How to establish a startup and raise funds in it (part 2)
The first part .
Aaron : When it comes to stocks, one of the main issues that a startup faces is how to divide the initial capital. I think the Internet is full of people with sophisticated equity calculators who calculate how much each founder will receive in one embodiment and in another. When it comes to how to distribute the shares among the founders, what advice would you give? What proportion is ideal in terms of the company's development and in terms of its success?
')
Kirstie : When we select companies to finance and look at the companies ’equity structure, we expect to see a relatively equal division of shares. It is not strictly 50 to 50, but a close proportion. When we encounter a situation where one founder has 90% and another has 10%, this is an alarming signal for a number of reasons. One of the problems may be that, in reality, they have not fully thought through this division.
Often the founder argues his 90% as follows: “I worked on this project for three months, I wrote the code for the first prototype and I invited the co-founder, therefore I have the right to the company's assets. That was my idea. ”
Aaron : And so I sit and say: “You know, it was my idea. I am a genius and deserve 80% of the company. Besides, you know, I attracted the first 15,000 dollars and invested 5,000 of my own funds. I deserve all 90%. " This is fair, isn't it?
Kirstie : There are many reasons why this does not work. And the main one is that three months of work on the project is a drop in the ocean across the company. If you want to bring it to success and go to an IPO, then you may have to work for ten, fifteen, and twenty years. Therefore, three months does not seem such a significant contribution. And, you know, in many companies, the final product with which they enter the market is a little like the initial idea.
Suppose the idea is yours, but after it was born, there is a large amount of work to implement it. And here we return to the concepts of quality communication and teamwork. And if you position yourself as equal partners, each of which has a voice in the company, this should be reflected. And yes, if one of you invested in order to finance the company at an early stage, this founder could be allocated an additional couple of percent and add a few shares.
From experience I can say that radical imbalances do not work. This is one of those things that feeds resentment: everyone is under stress, everyone works late. But you know that one of the founders is working for a huge potential benefit, which the second does not have. And the latter may ask: "Is it worth it?"
Aaron : Reflections on potential benefits are always too complicated for me, because, in truth, most of the stocks that a company issues at the start are worth nothing and are unlikely to ever be worth it. And trying to figure out who will earn more in the fictional scenario in which the company has succeeded is a difficult and gratifying task.
If a company is worth $ 100 billion, 10 percent is good money. But, alas, they do not give the feeling that you are an equal partner in the company. If both partners worked in the company for 10 years, put equal effort into the project, and one of them still feels like a junior partner - this leads to trouble. As mentioned earlier, coupled with poor communication, this is reflected in every decision in the company.
Kirstie : Yes, it is reflected. In all. It can even turn into distracted things a problem. It all comes down to talking to each other. You have to make sure that the founding team is happy and nobody feels unfairly bypassed. And also, that everyone is still ready to work hard for the benefit of the company.
Aaron : One of my favorite moments during the interviews with companies that are divided into 90 by 10 is when we start to explain something like this to them: „Just for information - such a separation, like you, has a right to exist, if you discussed it inside the company. But in our experience, traditionally shares are divided roughly equally. ” And then the younger partner eyes light up. He thinks to himself: “Wow! I didn't even know about that. "
Thus, we educate entrepreneurs, invite them to internal dialogue and help companies find themselves in more favorable conditions to enter the market. And this is cool. We carry this message, but we dictate nothing. Shares in the company may be unequal, but this should be a good reason and such conditions should be negotiated and agreed by all partners in the company. 90/10 cannot be dictated simply by the presence of an idea ...
Carolyn : I often note that the founder with 10% tries to justify his share, and the founder with 90% is simply present at the meeting. It looks like the Stockholm syndrome, right? The younger companion says: “I have 10%, because the idea of ​​the project is not mine and I do not have the appropriate education.” Or call another reason. And I listen and think “Lord, they didn’t discuss anything among themselves.”
