:39
okay uh sasha here has a question when
22:41
private equity invests in a down round
22:43
under what circumstances could common
22:45
shareholders be wiped out
22:48
when private equity invests in a down
22:50
round under what circumstances could
22:52
common holders be wiped out
22:55
lots of circles
22:56
yeah i mean it just depends on how low
22:58
the valuation is if you issue enough
23:00
stock like like scott was talking about
23:02
this this concept of a corporation
23:06
you can always authorize more shares and
23:08
issue more shares so if you start out
23:09
with a million shares and and the
23:11
company issues 500 million shares your
23:13
percentage goes way down
23:15
and in order to
23:17
you know raise more money more money at
23:19
a really low valuation
23:20
uh you have to issue more shares so
23:24
yeah that's right so it's a dilution
23:26
question and evaluation question so
23:28
they're moving targets but uh if your
23:30
value goes down and you've issued a
23:32
bunch of shares to other people you're
23:33
going to get wiped out that's the that's
23:36
the simple version
23:37
you take a lot of spreadsheets and cap
23:39
tables to prove that people should be
23:41
thinking positive the liquidation
23:43
preference will never matter and there
23:44
will never be a down round
23:46
right right that's that's the
23:47
opportunity for sure that seems to be
23:49
what's happening in the past three years
23:50
and it might continue for a few more
23:52
there you go okay and then they'll you
23:54
know it'll go the other way
23:56
right
23:57
um yeah and what he's referencing there
23:59
is there are trends in in financing
24:01
right so um it's good to keep up with
24:05
folks and have a good attorney right who
24:07
can track on this stuff because what may
24:09
you know if you're talking i say to
24:10
people all the time you wouldn't have
24:12
you know a uh ear nose and throat doctor
24:15
operate on your ankle right same thing
24:17
with lawyers you don't have a divorce
24:18
lawyer do your venture capital these are
24:21
specialists and you can tell by the way
24:22
joe talks he knows a lot about this
24:24
stuff and it's it's in your best
24:26
interests they're not cheap
24:28
but it's in your best interest in the
24:29
long run to have a professional on your
24:31
side who does this all the time
24:33
um okay just a couple more points before
24:34
we before i know you have to run could
24:37
you say a little bit about um
24:39
founder vesting
24:40
and what's typical now because a lot of
24:42
early stage founders are surprised that
24:44
sometimes they have to invest in their
24:45
own company when they thought they owned
24:47
the thing already
24:48
yeah i mean i always say all founders
24:50
really want all the other founders to
24:51
vest because if one of the founders
24:53
leaves let's say you split the equity
24:54
three ways and one founder leaves after
24:56
two months that founder should no longer
24:58
have one third of the equity and that's
25:00
what vesting schedules or
25:02
you know help uh you achieve is uh is
25:05
fairness
25:06
and
25:07
uh so therefore like the typical founder
25:09
investing schedule historically in the
25:11
valley has been three year one year
25:12
cliff meaning one third after one year
25:14
and 136 each month after that and that
25:17
usually starts from whenever the person
25:19
actually started contributing to the
25:20
company so it can be
25:21
a year or two before the date that you
25:24
actually do the agreement that says all
25:25
this right
25:26
um and um uh you know if you're
25:29
concerned about losing your shares
25:31
getting fired and losing your shares
25:32
just try to retain control of the
25:33
company as a founder
25:35
um the typical for people who join after
25:38
the founder are is a four-year one-year
25:39
cliff you know the same thing except an
25:42
extra year
25:43
and uh for advisors and directors you
25:45
know two years monthly
25:48
just some basic guys this is these are
25:50
standard uh schedules all throughout the
25:52
united states at this point
25:53
yeah and that's the great thing there
25:54
are standards now so a lot of times
25:56
folks if you're trying to figure out
25:58
what you should do you really can just
26:00
google it that doesn't mean you should
26:01
try to do the whole thing by yourself
26:02
but but some of these awkward
26:05
conversations with founders and early
26:06
team members there really are standards
26:07
out there that you can point at and uh
26:09
say is going to come on after joe leaves
26:11
he has a question about this we'll talk
26:12
a bit more about
26:14
advisors and how to compensate them that
26:15
kind of stuff because it's the same
26:17
similar answers but a little more
26:18
specific for advisor situations so
26:21
okay sign off unfortunately but uh it's
26:23
great to see everybody and uh just let
26:26
me know if you have any questions
26:27
awesome joe uh do your email one more
26:30
time
26:31
jay daniels at mccarter.com hey daniels
26:34
at macar.com great joe thanks nice to
26:36
see you
26:36
see you later good luck on your board
26:38
mate
26:40
okay folks so that is uh my friend joe
26:43
and uh thanks to him for his time uh
26:46
mccarter english is a good firm there's
26:47
lots of good firms uh it's one of the
26:49
things we can do here if you're looking
26:50
for a law firm i know lots of law firms
26:53
you can reach out to me through
26:54
scottfox.com
26:56
i can't do a lot of coaching i get lots
26:57
of people want me to review their decks
26:59
and so forth you know i can't do all
