Notes on VC’s and Capitalisation Tables

Somehow “Future Proofing your Capital Raise” got into my calendar and I’m not entirely sure how. Never remiss in guzzling festive beers and blue cheese, I decided to go have a look.

It was a Venture Capital Christmas Panel put on by the good folks at New Zealand Trade and Enterprise. Set on the 6th floor of NZTE’s Quay Street offices with a panoramic view of the downtown Auckland waterfront.

The speakers were given an assortment of Christmas themed sunglasses to wear and equity themed questions to answer.

The panel consisted of Nina Le Lierve (Enterprise Angels), Rob Vickery (Hillfarrance), and David Beard (Movac). All are active investors in New Zealand startups. All have huge amounts of in the trenches experience. All were speakers with a lot empathy for the people and businesses they serve. I do hope NZTE rounds them up again for another panel.

The focus of the panel was on how you manage your startups equity or what I like to call the life and fast times of a Cap Table.

The following are my notes based on the answers they gave. All mistakes, omissions and odd grammatical structures are mine.

Festive Sunglasses

Cap Tables

A Capitalisation Table being the record of note on who owns what in your company. It usually includes details on such wonders as common equity shares, preferred equity shares, warrants, and convertible equity.

A basic Capitalisation Table lists out each type of equity ownership capital, the individual investors, and the share prices. A more complex table may also include details on potential new funding sources, mergers and acquisitions, public offerings, or other more esoteric transactions.

A Capitalisation Table is a tool that is a valuable way of guiding and aligning ownership, recruitment and retention schemes.

Side-note. Most likely not kept in the Cap Table but Rob Vickery made reference to one company that kept a record on the performance of each of their VC’s (in regards to how much activity on behalf of the company they had contributed). Clever.

It’s a good idea to start keeping a Cap Table from the outset of any business. It can help keep the shareholders’ equity portion of your balance sheet crystal clear and it will be referred to more and more often as your business grows.

There are proponents of getting startups to breakeven as early as possible with the least amount of capital but that doesn’t mean you won’t need to raise money. 

The Software as a Service (SaaS) business model, is the primary business model in today’s startup world. You pay programmers to create software, and you pay more money to sales and marketing to get customers. The aim being to create a future stream of steady cash.

High upfront costs, and then a stable stream of payments later.

With this kind of capital requirement and in particular, capital timing, you are most likely going to need some help in the front end via…

  • Bootstrapping – using your own money
  • Loans – borrowing
  • Equity – exchanging investors money for shares of your business

You may have enough capital on hand to bootstrap, you might have enough collateral or credit with a bank or friends to get a loan. Or you might have to start pitching your idea and exchanging part ownership in your business for cash.

Naming Conventions

Rob Vickery noted that there are generally accepted naming conventions for the different stages of funding and it helps of you have an understanding of these stages. Though there is a confusing overlap of actual achievements and players involved at each stage.

Pre-Seed Funding: The bootstrapping stage where you have an idea you’re exploring and building your first rough minimum lovable product versions, looking for market fit. This is where you lean on your own money or as the adage goes money from the three “F’s” (friends, family and fools).

Seed Funding: The product development stage is usually where you actually have some kind of product and looking for market traction. You could be starting to hire around here and this is also when not only the three “F’s” but Angel Investors and possibly some VC’s start to play.

Series A Funding: The business model is in place, you have your early team and you are starting to refine and scale your products. Some Angel Investors are here but this is generally your first round with VC’s getting involved.

Series B, C, D etc Funding: You’re into scaling and building out a bigger and better team, further rounds of VC investment are injected to boost the speed at which you are moving.

These are sometimes called bridging rounds depending on where you are in growth and path to exit.

IPO: Stock market listing, the public tips in its money, early investors get to have drinks and fast cars all round.

NB: Enterprise Angels has a Capital Strategy template containing a useful exercise. 

Update: Hillfarrance has stepped up with some very nice templates and resources

Now that we have our naming out of the way we can get to some of the lessons Startup funding life likes to throw at us. Like finding investors to start with.

Finding the dosh

Google is your friend. LinkedIn is your friend. NZTE is your friend.

Do your research. Reach out to connect on LinkedIn but don’t pitch over LinkedIn. You will be ignored.

Find the investors websites, look up their email addresses. Email your pitch. Investors have a workflow and email is part of it. Remember the best investors are seeing thousands of pitches. No matter how convenient it is for you, they don’t want pitches thrown at them randomly on social media.

Stop and think about this for a moment. You’re sitting on a pile of cash that you literally have to spend at some point but you’re getting hundreds of pitches. What would you want to see and how would you want to see it?