Aaron : When did you decide on the division of shares in the company - how much interest does each party receive - how do you structure the procedure for the distribution of shares? Do participants get them in advance? “Okay, guys, I have 50% of the company. The first day of the company and I get 50% of the shares. " Does it look like that?
Carolyn : Basically, participants acquire them under a limited stock purchase agreement. You decide how to distribute the shares among the founders and then buy them. You buy them under a contract in which there are many important legal details, but the key concept is vesting. The idea of ​​vesting is that you buy your own shares. You own these shares. You can vote with them. However, they are subject to the so-called loss of the right to share. This means that the company can return them if you left the project or were dismissed from the company before the right to shares was fully fixed.
Aaron : I think this is a very strange concept if you are not familiar with it. That is, you own something, but the company can take it away from you. You do not have full ownership, despite the fact that you paid for these papers.
John : As Christie noted, founders need to communicate and come to equality of interests. Westing helps to build all the key elements of a company with which it can correctly enter the market and move further in the right direction. For example, if someone leaves the company after working for a couple of months and owning 50%, this will negatively affect further development. The company will be in a terrible situation. Westing may not look like the most fair tool, but it is important because it is aimed at a long-term perspective. Impossible to build a company overnight. The company is not only an idea. It is important to implement the company's strategy and the westing is the basis for the future.
Aaron : It seems to me that one of the important points that people lose sight of when establishing a company is that it needs to be protected. We are talking about the benefits to the company and its success in the long term. This benefit does not necessarily coincide with the private interests of the individual founders.
Theoretically, the founder may leave the company, taking his 50% and be satisfied, but in fact, this is a bad idea. The company will remain a small share, and it will issue new shares for investors or future employees to create a sense of ownership, ignoring the fact that in the long term, this situation will impede the success of the company. Founders must understand this: 50% of nothing will remain 50% of nothing.
Carolyn : I think it’s worth warning entrepreneurs about another bad idea. I am sure that some people think in this vein: “Well, even if the founder leaves the company with 50% of the shares, I will simply issue new, millions of new shares and shower myself with them. Yourself, the remaining founder “. It sounds promising. But, unfortunately, it does not work that way. There is a complicated legislative reason for this - I’ll just say that it’s not easy to do it. Therefore, do not think that you have such a reserve airfield. Do not think that this is a good excuse not to use the West.
Perhaps it is not even a matter of blurring the shares. Here's the thing: if you have increased the value of a company, you can no longer buy its shares at par. You have to pay fair market value for them. And it can be very high. The question is, can the remaining founder redeem them for cash? Of course, there are workarounds, but all of them are highly complex and we strongly do not recommend using them.
John : That's right. There are also other problems. After the release of the film “Social Network” in Y Combinator, there was a period when the founders came one by one and asked for strange changes in their constituent documents. Such, for example, as the possibility of a voting vote 10-1 or special preferences that would allow the founders to retain control over the company. And this is great. We are in favor of the founders to keep control over the company. But we are not just using standardized constituent documents in our practice, which we talked about earlier - this is indeed their best option.
When changes are made to the usual form and special points are added, this leads to unforeseen consequences: for example, potential investors study your documents more closely, and the assessment of the company's financial condition takes more time. For a startup, there are questions when raising funds - there may be difficulties. There are other reasons: for example, when buying stocks their value may vary. We developed standard templates of constituent documents, based on practical experience, over time, determining the most favorable conditions for the launch of the company and its development.
Aaron : The last question regarding the direct creation of a company that I want to discuss is the question of which entity to create and where? The state of Delaware is chosen by lawyers almost by default. But I remember that when I founded my own company, we were lost in guesswork “Do we need to establish an LLC? Do we want to be an “S” corporation? A type C corporation? "We didn’t even know what the difference was between them. A conversation with a corporate lawyer was limited to a council to set up a limited liability company:" Of course, Ltd. it is not difficult to create such a legal entity. We were in New York and registered a company there.