27:01
that but i can easily pass you along if
27:03
you're looking for accountants or
27:04
attorneys or recruiters or tech shops to
27:07
do development that kind of referrals we
27:09
can do easily my assistant can do those
27:11
basically so okay so we got another half
27:13
hour here on startup office hour and i'm
27:16
scott fox i'm your host i'm a serial
27:17
internet entrepreneur here to help you
27:20
learn uh the ropes of uh how to raise
27:22
money basically so i used to be a
27:24
founder i still have a founder i guess
27:26
but i've raised money myself and now i'm
27:28
more of an investor so i've done this on
27:29
both sides of the coin i'm very active
27:32
with tech coast angels which is the
27:33
largest angel group in america they're
27:35
based here in southern california i'm
27:36
also the chairman of the stanford angels
27:38
and entrepreneurs
27:39
group here in orange county california
27:42
and um i'm trying to help you guys out
27:44
basically so
27:46
if that's if that sounds if that's
27:48
helpful to you please um i'm doing this
27:50
for free uh during my lunch hour like i
27:52
said so would love it if you could like
27:53
or share this stuff invite your friends
27:55
uh subscribe um all those you know
27:57
social things where's that uh i have a
28:00
there it is there that okay could you do
28:03
that please i'm trying to help you out
28:05
here and um that's how the social media
28:07
world works right
28:09
okay so let's uh let's we're gonna bring
28:11
on say yeah i'm not sure i'm saying his
28:13
name right but we'll find out i guess um
28:16
let's see here we go
28:18
there he is hello
28:20
hello hi hurry hey good nice to meet you
28:22
and i can hear you perfectly that's
28:23
always everybody's first question so
28:25
there we go
28:27
is that close enough very close shay
28:29
oh it's a okay yeah okay all right
28:32
nice to meet you chef so um why don't
28:33
you outline for everybody your question
28:35
and i'll see what i can do to help you
28:37
sure so i'm sorry i do this every time i
28:39
i have i remember what else i'm supposed
28:40
to say everybody in the chat room go
28:42
ahead put in your questions now and
28:44
we'll work our way through them also i
28:45
encourage you all to introduce
28:47
yourselves to each other uh go find each
28:49
other on linkedin let's build a
28:51
community here right and you can you're
28:52
welcome to uh find me on linkedin as
28:54
well i've got um
28:57
there um come and connect and the idea
28:59
here is we're building a community it's
29:01
a lot easier to build good companies if
29:02
you have friends okay like most things
29:04
so all right back to uh back to shea
29:06
sorry to cut you off there yeah no
29:08
worries yeah so i was approached by uh
29:10
someone that
29:12
saw some my startups so the app that we
29:14
had built and that realized that we
29:16
haven't um essentially raised money and
29:18
i've been but strapping for a while and
29:20
so his question was his uh offer was
29:23
that he can come in as my uh financial
29:26
advisor to help
29:28
take my company from a precedent stage
29:31
through series a and essentially make
29:33
the necessary introductions to
29:35
vc's angels uh syndicates and whatnot to
29:38
raise funding now um
29:41
my question now is that is it advisable
29:43
because i know right now the like the
29:45
startup market is not the venture market
29:46
it's not people are investing in a lot
29:49
of things and so is that really just a
29:51
person that sees an opportunity and
29:54
kind of want to jump on it and get a
29:56
percentage of the company or do you
29:59
think as a first-time founder i actually
30:00
do need that type of person
30:03
that's a great question it happens all
30:04
the time and of course the answer is
30:06
it depends right um can you first of all
30:10
where are you calling from
30:12
washington d.c
30:13
okay great um and are you a tech person
30:16
or a dance person or yeah it's text so
30:19
it's a text social storytelling style
30:23
okay and you're on the tech side of that
30:24
stuff yes okay
30:26
okay um
30:27
so
30:29
i've been on both sides of that question
30:30
also you have you have a child there
30:32
with you sounds like
30:34
a little little yeah
30:36
she wants to go to the bathroom
30:40
so um but yeah i'll turn up my camera
30:42
and put it on the speaker
30:44
okay
30:45
go ahead no problem you can take her to
30:47
the bathroom too yeah go ahead
30:50
it's the first time we've been
30:51
interrupted by something that urgent
30:53
listening though you're still listening
30:54
okay
30:56
that's awesome
30:57
work from home joe had a cat you've got
30:59
a little girl that needs to pee
31:01
excellent
31:02
okay so
31:03
if other people are interested in this
31:04
advisor question this is a very common
31:06
one like i said i've been on both sides
31:08
of this i have
31:09
hired advisors and i've been an advisor
31:11
many times
31:12
um
31:13
say you are right to wonder is this
31:15
person trying to essentially take
31:17
advantage of a good situation
31:20
very likely and it happens a lot right
31:22
they see you they see you need help
31:26
meeting people that they know
31:28
especially in this example as often
31:30
happens you're sort of techy and there
31:31
may be a financial person very common
31:33
situation and there isn't necessarily
31:36
any bad intent here
31:38
but it often is a question of taking
31:40
advantage yes so you do need to be
31:42
careful the first thing i would do is
31:44
ask for references
31:46
you know if you can do that do not be
31:48
