Thread by @MacConwell, 1/8 Yesterday I tweeted about a story of founders who had given [...]

Mac the VC

MacConwell

1/8 Yesterday I tweeted about a story of founders who had given up too much equity too early which may impact their future funding. Today I want to talk about how this can happen when taking on a lot of Note agreements.

#vc #startups #founders #founders

2/8 It's common for startup founders to use SAFE or KISS or Convertible Notes for their earliest funding. it is also more and more common for founders to do multiple rounds of note agreements

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3/8 A secret here is Notes don't have to be a part of a round as each note is its own agreement, so technically each note could have different terms or different cap. This can lead to a lot of flexibility that's both good and bad

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4/8 Something founders sometimes mismanage is setting a fair valuation cap, but then taking on multiple notes over 12-18 months or longer without raising their cap or not raising it enough

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5/8 This can easily lead to a situation where the founders have given up way more equity than they thought or had planned to.

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6/8 This is a result of founders not always understanding or calculating their ownership relative to their investors and their many notes. that 50K check here, 25K check there, and equity to an accelerator starts to add up quick

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7/8 The way you avoid this is by constantly doing scenario planning for future rounds of funding. When you close a note calculate the value of your investors' ownership if you raise money at a low, mid, or high future valuation

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8/8 This allows a founder to monitor how much equity they have really given up to date and gives a sanity check around when they need to start thinking about raising their cap or saying no to new investments

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