How to Structure a Startup Equity Round?

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“A good negotiator understands that it’s his job to put things right. Mastering the art of doing business is what transforms an everyday company into a leading business empire.”-Warren Buffett

HERO, a virtual e-commerce company founded in London in 2015, was acquired by Klarna (a European-born Fintech unicorn) in July 2021 in order to strengthen its strategy in the growing global e-commerce market. HERO’s founders, like any startup, needed capital to grow their company. However, their strategy initially focused on using their own capital and when the startup reached a relevant size, they raised capital from third parties.

Before structuring a round, essential questions for every entrepreneur are: why raise, when to raise capital, and how much to raise.

Why raise? Establish where your company is today, where you want it to be in 12–26 months and define what resources you need to get there. This is the right time to define your goals as an entrepreneur and really think about where you want to take your venture.

When to raise? When you do not have your own or enough capital with which to develop your business and you need capital and support from other investors to grow. Especially if you are going to raise capital from Venture Capital funds, you should be in an accelerated growth phase looking to capture a large and potentially underserved market.

How much to raise? Raise as much money as possible that is aligned with the stage of development your venture is in, considering that the use of resources is sufficient to survive at least 12–36 months. The basic concept is runway; that is, the period of time you have to survive on the cash you have available in cash in relation to your monthly cash burn. Don’t wait until you have little time left to live on your available cash to start raising capital to extend the life of your startup.

When structuring a capital raising round, some of the elements you should take into consideration are the following:

Economic: Define the amount of capital you need to raise in order to develop your project considering a period of at least 12 months. Also, consider the value of the company and the percentage of equity you are willing to give to potential capital investors.

Type of investor: The type of investor recommended for accessing capital will depend on the stage of the startup. In early rounds it will be easier to raise from angel investors and seed funds, in growth stages the participation of Venture Capital funds will be essential for you to consolidate the raising. Consider the number of investors or funds that you want to participate in the round and the added value beyond capital that they will provide to the company. Usually, the fewer investors participate the easier it will be to negotiate and manage investors over time. Another element to consider is the capacity of each of the potential investors to make follow-on investments in the growth of your startup.

Type of instrument: The type of instrument to negotiate with investors will depend on the stage you are in and the amount to raise. In early stages it is more common to raise through convertible note or SAFE, in growth stages through direct equity.

Jurisdiction: According to the investors participating in the round you will have to establish the jurisdiction that regulates the structure and legal documents.

Time: Consider that the raising process takes time, as you will have to talk to multiple investors, negotiate terms and conditions (term-sheet) with the lead investor and go through a due diligence process until the closing of the transaction documents.

Consider that each capital raise affects the capital raise of future rounds. Therefore, invest time in structuring the current round so that the construction of your startup is built on a firm foundation. Many times, entrepreneurs just want to raise capital; however, what is most relevant is not the capital raising itself but the way in which you go about building your startup.

“It’s often said that raising money is not a success, it’s not a milestone for a company and I think that’s true.” — Marc Andreessen

Note: please refer to the original publication at EL CEO: ¿Cómo estructurar una ronda de capital de la startup? (elceo.com)

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Gonzalo Soriano. VC Investor at ACV.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.