blinded by people's promises of who they
31:51
know i've seen this so many times you
31:52
know i know this person and i know this
31:54
you know this prince who invests in
31:56
everything right
31:57
and
31:58
you just got to be careful about that um
32:00
so that's just kind of general business
32:02
common sense like use your comments
32:04
right if it's to seem too good to be
32:05
true it probably is
32:07
um
32:08
and uh
32:09
um
32:10
okay looks like he's back are you back
32:12
there yes i am okay
32:16
there you go there he is okay hope
32:18
everything worked out there
32:21
um so um did you hear that other part
32:24
yes i did okay cool okay so yeah so be
32:26
careful first of all then second like
32:28
the other question we talked about with
32:30
stock options and so forth there are
32:31
standards for this on the internet now
32:33
there's a fantastic resource resource
32:35
called the fast which is fast
32:40
something advisor services template i
32:43
don't know what the f founders institute
32:44
may be anyway if you google fast advisor
32:47
agreement there is a template out there
32:49
that is really useful because it breaks
32:52
down uh it's a matrix it has three
32:54
levels of involvement from the advisor
32:57
and then three levels of how advanced
32:59
your startup is right so if they're
33:01
doing a lot in your early stage
33:04
they get more if they're doing just a
33:05
little bit and you're already half grown
33:08
then they get less that kind of thing
33:09
right so you can kind of um
33:11
talk to the person and triangulate you
33:13
know what seems appropriate for them and
33:15
it gives you a rational reason for
33:17
saying no i'm not going to give you 10
33:18
of the company for that right and also
33:20
most importantly it introduces the
33:22
concept of vesting which joe and i
33:24
talked about a couple minutes ago which
33:25
is that people don't get everything at
33:26
once they get it over time
33:28
and especially in this case it will be
33:30
more about milestones
33:32
you don't want to just vest over time
33:34
and have this person you know taking up
33:36
your time talking about what they're
33:37
going to do you want them to actually do
33:38
something so you want to pick out a
33:40
couple key milestones
33:42
that are this kind of introduction or
33:44
this kind of success or that kind of
33:46
success before they get anything right
33:48
because otherwise they're just taking up
33:49
your time which is honestly your most
33:51
valuable asset right now if you don't
33:53
have the money it's your time and your
33:54
you know your your brain
33:56
um now a big caveat all that thank you
33:58
lulu in the chat room there so there's
34:01
there's the fast link that's um a very
34:04
useful template i've used it myself
34:06
so the
34:08
caveat i wanted to add to all that is
34:10
that
34:11
if what they're trying to do or claiming
34:13
that they're going to do is raise money
34:15
for you in exchange for equity that's
34:18
actually illegal
34:19
that is that is against the securities
34:21
laws unless they're a licensed broker
34:24
dealer like they do this professionally
34:26
and they have licenses from essentially
34:28
the sec
34:30
now i haven't looked at this law lately
34:32
there's been some liberalization of that
34:33
i think with the new crowdfunding laws
34:35
or maybe other things have changed so
34:37
you might want to talk to somebody or at
34:38
least look around heavily like at the
34:40
founders institute and see what the
34:41
latest laws are but traditionally that
34:43
was actually a no-no right because it's
34:46
it's securities for getting paid on a
34:49
contingent basis for raising money is
34:51
actually um the domain of a lot of
34:53
scammers right people pump and dump
34:55
schemes with publicly traded stocks and
34:58
that kind of stuff so there's literally
34:59
laws against that um you know is anybody
35:02
going to get arrested and sent to prison
35:04
for that you know if they help you raise
35:06
50 grand
35:07
that they play golf with
35:09
probably not right but still you should
35:12
know and if the person who's pitching
35:13
you this advisory relationship is
35:15
pitching that kind of relationship
35:17
they need to be aware of that and if
35:19
they're not then you may not want to
35:21
work with them and if they are
35:22
hopefully they're licensed and if they
35:24
are and they aren't licensed then run
35:26
away
35:29
yeah and i think
35:30
oh sorry
35:31
yeah no the offer was not i guess was to
35:35
help me do what needs to be done right
35:37
uh i'll walk through my pitch um
35:39
uh help uh create a a an invest obesity
35:43
playbook the list of people i can pitch
35:45
to and really just walk through that
35:47
process of bringing the startup to
35:50
market now of course i started doing
35:52
that myself and i'm realizing it it's
35:54
something i can do right of course
35:56
taking a lot of my time but i'm
35:58
realizing it's something that i can do
36:00
but it's not necessarily
36:03
equity in exchange for
36:05
um
36:06
raising money per se yeah okay okay
36:09
that's that's fine
36:11
compensating and this is lulu's question
36:13
as well about building an advisor team
36:16
that's totally fine and done all the
36:18
time this fast template will help you
36:20
it'll give you some ranges and help you
36:22
give you some categories like i said
36:23
think about how much they're doing over
36:24
what amount of time um and i think
36:27
that's that may be the answer to your
36:28
question actually
36:30
and i would just be careful just as just
36:32
one last point i'd be a little careful
