AskAVC #12 - How to negotiate a term sheet

[@jeremyhenley7533]

Hi Ryan! Thanks for all of your videos. I think they are great. One area I am still trying to get comfortable with is what are typical valuations at the seed stage? What are typical percentages that are given to or asked from the investor? Maybe you can create a video that has ranges for different scenarios. New founder, no traction, but a solid idea. Founder with some experience, some traction, and revenue, new founder, revenue traction but needs capital to quite full-time job and grow/expand. I think some scenarios and general ranges would hit a lot of founders in different places.

[@AskaVC]

Valuation is a hard topic when it comes to typical. Especially at the seed stage when metrics are non-existent. Its a good suggestion for a video - I have covered it a bit in prior clips but maybe it deserves more time. One thing I would tell entrepreneurs is to avoid at all costs giving away significant percentages of the business at the early seed stages. By significant, I mean more than 15-20%. The reason is that future rounds will be dilutive as well - at least as much if not more - than the seed round. The objective of the seed is to prove some things out, understand the opportunity and set the business up to begin to scale. These actions are not a function of dollars as much as time in my experience. You cannot bake a cake at 1000deg for 5min and expect a good result. Companies that give up too much equity at the beginning risk creating a problem for future rounds. We are nervous about investing in companies where employees and founders are not the vast majority of the cap table - and I know we are representative of most investors. If you play this concept out - if you needed let's say 1 year to figure out the opportunity and product and another 6 months to get some early customers for an A round - and it was going to cost you $1.5m to do it, you would want to drive a valuation of >10m pre. The other somewhat obvious comment would be the more competition there is for the opportunity, the more you will be able to control your destiny. Finally, I would say the biggest driver of valuation from investors at the seed is the team. While many people have potential, investors are trying to de-risk things early so they are looking for the ability to execute and demonstrated success. Can the founder recruit, can they raise money, can they sell etc. Bigco execs don't do any better here so experience is relative to the opportunity.

[@alexgehales]

Thanks for making this video, I am currently undertaking this process and the ideas outlined did help me.

[@AskaVC]

Thanks Alex. Let me know how things work out and your experience. Good luck!

[@prajaytipre1374]

Thanks for taking the time to put this together! Super helpful.

[@AskaVC]

Glad it was helpful! Let me know if there are other topic areas of interest - trying a new format / content idea for the next one. LMK what you think

[@prajaytipre1374]

@@AskaVC A framework for equity compensation for advisors/early team members would be awesome!

[@AskaVC]

@@prajaytipre1374 Great idea - thanks for the suggestion! I will look into it

[@andrej.rusakov]

Founder vesting. How far can a Founder push if he/she has invested capital into the company (therefore, it’s not only sweat equity that the founder has) and if he/she has already worked in the business building it for 2 years?

[@RyanFloydx]

Andrej - presumably you own stock for the capital you have invested so what we are really talking about is founder vesting. It's a sensitive subject as investors need founders to be committed and founders understandably want the vesting they set up at the beginning. You have to find a balance. Founders should not have to put all of their stock at risk of being fired from the company for example - that is just ridiculous. But at the same time - don't expect investors to be comfortable if there is not stock left to vest especially in the early days depending on the progress of the business. Obviously, this is from the perspective of an investor - I am sure there are some terrible stories of investors taking advantage. Just recognize there are likely also an equal number of stories of founders asking for more stock or leaving once vested which isn't what a new investor signed up for when they made the investment.