Startup Lessons: March 2008 Archives
Starting a company has many challenges including funding. Even for web start ups where you don't need a whole lot of money typically a seed of $200K-$300K is needed to build a first release and get to the point that you can get your first round of users to do a beta test.
One common questions for entrepreneurs is whether to get a loan or go to a VC. VC money is "smart" money (assuming you go to the right VC and you can actually convince them to give you the money), but even if we set aside all the known and unknown issues of dealing with VCs there is one huge issue when you want to get your company off the ground: Valuation. If you go to a VC to seed your company without a product and/or some sort of user traction there is no way of getting a good valuation. You have to let go of a big chunk of your company.
The Y Combinator model is interesting and is worth looking at for new companies, because they have good connections, they do not take half of your company, and they do not ask for outrageous rights VCs typically want. But the amount they invest is very limited and might not be enough for what you are trying to do.
So a common approach is to take a "bridge loan", which delays determining the valuation. Basically you take the money, you build your product (or part of it), if you're lucky you can even get some traction, then you go for your series A, and at that time you are in a better position to negotiate a meaningful valuation. The loan amount will now be converted into series A preferred shares, just like the VCs financing the round, usually with some discount to recognize the risk lenders took to give you money earlier. That's why this is also called a "convertible note".
You can find some good details about the process and what you should consider here.
One common questions for entrepreneurs is whether to get a loan or go to a VC. VC money is "smart" money (assuming you go to the right VC and you can actually convince them to give you the money), but even if we set aside all the known and unknown issues of dealing with VCs there is one huge issue when you want to get your company off the ground: Valuation. If you go to a VC to seed your company without a product and/or some sort of user traction there is no way of getting a good valuation. You have to let go of a big chunk of your company.
The Y Combinator model is interesting and is worth looking at for new companies, because they have good connections, they do not take half of your company, and they do not ask for outrageous rights VCs typically want. But the amount they invest is very limited and might not be enough for what you are trying to do.
So a common approach is to take a "bridge loan", which delays determining the valuation. Basically you take the money, you build your product (or part of it), if you're lucky you can even get some traction, then you go for your series A, and at that time you are in a better position to negotiate a meaningful valuation. The loan amount will now be converted into series A preferred shares, just like the VCs financing the round, usually with some discount to recognize the risk lenders took to give you money earlier. That's why this is also called a "convertible note".
You can find some good details about the process and what you should consider here.