36:33
about giving away money for some of
36:36
those services because a lot of them are
36:37
available basically for free online you
36:40
don't necessarily need to give people
36:42
equity for that
36:43
you do if you want to build a team like
36:44
lulu's talking about if you want to have
36:46
people that are really on your side
36:47
committed to this yes then you probably
36:48
want to get them involved there's a
36:50
whole layer of services now that didn't
36:51
exist when i was first starting
36:53
companies you know the small business
36:54
development corporations have offices
36:56
all around the country
36:58
there's got to be stuff the sbdc there
37:00
the founders institute that i just
37:02
mentioned i run these groups and i run
37:04
my masterminds one month also um you
37:07
know there's lots of places where you
37:09
can get coaching so i'd be hesitant to
37:11
give away too much of your company
37:13
just for advice right you want to give
37:16
right
37:17
away for people actually going to do the
37:19
work
37:20
right
37:24
yeah so one final part to this question
37:29
i apologize for that one final point to
37:31
this question that i was wondering is um
37:33
i was thinking of making uh the best 10
37:35
milestone base that at the series a you
37:38
need to bring through people you
37:39
introduce me to all through the work you
37:41
do you need to bring at least 50 percent
37:44
of what i am asking i'm trying to raise
37:46
a series a stage or other pre-seed stage
37:49
or the seed stage other than just saying
37:51
that we raise money by this time
37:56
um i didn't quite follow i you want to
37:58
add a mild film that they don't get paid
38:01
until you raise the money yeah so for
38:03
example uh assuming i'm looking to raise
38:06
uh 200 000 at the precedent stage right
38:08
they need to bring through their
38:10
networks and the work they do at least
38:12
50 of that money but then based on what
38:14
you're saying it almost sounds like that
38:16
goes back to the
38:18
the side that i mentioned might be
38:19
illegal
38:20
and so i'm not sure if it is well i
38:22
wasn't clear on that
38:24
yeah well it depends i can't give you a
38:27
clear answer but yes if if you are
38:29
compensating people being based on
38:33
them raising the money i'm pretty sure
38:34
that's not allowed
38:36
if you're compensating them saying i
38:38
will pay you later
38:40
when i raise the money
38:42
like basically like a deferred salary
38:44
but paid in equity right like when we
38:46
raise a million dollars i'm going to
38:47
give you this
38:48
and your their compensation is not
38:50
connected to them raising the money
38:52
directly i think that's better but
38:55
you're getting in the murky waters there
38:58
but but that latter part is is to my
39:00
mind at least again not legal advice you
39:02
should talk to somebody who does this
39:04
for a living but um that that's fairly
39:06
typical right like people all the time
39:08
join a startup and say i'll work for
39:10
free until we raise some money and then
39:11
you pay me right
39:13
in cash that's fine it's just a little
39:15
more complicated when you get into
39:17
equities because that's securities law
39:19
which is a lot of history of you know
39:20
ups and downs and scams and stuff over
39:22
the over the decades
39:24
so it just gets a little fancier very
39:26
quickly and then you also have the
39:27
question of what what kind of stock is
39:29
it is it options is it restricted stock
39:31
is it common stock is it preferred stock
39:33
you know there's it gets fancy fast um
39:37
anyway i hope that's helpful
39:39
yeah very much so thank you very much
39:40
okay yeah nice to meet you hope to see
39:42
you again glad you hope your daughter's
39:46
your business okay so all right so that
39:48
was our friend
39:50
shay hey shea
39:52
mess that up i'm sure um okay abby looks
39:54
like abby's in line there ever you want
39:56
to turn on your camera uh if you want to
39:57
join me on camera anybody else like to
39:59
come on yes gregory you can ask
40:01
questions here um okay there's abby so
40:03
abby's going to come in a second here
40:06
let me just let's just check the chat
40:07
room for a second uh abby um
40:10
let's see
40:13
and by the way thanks everybody for
40:14
watching if you could click the like and
40:16
share buttons
40:18
appreciate that so we can keep doing
40:19
this
40:22
let's see uh
40:26
sorry i'm just reading here okay uh
40:28
let's see
40:33
okay athena we'll get to you in a second
40:35
especially if you have your uh camera on
40:37
happy to see you let's talk to abby um
40:40
here comes abby there she is hi abby
40:44
i think you're muted
40:46
let's try that again
40:49
oh you know what that's my fault
40:52
okay
40:53
that was just if you're paying attention
40:55
sorry i had i had you meet it okay okay
40:58
all right
41:00
where are you tuning in from today
41:02
um i'm in new york um and i have a very
41:05
specific question you had mentioned that
41:07
you sometimes recommend people and we
41:10
are actually looking we've done some
41:11
financial modeling um
41:14
you know just for what our capabilities
41:16
are for a dtc
41:18
um home hygiene business with a go to
41:21
market strategy that is hybrid whole
41:24
specialty wholesale and dtc
41:27
um with the subscription um sort of
41:30
follow-on and so it's kind of standard
41:32
in the industry like when we're talking
41:34
to folks for fundraising like they get
41:36
it but i don't think our numbers tell
41:37
that story and we're probably at the
41:39