Why today all startups, regardless of location, are advised to establish a type-C corporation in the state of Delaver?
Carolyn : When businessmen choose, they should set up an LLC or a corporation of any type, familiar lawyers, indeed advise to create an LLC: “This is the best option in terms of taxes”. And perhaps it is. Especially if you have plans for a small, sustainable business in a particular state.
But, from the point of view of the fact that you are planning to create a successful company - and by successful we mean a large company with possible attraction of venture financing - this form of organization does not suit you. Now, perhaps you are looking for the best solution for paying taxes, but you need the best solution for success. Companies that receive foreign investment should be type C corporations.
Of course, limited liability companies can also receive external investment. But companies that show growth, funded by venture capital, are corporations of type C.
The reason we choose Delaver ... it is important to note that a corporation can be perfectly established in any state. But the Delaware is the undisputed favorite of all lawyers in corporate law, mainly because there are public companies in the most favorable legislative environment - there is a well-developed law enforcement practice. In the Delaware State Chancery Court there is a practice of applying legal regulations regarding, for example, legal and fiduciary duties - and other subtleties that are important for public companies.
This practice infiltrates into private companies, as the laws of the state of Delaver are familiar to almost all corporate lawyers. They are easy to interpret, and Delaware immediately comes to mind when asking for a recommendation. It is very easy to be there from an administrative point of view: you can create a company quickly, simply and cheaply.
Aaron : The last thing I want to say on this issue seems to be that there is nothing difficult in setting up a company. I agree with John that if you do not show off and adhere to standard templates of constituent documents, you will find yourself in a winning situation. Put all your efforts, ideas and innovations into the essence of the company - its activity, and not in its form.
Recently, we encountered a case, the details of which will not be advertised when a young company in a big way messes up, creating a legal entity. It got to the point that they had to go on a new round of investment and they found themselves in an absurd situation. Carolyn and John have seen many such companies in a situation of absurdity. And this absurdity can seriously harm the whole enterprise. Fortunately, then did not hurt. But such mistakes bring a huge headache and result in very high costs for lawyers. Better stick with standard templates.
Aaron : Let's move on - to the next interesting moment for lawyers, when the history of financing comes into play when creating a company. The moment you ask, “What does our capitalization table look like?”
The term “capitalization table” seems simple and taken for granted. However, last week The Economist published an excellent article that began to work seriously with this document relatively recently. Meanwhile, a clear understanding of who owns what is necessary. Kirstie, tell me what is the capitalization table and why is it so important?
Kirstie : In its simplest form, the capitalization table reveals the owners of the company. At the beginning, when creating a company, only two or three company founders will be added to it. But as soon as you start hiring employees or attracting investors, who will also become shareholders, you will need a clear way of tracking the table - you need to understand how the company is represented and what is the structure of its share capital.
In fact, the capitalization table is simply a list of individuals, which indicates the number of shares and the percentage of the company they own. A table can become more complex if you give employees options. Suppose that an option has been exercised or these employees have left the company - what will happen to these options? In general, the table will be difficult in a short time. The most important thing is to always have an idea about who owns the shares of your company.
Aaron : What happens if there are too many shareholders? What problems are waiting for entrepreneurs if they are no longer able to track the capitalization table?
Kirstie : I believe that if you do not know who owns your company, you are already in big trouble. As a rule, this information is addressed in difficult times. For example, to understand who your shareholders need, if you conduct a round of financing through the issuance of new shares. Or, for example, you have attracted venture capital investments and you need to put down the signatures of all the shareholders of your company.
And if you do not have a clear list of shareholders, or an idea of ​​who they are - it is very difficult to do. As a result, you plow through the pile of documents, trying to find contracts that you signed with them, trying to recover them. At such moments, you already have enough worries. This is a matter of company hygiene: the availability of this table and the inclusion of relevant information in it will not require significant effort and time. But if it is not at hand, you will have big problems.
