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Startup Funding Explained: Everything You Need to Know - YouTube
Channel: The Rest Of Us
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it all starts with the vision
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the project the product the service no
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one has done it before
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unbelievable it's so painfully obvious
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can you pull it off
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maybe your two friends you are excited
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design a logo designer name all fun and
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games
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design the concept things get serious
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you decide to make this
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a company you need a structure
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a legal structure how much will that
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cost you in the us incorporating a
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company will set you back anything
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between twenty five dollars and a few
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thousand dollars
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that's in part registration fees which
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largely vary depending on where you are
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and legal fees which vary depending on
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how fence you need your first
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shareholders agreement to be
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your incorporation turns out to be on
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the pricey side also you need to rent a
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server in order to develop your product
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therefore you decide to collect some
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other people's money for it this early
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in your venture
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who on earth would give you their money
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you will get it from family
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friends or by crowdsourcing it usually a
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new incorporated company issues 100
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000 shares which are equal pieces of
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ownership you need to decide who will
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get how many of those
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you agree on 40 000 shares or 40 percent
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of the company for each founder
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and 20 000 shares or 20 of the company
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for a well of family friend who buys
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them for 50
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000 dollars it's called an investment
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and at such an early stage in your
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startup it's called a seed investment
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the money he pays
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now belongs to the company if the
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company fails in the near future
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which statistically speaking is the most
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likely scenario you will probably never
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see a dime of it again
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fifty thousand dollars for twenty
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percent of the company puts the value of
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your enterprise
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at two hundred fifty thousand dollars
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which puts the value of your forty
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percent at one hundred thousand dollars
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not bad please sign here here and here
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congratulations you incorporated your
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company
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and finished your seed round of
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investment
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a year has passed you're having a
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successful beta trial with customers
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time to hire a few more people rent not
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just a server but a small office space
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the fifty thousand dollars of seat
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capital only got you so
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far time to collect your first big round
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of cash you will do this
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in a so called series a round you're
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looking for an investment of
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1 million dollars this time you're
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contacting angel investors and
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venture capitalists also called vcs vcs
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are people
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who work for venture capital firms which
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raise venture capital funds they take
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other people's money which they then
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invest into young
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risky companies such as yours angel
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investors are individuals who
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professionally invest their own money
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into young companies
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often they successfully sold their own
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startup many years ago and are now
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looking to support
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early ventures you contacted a few vcs
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and angels
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some of them you found online some you
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got in touch with by your friends and
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colleagues you send them mails you send
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them a business plan
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usually they don't care much for the
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business plan they want to see the team
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is it competent the idea is it special
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they know it's not easy what have you
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already achieved is it promising what
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could you achieve can you dream big
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you set up some skype calls a bit of
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small talk a lot of business talk
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describe the vision easy we've done it
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countless times by now they ask you
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tough questions have you heard of that
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other startup which does a similar thing
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how are you different you spark interest
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you have second calls your third calls
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you meet them in person they might
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invest
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time to talk valuation there is free
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money valuation and post money valuation
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the premium evaluation of your startup
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is how you currently value it the post
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money valuation is the pre-money
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valuation plus the investment you're
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looking to collect this is usually the
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one that you reference when you
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negotiate because
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the investment divided by the post money
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valuation equals to the investors share
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in your startup
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investors want a low post money
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valuation to get more for their money
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you want a high post money valuation to
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keep a larger share you suggest a post
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money valuation of 8 million dollars for
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the investor who would put in
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1 million dollars this would mean a 12.5
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stake in your company a few weeks down
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the road there are two offers on the
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table one vc offers an investment of one
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million dollars
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for post money valuation of six million
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dollars an angel investor you talk to
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offers to invest five hundred thousand
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dollars
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for a five million dollar post money
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evaluation the offer of the venture
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capitalist
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sounds like the better deal but the
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angel has great connections in the
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industry
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it's called smart money what do you do
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you decide to go for both you tell the
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angel that you have a standing offer of
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six million dollars post money
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evaluation but you would really love to
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have her on board she agrees to invest
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at a 6 million
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post money evaluation great how's the
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cake split this time let's do the math
