Placeholder Image

字幕表 動画を再生する

  • If you're starting your first company,

  • understanding stock, preferred stock,

  • options, convertible notes

  • and other fundraising instruments

  • can be truly overwhelming.

  • We actually didn't find a single video

  • that covered this, so here we go.

  • This is Fundraising for Startups 101.

  • If you are an early-stage startup in the tech space,

  • and you are looking for money to grow your company,

  • the official term for that would be raising capital.

  • The most commonly recommended instrument

  • to do so is called a Convertible Note.

  • However, to understand how those work,

  • we first need to understand how equity

  • (or stock) works.

  • By the way, if you are lost

  • with one of the fancy words we are about to use,

  • just rewind,

  • or check out the video description for a glossary.

  • Also, a shout-out to our investors

  • at Carao Ventures,

  • for validating our legal documents here.

  • Ok, so Stock.

  • You are probably semi-familiar with the term

  • 'stock.'

  • Stock is what represents the company ownership

  • and it is distributed in parts to reflect

  • how much of the company each owner

  • or shareholder possesses.

  • Each shareholder, receives a certain number of shares of stock.

  • The number of shares a person

  • or entity owns in the company,

  • divided by the total number

  • of shares that have been issued,

  • reflects that person's percentage ownership

  • of the business.

  • That ownership is often acquired

  • with a cash investment,

  • but it can also be acquired

  • through other forms of value contributed,

  • like your hard work.

  • The percentage owned

  • normally determines a shareholders' claim

  • on the company distributed profits,

  • (the term used is dividends)

  • and the voting power

  • on certain key company decisions.

  • But, for you to understand better,

  • use an example of a company

  • we'll call...

  • FounderHub.

  • Let's say that FounderHub has two founders,

  • who came up with the concept together,

  • and have both committed

  • all of their professional time

  • to develop this business,

  • so they'll be equal partners.

  • The Co-founders,

  • Walter and Jesse

  • go ahead and incorporate FounderHub.

  • Startups are usually incorporated

  • with about 1 million shares of stock.

  • Why so many?

  • Because it's complicated to break a share in half.

  • We'll get to that in a second.

  • So, after incorporating,

  • each one of the founders

  • owns 500,000 shares of stock

  • which represents 50% of the 1 million total.

  • Most startups are incoporated as

  • Delaware C-Corporations,

  • and they just are.

  • It's the legal structure that is

  • most familiar to investors,

  • it is easy to set up,

  • it's easy to manage

  • and is very tax friendly.

  • So let's look at a Price Round.

  • Raising money for stock.

  • The 'traditional' approach

  • towards raising capital

  • is with what is called a “priced round”.

  • Meaning, a round in which both the founders

  • and the investor are able to agree

  • on an accurate valuation for the company,

  • and so the investor gets shares of

  • company stock in return for his investment.

  • Let's imaging that FounderHub starts

  • generating sales, starts operating and

  • things are going very well.

  • Let's say they're selling $10,000/mo,

  • and subscriptions are growing fast,

  • so they decide to raise money.

  • They calculate a nice round number of, say,

  • $500,000 in investment that they need to raise

  • to accelerate their business,

  • so they seek out an investor.

  • Remember,

  • companies rarely raise money

  • without traction;

  • we made a whole video about that.

  • Check it out.

  • So, how many shares do they offer an investor

  • in exchange for those $500,000?

  • That question really relates to the business valuation.

  • How much is this business worth?

  • If instead of FounderHub,

  • Walter and Jesse owned,

  • let's say a car wash

  • its value would be calculated using a multiplier

  • of their revenue or their profits;

  • it's really, their EBITDA, but who has time to

  • explain what that is?

  • If Walter and Jesse are making $10,000/month,

  • that's $120,000/year,

  • a traditional business could be worth

  • maybe 1x or 2x this,

  • depending on how profitable they are.

  • This means that an investor could literally

  • buy the whole carwash business

  • for $250,000 or so

  • (excluding the value of the land or the building).

  • However, tech startups are different.

  • Tech startups could have

  • tremendous scale potential

  • and fantastic margins,

  • so it's extremely hard to measure

  • how large and fas they can grow

  • in revenues and in value.