Aaron : It is. Imagine that your capitalization table has become more complex. This happens either when you start issuing promotions for your employees, or when you begin to actively raise funds. All venture capitalists and business angels appear in your table. The first fundraising is usually what kind?
Kirstie : It can be of a different type.
Aaron : From whom does the money come and what tools are used to bring these funds?
Kirstie : People who invest in a company do not receive shares immediately. They use tools like convertible debt. This means that the investor is investing money now and at some point in the future, and this money will turn into shares later. Despite the fact that these people are not currently the shareholders, you should put them in a table and know who all these people have invested in your business.
When you accept money, you need to understand how much of the company will go to these people when they receive their shares. If, as a result, you give away 50% of the company, then you, as the founder, have little left. This, too, needs to be understood.
If you give up too much of the company at an early stage, when you go to the next round of financing - investors will start buying shares in real time - they will want to take even more from the company. And before you realize this, the creators of a startup will own a low unambiguous interest of the company. This, in turn, will not motivate to work. It is very important to understand the situation correctly: how much money you take, under what conditions and how it threatens in the future.
Aaron : Once we understand what happens at different stages, one of the things that I recall is that the first round of financing, as a rule, is not an estimated round of selling property in the form of securities. I think that most people who think about investing think this way: “I will go buy shares on the stock exchange. This is a stock with no fixed dividend. I know her price. ” If I acquire a stake in a company, should I not know their value? Why is the sale of shares without a fixed dividend is not the preferred way to raise money?
Carolyn : There are two reasons. I think that startups tend to use convertible rounds when the price is not fixed, because this is a faster way to make money. Throughout my career, I have watched the mechanics of the estimated rounds become simpler, but at the same time, as before, investors conduct a financial evaluation of your company.
They also conduct legal due diligence: examine your contracts and incorporation documents. This is a whole process. Also, there are financial documents that together make up the lawyers of a startup and a company-investor - they are being negotiated. This is also a process, and a long one.
The estimated round is appropriate when the company is already at the stage when it attracts $ 1.5 million or more. But those companies that are planning to “shoot” and go through certain milestones do not want to spend time waiting for the results of the investors check and company valuation: for them convertible rounds are the best way to get the so-called seed investments. First, you attract money to the company, and the conversion of these tools occurs during the estimated round.
Aaron : One of the interesting moments that all three of my interlocutors emphasized in the conversation is that we return to the idea of ​​standardized processes that allow activities to pass quickly and easily. In this case, the investor thinks like this: “I would like to assess the financial condition of the company. I would like to set my price. I need more time to make an investment decision. ” And startups say: “No, I need money now.”
This happens because for startups time becomes the most valuable resource at this stage, not money. How much they have time to do before they die. How much time they have in order to satisfy the product quality of their users. Therefore, creating templates is a great initiative in support of startups. Also, thanks to my current interviewees, YC supported the convertible loan tool as a way to invest in the company in its early stages. This is a quick and easy way. This brings a startup back to what he has to do — create a product.
John : I absolutely agree. I believe that it is very difficult to evaluate a startup. It is difficult to come to a common opinion when the company is in its infancy. And working with standardized documents is very convenient. The convertible loan tool is also very convenient, since it allows the founders of a startup company to focus on business. At this stage, it is unreasonable to waste time on anything else, such as strange voting order agreements.
We have already seen companies that have ceased to exist, while trying to attract money. And this is a big mistake. At Y Combinator, we always advise talking to users. Focus on your business. Write the code. Exercise to keep healthy. Do not go crazy. This is your goal. It should not sound like this: “Okay, we need to attract funding when we have the first users.” Do not overlook the status of the company. Losing a startup by filling out documents is a crime.
Aaron : Resolve all financial and legal issues in a short time and return to work on your product and company.