stage where we need to work with someone
41:41
to do that um and obviously we're you
41:44
know raising money so we're interested
41:46
in maybe working with somebody um you
41:48
know for percentage on the cap table and
41:50
you know if they'd be willing to have
41:52
some sort of you know financial advisor
41:54
but it's very specific like it's a very
41:56
specific model we need
41:59
okay so um you're talking about an
42:01
advisor basically what which a was
42:03
talking about right somebody to help you
42:04
kind of commercialize and take it to
42:06
market in this case the market being
42:08
investors not
42:09
not the customers
42:11
yes it is definitely um uh the market is
42:15
the audience is the um
42:17
the investors but we need we do need a
42:20
financial model that is just better than
42:23
what we're working with ours is not very
42:24
sophisticated we have some benchmarks
42:27
that we've kind of like industry
42:28
standards that we've based it on but
42:30
it's not it's not integrated and because
42:32
it's a hybrid model it's a little bit
42:34
complicated i think to to tell the story
42:37
um
42:38
what what is without being too specific
42:40
is uh what is the product it's a beauty
42:42
thing
42:43
you know it's home hygiene so it's
42:45
cleaning products
42:47
like a spray or something like
42:49
households
42:50
sure it's dish soap right now uh we're
42:53
you know because we're doing our you
42:55
know mvp so it's we're starting with
42:57
dish soap
42:59
all-purpose cleaner mirin glass cleaner
43:01
um and we also have um a hand soap
43:05
um and so it comes you know sort of in a
43:08
kit to get started we'll have add-ons
43:10
later we're gonna do do you know wipes
43:12
dishwasher you know and then laundry in
43:14
future
43:15
um
43:16
but it's and then we have a scented gift
43:18
that is actually you know fairly high
43:20
value but we're kind of capitalizing on
43:22
some of the interest in home sun right
43:23
now
43:25
we also working with a really cool nasa
43:27
biomimetic um botanicals
43:30
so that's that's a fun fun part yeah
43:32
okay so um good news bad news i guess
43:35
bad news is i don't know
43:36
i'm a software guy
43:39
i don't know much about direct to
43:40
consumer stuff but i good news i do know
43:43
a firm um in los you're in new york city
43:46
yeah i know a firm in l.a anyway that
43:49
does uh financials for a lot of direct
43:51
consumer companies uh an accounting firm
43:54
they help them with modeling
43:56
and uh financial modeling and even uh
43:58
term sheet negotiations and stuff so um
44:02
i would look up i'll just say this
44:03
public i'll give them an endorsement as
44:04
far as i know i think i'm pretty sure
44:06
they're called stage one financial
44:09
uh age with the number one usually not
44:12
spelled out o-n-e uh although i might be
44:14
wrong about that uh and the lead guy
44:16
there who i've worked with some is
44:17
jeremy
44:20
treyfanbach i think something like that
44:22
you could take your best get that
44:23
treefinbach uh but jeremy has worked
44:25
there's a company i'm involved with that
44:27
is a direct consumer company which is
44:29
very unusual for me that's why this is
44:30
the only contact i have um
44:33
uh and they've been working on their
44:34
financials and
44:36
they seem to be pretty sharp and they're
44:37
direct consumers so
44:38
you'd be welcome to contact jeremy uh
44:41
use my name if that's helpful and
44:44
don't necessarily ask them to do
44:46
something but maybe ask for
44:48
recommendations so forth you know that
44:49
kind of thing um and that might be
44:52
useful um the other is that there is a
44:56
there's a venture competition that i've
44:57
seen a bunch of times lately that's
44:59
actually european based that's that's a
45:03
direct consumer
45:05
venture pitch type thing and i can't
45:08
remember the name of that offhand i did
45:10
pretty well there was stage one but
45:12
the the venture one
45:14
it's not the founders factory is it
45:17
that does sound right maybe that's it is
45:19
that does that sound right is it based
45:20
in
45:21
europe or something it's it's based in
45:24
um they do a lot of dtc we actually did
45:26
initial meeting with them because their
45:29
accelerator for hygiene is run by wreck
45:31
it and wreck it was interested in maybe
45:33
doing some testing on the botanicals
45:35
that's probably it then okay yeah all
45:37
right so you know that one okay that's
45:39
the limit of my knowledge there if
45:40
you're a software company i could help
45:41
you a little more but anyway that might
45:43
be a good lead um and i hope that's
45:45
helpful
45:46
i'm very helpful thank you okay great
45:48
nice to meet you hope to see you next
45:50
time please like and subscribe and all
45:52
that stuff right
45:53
okay all right cheers okay so that's our
45:55
friend abby from new york city
45:57
uh let's see next hey athena do you have
46:00
a camera i'd be happy to see you i know
46:01
you own one because i've seen you at our
46:03
some of our masterminds meetings
46:04
speaking of that our masterminds
46:06
meetings happen once a month those are
46:08
um they tend to be the sec for second
46:11
wednesday or thursday every month
46:13
and traditionally they were face to face
46:15
here in uh
46:16
in california but now they're online of
46:18
course so if you like this kind of
46:20
environment but you all want to talk to
46:21
each other more it's like this but 30 or
46:24
40 of us all online and i moderate same
46:26
deal you guys bring questions and we
46:27
discuss them sometimes we have guest
46:28
speakers we also do investor pitch
