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Invest Yourself To Seize Opportunities

I reconnected with a wantrepreneur I met months ago to see how things were going. Since our first meeting, she’s made connections all around, built a pitch deck, and got estimates for developing her idea. From the outside, she’s doing great. She talks excitedly about a new platform launching soon that would be huge for her product. Sadly, she’s going to miss the boat because her product is still just an idea.
She also pared down her list of features to get more minimum viable product-lean. This has dropped her development costs dramatically to economical levels. However, she’s still seeking meetings with investors to get funding to start development.
Unfortunately, funding hasn’t come through while great opportunities like the new platform launch have come and pass. In two months come holiday season when the new platform will be on many people’s wishlists – another golden opportunity will pass.
We talked about what her idea was worth and what she believes the value will be if she’s a success. Is she confident in her idea and her ability to execute that perhaps she could fund more of the development herself rather than rely on outsiders? If she had all the information she had today but two months ago, would she had invested in development to make it to this new platform’s launch? Hesitating as she laments the very idea, she whispers, “Yes, I would.”
A few thoughts:
  • She, like many others, is learning how difficult it is to raise money without traction. She’s also lost an initial investor. Like I said in sales, never celebrate till two weeks after a check clears. Build momentum (read: traction) to spark investment interest.
  • Entrepreneurship is about doing and being opportunistic. Could she have known the platform was launching soon? Possibly, based on company history. Meanwhile, holidays are pretty set. One of the most important factors in startup success is about timing and being able to seize opportunities. I believe full-heartedly in what Seneca said — “Luck is what happens when preparation meets opportunity.”
  • Things happen outside of your control, but control as much as you can when you can. Unfortunate events like losing investors can be unpredicted, and development continues to be delayed. She could address this directly by learning to code herself, growing her network of developers and partnering with a technical cofounder, or fund the development herself (or other).
I like to consider how invested and confident wantrepreneurs are in their ideas (from wantrepreneur to entrepreneur). If they truly believe in their ideas and themselves, are they realizing what the bottlenecks are? What are they doing to knock those barriers down? For her, taking more control by funding development herself, if not finding a technical co-founder or learning development herself, could help her seize golden opportunities or move on.
For the wantrepreneur, she’s going to take immediate action. I’m excited to see her idea come to fruition soon.
What are your thoughts on requiring outside investment to fund an idea? How could a lack of funding interest affect a wantrepreneur’s passion and drive to execute?
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The Finance of Startups: For Dummies (Part 9.5 – Examples of a Safe)

I wanted to continue on my last post considering the simple agreement for future equity (“safe”) by reviewing a couple examples of how a safe works.
As mentioned in the last post (Part 9 – Raising Funds through a Safe — follow to understand the concepts), there are a few combinations safes using levers such as discounts and valuation caps (or cases with neither which likely includes an MFN provision). Let’s walk through a few examples:

Example 1: No Discount, Valuation Cap
Post-Money Valuation
Investor Invests in Safe
$100,000
Discount Rate
None
Valuation Cap
$5,000,000
Post-Money Valuation
New Investment through Series A Equity Financing
$1,000,000
Pre-money Valuation
$10,000,000
Fully-Diluted Outstanding Capital Shares
11,000,000
Here, the company will issue sell shares at $0.909 per share ($10,000,000 ÷ 11,000,000 shares). Thereby, the company issues 1,100,110 shares ($1,000,000 ÷ $0.909).
However, the safe investor from earlier will be issued shares at $0.4545 per share ($5,000,000 ÷ 11,000,000 shares). The per-share price is based on the $5,000,000 cap as it is lower than the $10,000,000 valuation from the Series A fundraise. The safe investor would then be issued 220,022 shares ($100,000 ÷ $0.4545).
Note: this assumes the company does not pay back any amount of the initial $100,000 safe investment.
Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.909
$0.4545
Investment Amount
$1,000,000
$100,000
Series A Preferred Stock Issued
1,100,110
220,022