Divide the company fairly
Aaron : When it comes to stocks, one of the main issues that a startup faces is how to divide the initial capital. I think the Internet is full of people with sophisticated equity calculators who calculate how much each founder will receive in one embodiment and in another. When it comes to how to distribute the shares among the founders, what advice would you give? What proportion is ideal in terms of the company's development and in terms of its success?
')
Kirstie : When we select companies to finance and look at the companies ’equity structure, we expect to see a relatively equal division of shares. It is not strictly 50 to 50, but a close proportion. When we encounter a situation where one founder has 90% and another has 10%, this is an alarming signal for a number of reasons. One of the problems may be that, in reality, they have not fully thought through this division.
Often the founder argues his 90% as follows: “I worked on this project for three months, I wrote the code for the first prototype and I invited the co-founder, therefore I have the right to the company's assets. That was my idea. ”
Aaron : And so I sit and say: “You know, it was my idea. I am a genius and deserve 80% of the company. Besides, you know, I attracted the first 15,000 dollars and invested 5,000 of my own funds. I deserve all 90%. " This is fair, isn't it?
Kirstie : There are many reasons why this does not work. And the main one is that three months of work on the project is a drop in the ocean across the company. If you want to bring it to success and go to an IPO, then you may have to work for ten, fifteen, and twenty years. Therefore, three months does not seem such a significant contribution. And, you know, in many companies, the final product with which they enter the market is a little like the initial idea.
Suppose the idea is yours, but after it was born, there is a large amount of work to implement it. And here we return to the concepts of quality communication and teamwork. And if you position yourself as equal partners, each of which has a voice in the company, this should be reflected. And yes, if one of you invested in order to finance the company at an early stage, this founder could be allocated an additional couple of percent and add a few shares.
From experience I can say that radical imbalances do not work. This is one of those things that feeds resentment: everyone is under stress, everyone works late. But you know that one of the founders is working for a huge potential benefit, which the second does not have. And the latter may ask: "Is it worth it?"
Aaron : Reflections on potential benefits are always too complicated for me, because, in truth, most of the stocks that a company issues at the start are worth nothing and are unlikely to ever be worth it. And trying to figure out who will earn more in the fictional scenario in which the company has succeeded is a difficult and gratifying task.
If a company is worth $ 100 billion, 10 percent is good money. But, alas, they do not give the feeling that you are an equal partner in the company. If both partners worked in the company for 10 years, put equal effort into the project, and one of them still feels like a junior partner - this leads to trouble. As mentioned earlier, coupled with poor communication, this is reflected in every decision in the company.
Kirstie : Yes, it is reflected. In all. It can even turn into distracted things a problem. It all comes down to talking to each other. You have to make sure that the founding team is happy and nobody feels unfairly bypassed. And also, that everyone is still ready to work hard for the benefit of the company.
Aaron : One of my favorite moments during the interviews with companies that are divided into 90 by 10 is when we start to explain something like this to them: „Just for information - such a separation, like you, has a right to exist, if you discussed it inside the company. But in our experience, traditionally shares are divided roughly equally. ” And then the younger partner eyes light up. He thinks to himself: “Wow! I didn't even know about that. "
Thus, we educate entrepreneurs, invite them to internal dialogue and help companies find themselves in more favorable conditions to enter the market. And this is cool. We carry this message, but we dictate nothing. Shares in the company may be unequal, but this should be a good reason and such conditions should be negotiated and agreed by all partners in the company. 90/10 cannot be dictated simply by the presence of an idea ...
Carolyn : I often note that the founder with 10% tries to justify his share, and the founder with 90% is simply present at the meeting. It looks like the Stockholm syndrome, right? The younger companion says: “I have 10%, because the idea of ​​the project is not mine and I do not have the appropriate education.” Or call another reason. And I listen and think “Lord, they didn’t discuss anything among themselves.”
Use westing to protect the company.