46:30
practices so if you want to practice
46:32
your pitch you can get tickets for those
46:34
as you can see on the screen there at
46:36
mastermindsworkshops.com
46:38
and it's free if you bring a question so
46:40
kind of like this but it's a little more
46:42
uh interactive and um those are two two
46:45
and a half hours long usually so a
46:46
little more a little more networking a
46:48
little more fun uh and a lot more
46:50
in-depth so okay okay so athena's
46:53
driving so no good okay that's fine uh
46:56
and gregory yes you can post your uh
46:58
question in the chat there if you'd like
46:59
um and uh let's see let's get into
47:03
athena's thing oh you know hold on i saw
47:05
another one athena if you're driving let
47:07
me
47:08
let me just review the chat here because
47:10
i know the
47:11
questions are coming quickly um okay
47:14
take care of that
47:15
randy and then savas
47:17
uh
47:19
uh
47:20
let's see oh lulu so i see one there i
47:22
missed we speak to the differences
47:23
between giving key team members a
47:25
percentage for c corps versus llc's so c
47:29
corp is a standard corporation um an llc
47:32
limited liability company those are both
47:34
corporate formations that a person can
47:36
use to
47:37
create a company
47:38
and protect themselves from liability
47:40
and grow basically
47:42
as a company as opposed to just
47:43
something that you own by yourself
47:47
for venture type funding lulu the answer
47:49
is very easy here you don't do llc's
47:51
full stop
47:52
uh
47:53
investors do not invest in llc venture
47:56
investors do not invest in llc your
47:58
uncle might right or you can't
48:00
or
48:01
the local bank might but venture
48:03
investors
48:05
only invest in c corporations and these
48:07
days that is standardized around
48:09
delaware c corporations so corporations
48:11
that are incorporated in delaware as a c
48:14
corp is the standard
48:15
and that is new in the last few years
48:17
before you could maybe do california or
48:19
maybe some other places um
48:22
but
48:23
these days it's a delaware c corp full
48:24
stop so that kind of uh not the answer
48:27
you were expecting maybe but that's how
48:29
it works uh and then richard so yeah
48:31
this one i saw so for a pre-revenue
48:32
raise how much equity and percentage
48:35
should be given for each
48:37
million uh in capital assuming the tam
48:41
is 500 billion okay that's a big market
48:43
richard for a pre-revenue raise
48:46
should be given for each million in
48:48
capital
48:49
so okay you're talking about evaluation
48:51
so the 500 billion total addressable
48:54
market that's what tam stands for folks
48:56
total addressable market meaning
48:57
everybody that possibly could think of
48:59
that might be a customer of yours this
49:01
is a 500 billion dollar market so
49:02
richard's targeting something huge like
49:04
air or water you know food
49:08
or gasoline or something you know
49:09
something really large
49:11
so how much percentage should you give
49:12
for each million dollars in capital well
49:14
it's not a question of the tam
49:17
there's three levels that vcs look at
49:19
when they're analyzing a company that's
49:21
total addressable market is the tam
49:24
the
49:25
serviceable addressable market sam is
49:28
how many of those uh 500 billion dollars
49:32
are available that you might actually
49:33
reach so not like all the food for
49:36
everybody in the world but the food for
49:38
people in say the united states right
49:40
because that's how you practically
49:41
realistically reach
49:43
and then the sam som serviceable
49:45
obtainable market which is the people
49:47
that you really will reach so not the
49:49
food for the planet or the continent but
49:51
just say in your state so you're in ohio
49:55
you know the food program in ohio right
49:56
so tam samsam and the som is what you're
50:00
actually going to deliver so the tam is
50:02
exciting because it's really big and
50:03
that's a very good thing but it doesn't
50:05
tell you anything about the valuation or
50:06
how much capital
50:08
one would how much equity one would get
50:10
for capital so a million dollars i don't
50:13
know
50:14
what does your market actually look like
50:16
not what could it look like but what
50:18
does it actually look like how many
50:20
customers you actually have what kind of
50:22
revenue are they generating over what
50:23
period of time what does it cost you to
50:25
acquire those customers
50:27
those are the kind of numbers you need
50:29
to then work backwards to say um
50:32
something like you know we're doing this
50:34
much revenue a month or we have these
50:36
kind of customers it costs us this much
50:37
to acquire those customers there's this
50:40
kind of churn in the customers if
50:41
they're repeat customers and that means
50:43
that we have a valuation of
50:46
8 million or something like that right
50:48
you need to work backwards
50:50
and the tam is the right idea but that's
50:52
too big it's that's the theoretical
50:54
market you need to get a little more to
50:56
the actual market so i hope that's
50:58
helpful
50:59
um
51:00
let's see
51:01
uh okay athena we are getting lulu's
51:04
just chiming in here we choose llc's we
51:06
don't want vc and are going for pe
51:08
meaning private equity my understanding
51:10
for my legal team and our investors that
51:11
we can do angel and p funding as an llc
51:13
we don't
51:14
want to i presume you're missing a verb
51:16
there we don't to avoid vc funding as
51:18
techos angels invest in llc no
51:21
i don't know of any deals at least these