Example 2: No Discount, Valuation Cap
Post-Money Valuation
Investor Invests in Safe
$100,000
Discount Rate
None
Valuation Cap
$4,000,000
Post-Money Valuation
New Investment through Series A Equity Financing
$600,000
Pre-money Valuation
$3,000,000
Fully-Diluted Outstanding Capital Shares
12,500,000
Here, the company will issue sell shares at $0.24 per share ($3,000,000 ÷ 12,500,000 shares). Thereby, the company issues 2,500,000 shares ($600,000 ÷ $0.24).
However, the safe investor from earlier will be issued shares at $0.24 per share ($3,000,000 ÷ 12,500,000 shares). The per-share price is based on the $3,000,000 valuation as it is lower than the $4,000,000 cap. The safe investor would then be issued 416,666 shares ($100,000 ÷ $0.24).
Note: this assumes the company does not pay back any amount of the initial $100,000 safe investment.
Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.24
$0.24
Investment Amount
$600,000
$100,000
Series A Preferred Stock Issued
2,500,000
416,666

Example 3: Discount, No Valuation Cap
Post-Money Valuation
Investor Invests in Safe
$20,000
Discount Rate
80%
Valuation Cap
None
Post-Money Valuation
New Investment through Series A Equity Financing
$400,000
Pre-money Valuation
$2,000,000
Fully-Diluted Outstanding Capital Shares
10,500,000
Here, the company will issue sell shares at $0.19 per share ($2,000,000 ÷ 10,500,000 shares). Thereby, the company issues 2,105,263 shares ($400,000 ÷ $0.19).
However, the safe investor from earlier will be issued shares at $0.152 per share ($5,000,000 ÷ 11,000,000 shares = $0.19 per share * 80% discount). Notice that the price-per-share must be discounted to arrive at a discounted price-per-share. The safe investor would then be issued 131,578 shares ($20,000 ÷ $0.152).
Note: this assumes the company does not pay back any amount of the initial $20,000 safe investment.
Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.19
$0.152
Investment Amount
$400,000
$20,000
Series A Preferred Stock Issued
2,105,263
131,578

Example 4: Discount, Valuation Cap
Post-Money Valuation
Investor Invests in Safe
$100,000
Discount Rate
85%
Valuation Cap
$8,000,000
Post-Money Valuation
New Investment through Series A Equity Financing
$1,000,000
Pre-money Valuation
$10,000,000
Fully-Diluted Outstanding Capital Shares
11,000,000
Here, the company will issue sell shares at $0.909 per share ($10,000,000 ÷ 11,000,000 shares). Thereby, the company issues 1,100,110 shares ($1,000,000 ÷ $0.909).
However, the safe investor from earlier will be issued shares at $0.72727 per share calculated by the minimum of:

  • Valuation Cap: $8,000,000 valuation cap ÷ 11,000,000 shares = $0.72727 per share.
  • Discount: $10,000,000 full valuation ÷ 11,000,000 shares = $0.909 per share × 85% discount = $0.77265
Thus, the minimum price-per-share is $0.72727. The safe investor would be issued 137,500 shares ($100,000 ÷ $0.72727).

Note: this assumes the company does not pay back any amount of the initial $100,000 safe investment.
Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.909
$0.72727
Investment Amount
$1,000,000
$100,000
Series A Preferred Stock Issued
1,100,110
137,500

And…

You can find more examples on the Safe primer by the Y Combinator team here.
What questions do you have about safes? How do you view safes to be advantageous for both entrepreneur and investor?
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The Finance of Startups: For Dummies (Part 9 – Raising Funds through a Safe)

A friend looking to raise money recently told me a new form of raising money I hadn’t heard of before referred to as a Safe (simple agreement for future equity). A safe is a mechanism Paul Graham and his YC partner and lawyer Carolynn Levy created as an alternative to convertible notes – refer Finance of Startups: For Dummies (Part 4) for a short description of convertible notes.