Aaron : When did you decide on the division of shares in the company - how much interest does each party receive - how do you structure the procedure for the distribution of shares? Do participants get them in advance? “Okay, guys, I have 50% of the company. The first day of the company and I get 50% of the shares. " Does it look like that?
Carolyn : Basically, participants acquire them under a limited stock purchase agreement. You decide how to distribute the shares among the founders and then buy them. You buy them under a contract in which there are many important legal details, but the key concept is vesting. The idea of ​​vesting is that you buy your own shares. You own these shares. You can vote with them. However, they are subject to the so-called loss of the right to share. This means that the company can return them if you left the project or were dismissed from the company before the right to shares was fully fixed.
Aaron : I think this is a very strange concept if you are not familiar with it. That is, you own something, but the company can take it away from you. You do not have full ownership, despite the fact that you paid for these papers.
John : As Christie noted, founders need to communicate and come to equality of interests. Westing helps to build all the key elements of a company with which it can correctly enter the market and move further in the right direction. For example, if someone leaves the company after working for a couple of months and owning 50%, this will negatively affect further development. The company will be in a terrible situation. Westing may not look like the most fair tool, but it is important because it is aimed at a long-term perspective. Impossible to build a company overnight. The company is not only an idea. It is important to implement the company's strategy and the westing is the basis for the future.
Aaron : It seems to me that one of the important points that people lose sight of when establishing a company is that it needs to be protected. We are talking about the benefits to the company and its success in the long term. This benefit does not necessarily coincide with the private interests of the individual founders.
Theoretically, the founder may leave the company, taking his 50% and be satisfied, but in fact, this is a bad idea. The company will remain a small share, and it will issue new shares for investors or future employees to create a sense of ownership, ignoring the fact that in the long term, this situation will impede the success of the company. Founders must understand this: 50% of nothing will remain 50% of nothing.
Carolyn : I think it’s worth warning entrepreneurs about another bad idea. I am sure that some people think in this vein: “Well, even if the founder leaves the company with 50% of the shares, I will simply issue new, millions of new shares and shower myself with them. Yourself, the remaining founder “. It sounds promising. But, unfortunately, it does not work that way. There is a complicated legislative reason for this - I’ll just say that it’s not easy to do it. Therefore, do not think that you have such a reserve airfield. Do not think that this is a good excuse not to use the West.
Perhaps it is not even a matter of blurring the shares. Here's the thing: if you have increased the value of a company, you can no longer buy its shares at par. You have to pay fair market value for them. And it can be very high. The question is, can the remaining founder redeem them for cash? Of course, there are workarounds, but all of them are highly complex and we strongly do not recommend using them.
John : That's right. There are also other problems. After the release of the film “Social Network” in Y Combinator, there was a period when the founders came one by one and asked for strange changes in their constituent documents. Such, for example, as the possibility of a voting vote 10-1 or special preferences that would allow the founders to retain control over the company. And this is great. We are in favor of the founders to keep control over the company. But we are not just using standardized constituent documents in our practice, which we talked about earlier - this is indeed their best option.
When changes are made to the usual form and special points are added, this leads to unforeseen consequences: for example, potential investors study your documents more closely, and the assessment of the company's financial condition takes more time. For a startup, there are questions when raising funds - there may be difficulties. There are other reasons: for example, when buying stocks their value may vary. We developed standard templates of constituent documents, based on practical experience, over time, determining the most favorable conditions for the launch of the company and its development.
What to create - a limited liability company, a corporation type "S" or a corporation type "C"?
Aaron : The last question regarding the direct creation of a company that I want to discuss is the question of which entity to create and where? The state of Delaware is chosen by lawyers almost by default. But I remember that when I founded my own company, we were lost in guesswork “Do we need to establish an LLC? Do we want to be an “S” corporation? A type C corporation? "We didn’t even know what the difference was between them. A conversation with a corporate lawyer was limited to a council to set up a limited liability company:" Of course, Ltd. it is not difficult to create such a legal entity. We were in New York and registered a company there.