51:23
day ever maybe right anything's possible
51:26
uh there might be exceptions to the rule
51:27
but the standard is delaware c corps
51:29
full stop uh for venture capital money i
51:31
don't know about private equity because
51:32
private equity really means buying out
51:34
existing
51:35
existing businesses so if an existing
51:37
business is doing well and they're
51:39
structured as an llc you're talking
51:41
about an already operating company and
51:42
they're buying based on revenues for an
51:44
existing company right so if you've got
51:46
a company that's spinning off millions
51:48
of dollars a year in cash
51:50
they're not going to care whether it's
51:51
an llc or a sole proprietorship or
51:53
whatever right
51:55
because they already have proven the
51:56
model based on revenues and profits
51:58
presumably or losses right depending on
52:00
what they're looking at
52:02
but for vc type investment these days
52:04
it's a delaware c corp
52:06
um so you might want to ask your
52:08
investor why they think that um again
52:10
i'm not the world's only expert on this
52:13
there's lots and lots of people um
52:15
and uh you should find a good attorney
52:17
and so forth and or or little keep
52:19
coming to our masterminds meetings right
52:21
um
52:21
let's see okay now we're gonna get to
52:23
athena i promise let's see um let me
52:25
just put that other caption back on the
52:27
screen uh
52:29
no not that one uh
52:32
where is it i want to promote the
52:34
masterminds workshop sorry hold on there
52:36
it is okay
52:38
okay so athena so athena had a great
52:40
question um and she said
52:42
that she's having trouble shifting gears
52:44
she's a solopreneur
52:46
funding her own businesses she's a
52:48
serial entrepreneur so she started a few
52:49
businesses of her own and funded them
52:51
herself
52:52
and now she's having to go out and brave
52:54
the world of raising money with
52:55
investors so she's read all the good
52:57
books about raising capital and she
52:58
knows the technical side of it any
53:01
advice where to start
53:03
um
53:05
well um where to start raising money uh
53:08
well you start right here that's why i
53:09
do this so i hope this is helpful and
53:11
you come to our masterminds meetings
53:13
already so let's practice your pitch
53:16
that's
53:17
that's what it boils down to because
53:19
i think i i recognize and respect what
53:22
you're saying it's a different thing
53:24
when you work for yourself
53:26
you know it's the difference between
53:28
being a a bachelor or a bachelorette and
53:30
being married right suddenly there's
53:32
these other people involved and then
53:34
having kids essentially right because
53:35
you've got
53:36
investors who expect things from you and
53:38
a board of advisors and board of
53:40
directors who actually are your boss if
53:42
you're a founder and especially if they
53:44
give you enough money to control the
53:45
company
53:46
yeah you're you're working for somebody
53:49
else
53:50
and
53:51
you need to be ready for that and it is
53:52
a big shift mentally but the way to get
53:54
there is like anything else just like
53:56
learning a language right you learn one
53:57
word at a time and then you practice
53:59
right so uh and you go ideally go spend
54:01
time in that country so that you're
54:03
forced to speak that language uh and
54:05
that's what you need to do um and so i
54:08
would look at pitch templates it's a lot
54:10
about the pitch deck these days luckily
54:12
we've evolved past the point you don't
54:14
need to write a great big business plan
54:15
anymore like i used to write
54:17
back in the 90s you know big plan with
54:19
five year projections and stuff
54:22
you can really just look at um trying to
54:25
get your mindset right and a deck of uh
54:28
10 or 15 slides at most
54:30
uh and try to present the problem and
54:33
the quick
54:34
the quick um
54:36
the quick approach here really we can do
54:38
a whole session on pitch decks actually
54:39
you know if you guys are listening i'd
54:41
love to hear what else you'd like to
54:43
hear about if you want to chime in in
54:44
the chat room i'd appreciate that
54:46
because i noticed we got a lot of
54:47
signups this time when i talked about
54:48
term sheets specifically and it seems
54:50
like a lot of people are very interested
54:52
in that so give me some ideas for other
54:53
specific topics you'd like and i'll try
54:56
to address them but the quick version on
54:57
pitch decks is
54:59
a problem solution framework you have to
55:01
resist the temptation to talk about your
55:03
product all the time because as a
55:05
founder you're in love with your product
55:07
right and
55:08
every little feature is near and dear to
55:10
your heart honestly investors aren't
55:11
that interested in that they want to
55:13
know about the business right and you
55:15
don't have a business unless you have
55:18
customers and you don't have customers
55:20
unless you're solving a problem so i
55:22
would think about your pitch deck in
55:24
terms of what is the problem i'm solving
55:26
and why and then how big a business is
55:28
that going to be and when that's really
55:30
what a pitch deck is it doesn't have to
55:32
say everything it's really just kind of
55:34
the first date you need to present
55:36
enough to get people interested that
55:37
they want to hear more and then you can
55:39
have the meeting and really you know
55:40
talk it over over lunch you know and so
55:42
forth and get into longer projections
55:44
but a pitch deck is really a calling
55:46
card
55:47