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together the vc and the angel will put
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in a total of 1.5 million dollars into
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your business
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for a 6 million dollar post money
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valuation this means that they will own
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25 of the company you your co-founder
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and your family friend
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used to own 100 together with the new
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investors coming on board you will be
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diluted after the series a investment
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your cumulative share will only add up
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to 75 percent of the company
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this dilution happens proportionally
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thus this mean that you have
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fewer shares now no here's how it works
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just like your company issued the first
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100 000 shares when you incorporated it
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it will now
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issue more shares for the new investors
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to buy a company can create shares just
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like a central bank can print money the
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total number of shares of the company
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just changes while your number of shares
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remains the same how many shares does
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the company issue
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if 100 000 shares are now only 75
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of the company it means that 100 of the
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company will now be equivalent
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to 133 000 shares therefore
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the investors receive 33 000 newly
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issued shares for their investment
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since they pay 1.5 million dollars for
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their shares
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each share is now valued at 45
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your 40 000 shares are now worth over
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1.8
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million dollars congrats this whole
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process of a company issuing new shares
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to receive cash
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is called a capital raise if things go
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well the series a won't be the last
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capital raise of your startup there will
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be a series b
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a series c a series d and so on for each
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investment round
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the company valuation will hopefully
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increase also
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each time your company takes a new cash
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from investors you will be further
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diluted remember how i said that your
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number of shares remains the same though
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i lied
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actually there will usually be stock
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splits along the way
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which convert each single chair anyone
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holds into multiple shares
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hence your number of shares is doubled
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or tripled every now and then
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along with everyone else's the purpose
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of this and many other things that are
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determined in the
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term sheet are a story for next time you
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don't care much for legal work anyway
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your primary interest is in growing your
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business which is now on track to reach
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new heights
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it has been six years since you founded
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your company you have successfully
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completed four investment rounds since
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then you launched your product by now
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guess what customers love it you're a
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huge success
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the big blocks write about you and
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whatnot most importantly last quarter
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your company has not been losing money
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for the first
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time the business made a profit time for
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the exit
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exiting the company is investors talk
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for selling their
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shares everyone who invested cash into
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your business since the beginning
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has been quietly dreaming about a big
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profit the earlier they invested the
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bigger of a risk they took and
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accordingly the bigger of a profit they
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will get
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if the company really takes off there
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are usually
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two ways of exiting a company selling to
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one of the big guys
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or offering it on the stock market if
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you sell out to a big company the
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investors will usually sell all their
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shares at once
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you and your co-workers on the other
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hand usually won't whoever buys you
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needs you people to stay motivated to
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run the whole thing therefore your
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shares will be transformed into shares
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of the company who bought you and then
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made available to you
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over time this is called vesting your
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shares
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if you leave early or you don't reach
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some milestones you agreed on then
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you won't receive all your shares the
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much cooler way to exit
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is to become big enough so that you will
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be able to sell your company's shares on
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the stock market
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the process of doing this is called an
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initial public offering or in short ipo
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what's an ipo what's an ipo i still
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don't know what ipo is don't believe
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martin scorsese how it works is
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painfully easy in essence an ipo
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is just another capital race once again
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your company will issue new
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shares only that the investor who buys
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them this time is neither an angel nor
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vc
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it's the public the day you go public
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your company dumps a bunch of new shares
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on the stock market from then on people
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can buy and sell them
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among themselves furthermore you now
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hold tradable paper
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almost as good as cash the price of
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which goes up and down
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every day you can sell your stock into
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the stock market at market price anytime
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with the exception of ipo lock-up
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periods which are topic for another time
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you've floated the shares at a starting
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price
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of 64. and they shot up to over 70
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on the first day of trading due to stock
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splits you did along the way
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you are now sitting on 10 million shares
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of your company your personal wealth is
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over
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700 million dollars you could cash in
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but do you want that
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it feels like yesterday that you two
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just had a vision
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now you're one in a million there's a
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lot you achieved and yet
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endless things to do even though
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investors call it an exit
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for many founders it's just the
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beginning
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