Why today all startups, regardless of location, are advised to establish a type-C corporation in the state of Delaver?
Carolyn : When businessmen choose, they should set up an LLC or a corporation of any type, familiar lawyers, indeed advise to create an LLC: “This is the best option in terms of taxes”. And perhaps it is. Especially if you have plans for a small, sustainable business in a particular state.
But, from the point of view of the fact that you are planning to create a successful company - and by successful we mean a large company with possible attraction of venture financing - this form of organization does not suit you. Now, perhaps you are looking for the best solution for paying taxes, but you need the best solution for success. Companies that receive foreign investment should be type C corporations.
Of course, limited liability companies can also receive external investment. But companies that show growth, funded by venture capital, are corporations of type C.
The reason we choose Delaver ... it is important to note that a corporation can be perfectly established in any state. But the Delaware is the undisputed favorite of all lawyers in corporate law, mainly because there are public companies in the most favorable legislative environment - there is a well-developed law enforcement practice. In the Delaware State Chancery Court there is a practice of applying legal regulations regarding, for example, legal and fiduciary duties - and other subtleties that are important for public companies.
This practice infiltrates into private companies, as the laws of the state of Delaver are familiar to almost all corporate lawyers. They are easy to interpret, and Delaware immediately comes to mind when asking for a recommendation. It is very easy to be there from an administrative point of view: you can create a company quickly, simply and cheaply.
Aaron : The last thing I want to say on this issue seems to be that there is nothing difficult in setting up a company. I agree with John that if you do not show off and adhere to standard templates of constituent documents, you will find yourself in a winning situation. Put all your efforts, ideas and innovations into the essence of the company - its activity, and not in its form.
Recently, we encountered a case, the details of which will not be advertised when a young company in a big way messes up, creating a legal entity. It got to the point that they had to go on a new round of investment and they found themselves in an absurd situation. Carolyn and John have seen many such companies in a situation of absurdity. And this absurdity can seriously harm the whole enterprise. Fortunately, then did not hurt. But such mistakes bring a huge headache and result in very high costs for lawyers. Better stick with standard templates.
Track capitalization table
Aaron : Let's move on - to the next interesting moment for lawyers, when the history of financing comes into play when creating a company. The moment you ask, “What does our capitalization table look like?”
The term “capitalization table” seems simple and taken for granted. However, last week The Economist published an excellent article that began to work seriously with this document relatively recently. Meanwhile, a clear understanding of who owns what is necessary. Kirstie, tell me what is the capitalization table and why is it so important?
Kirstie : In its simplest form, the capitalization table reveals the owners of the company. At the beginning, when creating a company, only two or three company founders will be added to it. But as soon as you start hiring employees or attracting investors, who will also become shareholders, you will need a clear way of tracking the table - you need to understand how the company is represented and what is the structure of its share capital.
In fact, the capitalization table is simply a list of individuals, which indicates the number of shares and the percentage of the company they own. A table can become more complex if you give employees options. Suppose that an option has been exercised or these employees have left the company - what will happen to these options? In general, the table will be difficult in a short time. The most important thing is to always have an idea about who owns the shares of your company.
Aaron : What happens if there are too many shareholders? What problems are waiting for entrepreneurs if they are no longer able to track the capitalization table?
Kirstie : I believe that if you do not know who owns your company, you are already in big trouble. As a rule, this information is addressed in difficult times. For example, to understand who your shareholders need, if you conduct a round of financing through the issuance of new shares. Or, for example, you have attracted venture capital investments and you need to put down the signatures of all the shareholders of your company.
And if you do not have a clear list of shareholders, or an idea of ​​who they are - it is very difficult to do. As a result, you plow through the pile of documents, trying to find contracts that you signed with them, trying to recover them. At such moments, you already have enough worries. This is a matter of company hygiene: the availability of this table and the inclusion of relevant information in it will not require significant effort and time. But if it is not at hand, you will have big problems.