that that lets people know what you're
55:48
about why and what the potential is and
55:51
ideally these days you kind of have to
55:53
have some actual sales you used to be
55:55
able to raise money more easily just on
55:58
a
55:59
more on concepts or pre-revenue uh
56:02
prototypes and mv minimum viable
56:04
products but these days investors really
56:06
are looking for
56:08
traction which means cash means
56:11
customers are buying right so athena
56:14
love to see you here love to see you at
56:16
other events um actually i'm speaking
56:18
tomorrow night if you don't know about
56:19
this i give you free tickets i know
56:21
you're local uh at concordia university
56:23
i'm on a panel uh be a very interesting
56:25
panel i don't think they're zooming it
56:26
the rest of you sorry um but it's uh a
56:30
panel uh it's me as an angel investor a
56:33
friend who runs a venture fund and
56:34
another gentleman who runs a family
56:36
office moderated by another uh investor
56:39
friend uh and we're talking about the
56:41
differences in investing styles and
56:43
requirements when you pitch family
56:45
offices versus vcs versus angels right
56:48
and that's a concordia university
56:50
tomorrow night in irvine california
56:52
athena i've got a comp code if you want
56:54
to go
56:56
so um so
57:00
the question of how to shift your
57:01
mindset is practice um and but it's
57:03
around those two things it's it's the
57:06
deck
57:07
and um your pitch the story that goes
57:10
with the deck and if you rehearse those
57:12
enough times
57:13
and do it in front of other people not
57:15
just in front of a mirror and not just
57:17
to your mom
57:18
then i think you'll get where you need
57:19
to be and as you know i'm happy to help
57:21
and we have lots of resources to help
57:22
you do that
57:24
okay so um there we go it's one o'clock
57:27
already look at that okay well so i
57:28
think we're gonna wrap up um but let me
57:30
just check here see if anybody has other
57:32
questions um
57:34
oh oh i didn't know i could do that look
57:36
at that i just featured your question
57:38
greg cool um
57:42
i don't know hold on
57:44
this this uh this tool
57:47
okay cool all right well i just learned
57:48
something with greg i gotta put that on
57:50
the uh let me sorry i'm gonna try that
57:52
again
57:53
uh
57:54
no that didn't do i don't know how i did
57:56
that all right i'll practice that
57:57
offline when the rest of you aren't
57:58
watching me
57:59
but i'm scott fox and you have been
58:01
listening to the masterminds startup
58:03
fundraising office hours this is a free
58:05
service from me i run the startup
58:07
council which is an organization
58:09
dedicated to helping folks just like you
58:11
uh get to well kind of to where i am i'm
58:13
mostly an investor these days trying to
58:14
help and uh happy to help you uh here or
58:18
in the masterminds workshops that i
58:19
mentioned and if you do a chance would
58:21
really appreciate you liking and
58:22
subscribing um because you know if i
58:25
only have 10 people watch this then it's
58:26
not worth my time honestly um and i need
58:29
your help to get the word out there
58:30
because i'm not making any money here so
58:33
it would be nice to get the feedback so
58:36
um
58:37
okay so that's my pitch let's just
58:39
review the chat here before i
58:41
before i hang up
58:42
um
58:43
let's see here okay so uh got that got
58:46
that
58:47
thank you yeah uh yes you guys can hit
58:49
me on linkedin if you'd like let me post
58:51
that again while i'm just reviewing the
58:52
chat um happy to connect like i said i
58:55
don't do linkedin messaging though i get
58:57
too many of those just so you know i
58:59
really am happy to help but email is the
59:01
way i work you can go to scottfox.com
59:04
um and
59:06
find a contact page for me there oh and
59:08
this is the startup console page on
59:09
linkedin
59:10
i would love to know if folks
59:12
where you are
59:15
streaming so send me feedback about that
59:17
hopefully that's going well and sorry
59:19
i'm really i'm trying to wrap up here
59:21
okay uh that that would cover that we've
59:23
got that um
59:25
okay i know for what it's worth kirk
59:26
i've never heard of a run book either
59:28
lulu i don't know who your investor guy
59:30
is but if he's telling you you can run
59:32
an llc and use something called a run
59:34
book i'm not
59:35
sure
59:36
what that advice is based on i've never
59:38
heard either of those as good advice so
59:41
hopefully i hope that's helpful um okay
59:44
uh
59:48
chris uh chris chris a great question
59:51
probably more than we have time to go
59:52
into today happy to talk to you next
59:54
time or come to our masterminds workshop
59:56
uh to talk about how to get from
59:58
self-funded mvp to raising money that's
60:00
what we talk about pretty much all the
60:01
time on this show and and the
60:03
masterminds and uh thank you for being
60:06
here uh uh lu you're welcome lulu and
60:08
abby and athena and heather and chris
60:11
and kirk and chris chris and the
60:13
polyester giant
60:15
you're welcome too all right guys nice
60:17
to meet you all hope to see you again
60:19
next time
60:20
uh like and share et cetera et cetera
60:22
and um thanks for being here um we will
60:24
see you next time savas go to
60:25
scottfox.com there's a conflict or the
60:28
startup council website there are
60:29
contact forms there i don't give out my
60:30
personal email address cool nice to meet
60:33
you all hope to see you again thanks for
60:34
watching

 

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