Safes are meant to remove the clutter and complications of convertible notes in that they are not debts themselves. Instead, they are agreements for rights to the purchase of future stock – goal is to convert safeholders into stockholders.
  • Convertible notes can be highly regulated via their maturity dates, interest rates, etc. Safes, on the other hand, have no maturity date and as they are not debt, are not beholden to regulations regarding interest rates.
  • Safes remove the complexity of having to extend maturity dates as there are none (vs. convertible notes).Safes are converted to equity at specific events such as an equity financing round, liquidity event, or dissolution of the company (insolvency).
  • Like convertible notes, there are variations to the safes – those with a discount, valuation cap, or some combination of those two (with/ without) or none at all – instead, with an MFN (“Most Favored Nation”) provision.
  • Most Favored Nation provision (MFN) are used to amend a safe’s terms with a safe raised at a later date. This is common for safes with no discount or cap set. Note: safe can only be amended once, not multiple times.
Safes have been a big hit for YC-backed companies, and have been finding traction here in ATL for early stage startups looking to raise funds quickly without the battle over valuation. For more details on safes, check out this primer.

What are your questions about safes? If you were a startup or investor, what would your apprehensions about safes be? Versus convertible notes?
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PAUSE! Her Startup’s Seeking Funding

I was recently introduced to a wantrepeneur building a platform with an experiential method of consuming media with an ecommerce side to it. I’m skeptical of the experiential component. Then again, I’m skeptical of a lot. Instead, show me the numbers (user engagement, traction, and any revenue numbers). However, she has none to show, and isn’t actively able to provide any.
She has a great v1.0 already that can be marketed to test traction and gather feedback, but she’s reluctant, opting for a feature-full release. After months with v1.0, progress is on hold as she seeks funding to build her “needed” features.
ZERO users. ZERO revenue. Ideas on business model, but that’s it. Trying to raise six figures. That’ll be tough.
Some thoughts:
  • Seeking funding takes TIME! My friend underestimates the efforts to raise funds — prospecting potential investors, setting up meetings, creating pitch decks, etc.
  • With or without funding, what’s happening? Her “startup” is stagnant. There’s no feedback from users (none anyways). No product development. Each day that passes, the market evolves, and a competitor entrenches itself with the market.
  • Life happens. How do you cope? My friend’s early partners have left due to life complications. This happens. However, she’s stuck unsure of how to proceed like hoping a good, cheap developer falls into her lap.
  • Raising funds with no traction in a difficult-to-defend market?! Startups and entrepreneurship are today’s “it” thing, so there’s lots of noise from those seeking money. Investors mitigate some risk by startups’ traction.

I like TechCrunch’s “Wasting Time with the Joneses” article calling funding as “hyperdrive, not a joy ride”. That is, “If you lay in the proper course, it will take you far. If you haven’t, you’ll just be way off the mark and beyond the reach of anyone to save you.”

What are the traps of seeking funding while still in the early stages of product development? How could entrepreneurs be successful in raising capital without traction?
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Funding + Contractors = Unrealistic Expectations = Cutting Corners?

Working with several startups over the last couple years, I’ve noticed a recurring theme with well-funded companies using third-party contractors – that is, many sacrifice quality in favor of urgency to deliver a more feature-rich product oftentimes by cutting corners.
That is, startups aim for seemingly arbitrary dates to deliver a product, forgoing things like customer discovery or shifting responsibilities to contractors. In some cases, contractors have not worked in the startup environment or are bought into the business to make the best decisions.
  • I believe the “business” should define what the user flow (experience) should look like with input by a UI/ UX designer. Except in one project, the business shifted user flows to the UI/ UX designer. Being an outside resource without the experience of the business, the designer was left to insert his own vision. So when designs were up for approval, the business owners threw up all over them. Why? Because the designs didn’t match their vision.
  • An early-stage entrepreneur launched a new travel platform without testing the product with customers and gathering feedback for customer acquisition. His previous life in investment banking funded his startup’s six-figure development costs. However, when he launched, he had no answers to how to acquire customers in a highly competitive market. He ended up shutting down almost immediately.
Funding/ money is a funny thing – you want it, but without control, can set unrealistic expectations and take the scrappiness out of startups. You may expect quality to go up, but instead, efforts to ameliorate investors by hitting deadlines motivate the startup to cut corners and sacrifice quality; whereas in bootstrapped, lean startups, quality is tuned to critical elements, and growth occurs more organically.
These aren’t rules… but rather anecdotes of what I’ve seen.
What are your thoughts on how funding has affected startups and expectations? How would you implement some of the lean startup and scrappy methods in a well-funded startup? How else could startups use contractors more effectively?
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