Aaron : It is. Imagine that your capitalization table has become more complex. This happens either when you start issuing promotions for your employees, or when you begin to actively raise funds. All venture capitalists and business angels appear in your table. The first fundraising is usually what kind?
Kirstie : It can be of a different type.
Aaron : From whom does the money come and what tools are used to bring these funds?
Kirstie : People who invest in a company do not receive shares immediately. They use tools like convertible debt. This means that the investor is investing money now and at some point in the future, and this money will turn into shares later. Despite the fact that these people are not currently the shareholders, you should put them in a table and know who all these people have invested in your business.
When you accept money, you need to understand how much of the company will go to these people when they receive their shares. If, as a result, you give away 50% of the company, then you, as the founder, have little left. This, too, needs to be understood.
If you give up too much of the company at an early stage, when you go to the next round of financing - investors will start buying shares in real time - they will want to take even more from the company. And before you realize this, the creators of a startup will own a low unambiguous interest of the company. This, in turn, will not motivate to work. It is very important to understand the situation correctly: how much money you take, under what conditions and how it threatens in the future.
Aaron : Once we understand what happens at different stages, one of the things that I recall is that the first round of financing, as a rule, is not an estimated round of selling property in the form of securities. I think that most people who think about investing think this way: “I will go buy shares on the stock exchange. This is a stock with no fixed dividend. I know her price. ” If I acquire a stake in a company, should I not know their value? Why is the sale of shares without a fixed dividend is not the preferred way to raise money?
Carolyn : There are two reasons. I think that startups tend to use convertible rounds when the price is not fixed, because this is a faster way to make money. Throughout my career, I have watched the mechanics of the estimated rounds become simpler, but at the same time, as before, investors conduct a financial evaluation of your company.
They also conduct legal due diligence: examine your contracts and incorporation documents. This is a whole process. Also, there are financial documents that together make up the lawyers of a startup and a company-investor - they are being negotiated. This is also a process, and a long one.
The estimated round is appropriate when the company is already at the stage when it attracts $ 1.5 million or more. But those companies that are planning to “shoot” and go through certain milestones do not want to spend time waiting for the results of the investors check and company valuation: for them convertible rounds are the best way to get the so-called seed investments. First, you attract money to the company, and the conversion of these tools occurs during the estimated round.
Aaron : One of the interesting moments that all three of my interlocutors emphasized in the conversation is that we return to the idea of ​​standardized processes that allow activities to pass quickly and easily. In this case, the investor thinks like this: “I would like to assess the financial condition of the company. I would like to set my price. I need more time to make an investment decision. ” And startups say: “No, I need money now.”
This happens because for startups time becomes the most valuable resource at this stage, not money. How much they have time to do before they die. How much time they have in order to satisfy the product quality of their users. Therefore, creating templates is a great initiative in support of startups. Also, thanks to my current interviewees, YC supported the convertible loan tool as a way to invest in the company in its early stages. This is a quick and easy way. This brings a startup back to what he has to do — create a product.
John : I absolutely agree. I believe that it is very difficult to evaluate a startup. It is difficult to come to a common opinion when the company is in its infancy. And working with standardized documents is very convenient. The convertible loan tool is also very convenient, since it allows the founders of a startup company to focus on business. At this stage, it is unreasonable to waste time on anything else, such as strange voting order agreements.
We have already seen companies that have ceased to exist, while trying to attract money. And this is a big mistake. At Y Combinator, we always advise talking to users. Focus on your business. Write the code. Exercise to keep healthy. Do not go crazy. This is your goal. It should not sound like this: “Okay, we need to attract funding when we have the first users.” Do not overlook the status of the company. Losing a startup by filling out documents is a crime.
Aaron : Resolve all financial and legal issues in a short time and return to work on your product and company.
Source: https://habr.com/ru/post/298370/
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