There is another great post of Fred Wilsons blog. Freds blog is always a great source for no-nonsense view on business, technology, funding and related issues. It has become a staple in my daily blog-feed.
His recent blogpost deals with Terms Sheets & exit values. Both are inescapable facts for any start-up that trues to raise funding. The contents of Term Sheets as well as the concept of Exit Values can be sometime hard to grasp for fist time fundraisers (and even for those who have done it all before). However the point is to not become blinded by all sheer mass of details contained in a term sheet. Most of this is formality and you should really contract a qualified legal and/or financial professional to deal with those details. What should really concern you are only a few points:
- The amount you are raising
- The amount of equity you are offering in exchange
- Your dilution (i.e. how much of your company will you own after this round of funding)
- The types of shares you are offering (preferential, common etc)
- How all this fits in with your future funding needs
- The exit
The exit, or more exactly the exit value, is what ultimately will decide the amount of money that you will be able to raise. The maths can be very basic; if you’re raising 1 million for 25% equity and your investor expects a 10x return (most expect that or more) than that 25% has to be worth at least 10 million at the time of exit. This has to be reflected clearly in your financial projections (and oh yeah forget about 3 year financials, 5 years make much more sense).
A lot of this is covered in mind-numbing detail during our bootcamps. But don’t let the mind-numbing put you off.
KNOWING THIS WILL SAVE YOU MONEY
Understanding a VC’s thinking will put you in a much stronger position when the time comes for you to sit across the table from them. It also stops you from looking like a fool…