  • A software product or an app, for example,

  • can realistically serve millions of customers

  • around the world, with a minimal staff.

  • Think of Uber,

  • who raised $500,000 on their first round,

  • and are now worth,

  • well, close to $80B of dollars.

  • They did not need to invest billions of dollars

  • on buying a car fleet, for example.

  • So the value of a tech startup

  • is not related directly

  • to their current assets or revenues,

  • but to their upside potential,

  • their capacity to innovate

  • and transform those innovations

  • into value.

  • Some variables to take into account here are:

  • - The addressable market size.

  • So, how many customers are there

  • for the company to serve

  • and how much would they be willing

  • to pay for this product

  • or service.

  • - The technology variable

  • Is there a unique piece of tech

  • that nobody else has,

  • or that optimizes a process drastically?

  • - Potential margins.

  • How much does it cost me

  • to serve an additional customer?

  • For example,

  • when Instagram had 300 million users,

  • their staff was only 13 people.

  • However,

  • all these numbers are variables and estimates,

  • and nobody really knows for sure.

  • But based on them,

  • along with some credible early results,

  • the valuation of the startup

  • is defined by how much potential

  • an investor sees in the business,

  • how risky it is,

  • and how much upside do they expect

  • in exchange for risking their money,

  • just like a bet.

  • So, these days,

  • an average valuation in Silicon Valley,

  • for a tech company like our theoretical FounderHub

  • would be around

  • $4million pre-money valuation.

  • Again, assuming this is a high-scale,

  • high-margin business, not the car wash.

  • So, let's say that Gus,

  • our investor, accepts these terms,

  • and then he is willing to purchase

  • a $500,000 chunk of this business,

  • as an investment.

  • Simple math tells us that if

  • the full company is worth $4 million,

  • then $500,000 would represent

  • about 11% of this company.

  • We are gonna dig deeper into this.

  • Remember Walter and Jesse

  • both have 500,000 shares of this business.

  • Shares of stock

  • Typically, the original shareholders

  • do not transfer or sell their shares,

  • what's gonna happen is the company will

  • issue new shares to Gus.

  • In businesses stock rarely changes owner,

  • unless the business is actually acquired.

  • On the contrary,

  • companies often issue new stock,

  • which dilutes the original shareholders

  • percentage ownership.

  • I'm gonna explain this in the easiest of ways.

  • Let's say that if Walter and Jesse

  • had one share each,

  • they would each own 50%

  • of a 2-share business.

  • If the company issues a new share of stock to Gus,

  • then everybody still has one share,

  • but it's no longer 50% of the business,

  • it's 33% of it.

  • So, in this case

  • for the math to work,

  • FounderHub will issue

  • 125,000 new shares of stock to Gus.

  • When the company does this,

  • it will no longer have 1 million shares,

  • it will have 1,125,000 shares.

  • So, Walter and Jesse will still own

  • 500,000 shares each,

  • but they no longer represent 50% of the business,

  • but around 44.4% of it..

  • The new 125,000 shares issued to Gus

  • now represent 11.11% of the company.

  • The post-money valuation of FounderHub

  • is now $4,500,000.

  • And this is why we had 1 million shares to start with,

  • so that we don't have to issue fractions of shares.

  • If the company would have been incorporated

  • with only 100 shares, for example;

  • 50 for Walter and 50 for Jesse...

  • then it would have had to issue

  • 12 or 13 stocks to Gus,

  • so we'd need to round up or down.

  • That round up could be worthless now,

  • but a 0.01% equity stake

  • in a company like Uber

  • that's actually

  • $8 million today.

  • Now, the challenge with raising money this way,

  • a priced round,

  • is that there are a lot of things to figure out,

  • for example,

  • How many votes

  • does each share get in certain discussions?

  • Usually, the standar is that you get one vote per share,

  • but investors will often want

  • more control over certain

  • key company decisions

  • considering that'll have

  • a minority ownership in the company.

  • If the company goes bankrup, for example,

  • and needs to liquidate assets,

  • do investors get paid first?

  • That's another thing,

  • that you'll have to agree on, on a price round.