Tips for startups raising investment (from an angel investor)

In July, we spoke with Jeff Erickson, Startup Advisor, Angel Investor, and Partnerships Manager at Carta, about what startups should consider while looking for investors. Now we meet with him again to discuss what startups should consider when actually raising capital and making decisions about equity.

How much equity should you give to advisors and employees? What is the right amount of equity to allocate to an option pool? What type of financing round is best?

Read on to see Jeff’s answers to those questions and more as we delve into tips for startups raising investments.

Equity and options

Once you’ve found an investor, there’s the question of equity. How much should you give to advisors? What about your employees? And how much should you plan to carve out for the option pool?

Advisors

Jeff suggests that advisors for early-stage companies typically receive anywhere between .25% to 1% equity (with .25% being very common). It is also common for advisors to have shorter vesting periods than employees, with a 2-year vesting period being fairly standard.

When selecting advisors, Jeff encourages founders to first assess the needs they have as a team and identify specifically what they expect to gain from an advisor. He also suggests it is important for expectations to be established at the very beginning and documented in an advisor agreement.

Jeff states, “Ultimately, it’s the entrepreneurs responsibility to get the most out of the Advisor. Clearly define what is expected of your advisors, and keep them accountable for doing what they say they will do. While your company is always top of mind for you as a founder, it is important to realize this is not the case for your advisors. They often have other companies they work with and other priorities. Therefore, it is essential to keep advisors updated regularly in order to keep your company top of mind for them. A tip is to have regular meetings, provide frequent updates in a cadence, and make specific asks of your advisors.”

Employees

As for employees, the amount of equity granted will vary based on the employee position, level, and location. Because there are so many variables to consider, Jeff recommends using software like Carta’s Total Compensation Tool to determine how much equity to grant to specific employees.

The option pool

What about the option pool? How do you know how much equity to set aside for future option grants to employees and advisors? Well, this will depend on the stage of the company and its hiring needs. For many early-stage companies, the option pool may typically range between 10-20%, although it can vary based on industries, sectors, and company growth cycles.

Essentially, you’ll need to build out your hiring plan first, then build out the option pool based around your needs. If you don’t, then your investors will dictate the option pool, so be prepared to make your case. Be confident with your projections, and be prepared to revisit it with investors if things don’t go as planned.

What kind of round?

Then there’s the important question of whether you should do a SAFE, Convertible Note, or Priced Round. That’s a complex topic, and there’s no one-size-fits-all answer. Instead, consider your goals and the investor’s preference.

Jeff’s advice: “As a founder, it's advantageous for you to understand the differences, and what you’re getting into. Keep track of the impact of dilution leading up to a priced round and model out different funding round scenarios when taking on SAFEs and Convertible Notes so you aren't surprised when you do your Series A round.”

Consider the benefits of each:

• SAFE (Simple Agreement for Future Equity): Typically simple, quick, and inexpensive.

• Convertible Note: Traditionally more investor-friendly, as it gives the investor the power to call the note at a maturity date and typically has an interest rate associated with it.

• Priced Round: Generally more expensive in terms of time and legal fees. The advantage of raising a priced round is that it clearly establishes a valuation of the company for you and your investors and defines many more specific terms of the financing. You’ll want to make sure you understand all the terms and work with an experienced startup attorney.

Of course, for a Priced Round, that raises more questions: what should the valuation be? Well, this is all part of the negotiation, although Carta has market data that you can reference, including fundraising benchmarks for pre-seed, seed, and Series A funding. Regardless, it can be beneficial if you’re able to get multiple term sheets, and Jeff recommends making sure you have a good startup attorney to help review them.

Vesting and equity

What about vesting? Naturally, there may be different vesting periods for founders, advisors, and employees. Typically, Jeff has found that a vesting period of 48 months with a 1-year cliff for employees is quite standard. There are some arguments for founders to have longer vesting periods if vesting begins at the formation of the company, since the typical time for a company to exit can be 10+ years. As noted previously, advisors normally have shorter vesting periods, “as their value added to the company often follows a more immediate timeline.” Jeff recommends a 24-36 month vesting period, with at most a 6-month cliff if any for advisors.

There’s also the matter of equity, particularly how much you should expect to give up in each round. Jeff says a 20% discount for SAFEs and convertible notes is quite standard. 20-30% dilution for Series A is pretty typical. Series B funding rounds can get a bit more complicated, as some companies decide to raise large amounts of capital in anticipation of significant growth and they may be willing to give up more equity.

In general, you might expect around 20-25% dilution per round of funding, and it is wise to model this out to make sure there’s enough equity left based on the number of anticipated funding rounds and amount of equity funding expected to be raised during the life cycle of the company.

Investor checklist

There’s a lot you’ll want to do in anticipation of raising capital from investors. Even if you are not raising capital immediately, it is good to know some of the things you will likely need so you can begin making a timeline. Below is a convenient checklist of some things you’ll likely need when meeting with investors. Make sure everything is clear and ready to go, and you won’t be taken by surprise.

• Data Room

• Articles of Incorporation

• Cap Table

• Pitch Deck

• Board Meeting Minutes

• Board Consents and Approvals

• Analytics access (GA/Mixpanel etc.)

• Traction/Conversion Metrics doc

• Cash Flow Statement

• Balance Sheet

• Income Statement

• Intellectual property docs

Tools to help

Fortunately, you don’t have to go at this alone. There are a number of tools designed to help startups while they’re bootstrapping and preparing to raise capital. Free tools and discounted offers from companies such as Dialpad and Carta can be found through sources such as The Startup Stack (www.mystartupstack.com). Jeff also recommends checking out the Carta Founders Resource Center for more information and tools that can help you prepare for your next funding round.

Of course, you’re going to need a good communications platform not only during this process, but for your business afterwards. Sometimes you’ll need a good video conferencing platform to communicate with investors, and oftentimes a powerful business phone system can make the difference between a team succeeding and falling short.

That’s why Dialpad offers the Dialpad for Startups program, designed to provide enterprise-grade communications at a price made for startups. A good communications platform is an important investment for any business, especially when it comes with HD voice and video, accessibility across devices, and AI-powered transcriptions and real-time agent assistance.