  • Maybe a clearly formatted, well thought out, spell checked, single page document that doesn’t make you wade through footnotes to figure out what the business is?
  • Perhaps a succinct description of the problem being addressed, who’s problem it is and the size of the market?
  • A short punchy explanation of how they are addressing that problem followed with a summary of what makes the solution unique in the market place?
  • A quick description of who the team is, with a sentence or two about why they are suited to addressing this problem?
  • A clear call to action… do they need money? how much (what range)? Maybe a quick explaination of what they would do with the money? Do they need connections? What kind? Which industry? Looking for advice? What area exactly?
  • Rounded off with full contact details, a note on how and when is easiest to reach them
  • Finished with a nice thank you?

Is that something you would like to see in your inbox? Something that makes it easy for you to reply to?

NB: Again Enterprise Angels has your back with a very nice template.

Update: Hillfarrance has stepped up with some very nice templates and resources

Don’t be afraid to knock twice. Good investors are busy, a polite follow up after a reasonable amount time is ok.

While searching for investors NZTE is also a good starting point. Simon Ansley, NZTE’s Auckland based Investment Director spoke up. All of the above points regarding a sharp one pager also apply when sending them an inquiry. They have a list of investors they can scan through and match you up with. If it’s overseas investors you are looking for they can throw the ball to Terry Allen their Investment Director for North America.

Relationship Goals

Once you have got your investors attention and you’re communicating now is the time to be transparent. Be confident, be honest. Contrary to popular belief they’re in the business to help. Transparency works both ways.

Sure you are looking for money but there are other factors that are just as important if not more so. Nina Le Lierve raised this point and all the panelists agreed you are looking for alignment. Once you take the money you’ll be working together for a long time. Think ten years, maybe longer. This is not a short-term relationship.

Does the investor offer connections or industry experience? Will they open doors? Are they in it for the same duration as you are? Are they easy to get along with? Do they understand the problem? Have they got some key insights? Are they proactive? Speak to other founders they have invested in. All these aspects and more contribute to the overall relationship and again that relationship is going to be a long one. So take your time doing *your* due diligence. 

Speaking of which they will be doing their own due diligence. Prep your partners, your staff and your clients. Investors will and are going to talk to them candidly. Don’t let them get caught by surprise.

They will also be looking at your Cap Table. Or at least a summary of one. Now is not the time for you to find out it’s the proverbial hot mess. Get some legal advice when setting up your Cap Table but please don’t put the lawyer into the table in exchange for services.

Things like a hundred shares split across twenty five founders, friends and family or a random non-dilution clause snuck in by a cheeky pre-seed investor can be a royal pain to tidy up.

Equity Leakage

You want to do your best to avoid Equity Leakage. Dishing out more equity than you need to or in unproductive ways, causes problems.

No one enjoys ownership fights. Figure out how you are going to divorce before you get married when splitting shares amongst founders. It’s easier when there is no real money involved.

David Beard suggested having a mechanism or clause in place so that the equity of founders who walk away from the business gets returned to the common pool or something similar. It’s all too common for partners to get sick of the slog or take better offers of work, and walk away holding large chunks of equity. This is dispiriting to the partners that stick it out and not something any investor wants to see in a Cap Table.

With some forethought, some study and a little advice you can avoid these things.

Over-subscriptions. If things are going well sometimes a funding round will become oversubscribed where there’s more buyers than there is equity on offer. While this is generally considered a good thing it can have complications. You can increase the price of the equity but you don’t want a “down round” if you have to raise funding again. You might want new investors onboard at a reasonable price without giving up too much equity to do so. All of these considerations need to be kept in balance.

An experienced VC can help you work your way through these issues.

The general consensus was, don’t take more money than you need. Too much money at the wrong time can be just as problematic as not enough. Too much money can make companies sloppy. Stay a little hungry.

If you are using equity to attract or retain talent via Employee Stock Ownership Plans (ESOP’s) learn about vesting and cliffs.

Think about giving everyone in the company something. It’s not leakage if done right and aligns the team towards the same goal. For example (hypothetical numbers here) reissue 10 million shares and dish out parcels of 10,000 shares. It’s a bit of an optical illusion but 10,000 shares looks better than 0.1%. If you really hit it big those 10,000 shares will be a nice package.

A good Cap Table also allows employees to understand what their payout would be and for you to understand what the value of your common stock is after each round of financing.

In the USA at least. Investors like to see founders holding a substantial amount of equity usually in the 70 percent bracket to ensure they have plenty of skin in the game. The last thing they want to see is a founder tired of their ninety hour weeks and getting scooped up with a big corp seven figure salary offer and walking.

I’m pretty sure there was more but I was four beers in and enjoying a very good conversation with the interesting people behind the Blinder startup and the Punakaiki Fund.

I would like to thank the people at NZTE and all the panelists for an entertaining and informative evening.