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Entrepreneur Office Hours: Issue #190
A guilty pleasure every passionate entrepreneur can relate to (and Bananas!)
I was in a team-building activity with colleagues, and the person leading the session asked everyone to share their guilty pleasure. The session leader pointed at me first, and I immediately began trying to figure out what my guilty pleasure was.
For some reason, to identify my guilty pleasure, I asked myself, “If you could be doing anything on a Friday night at 11:00, what would it be?” My answer: “work.”
That’s right… I told all my work colleagues that my guilty pleasure is work.
Everyone else said things like wine, scotch, video games, pizza, and ice cream. I said “work.” What’s wrong with me?
At first, I was annoyed at myself for not being able to come up with something better. However, the more I think about it, the more I’m certain I gave an entirely honest answer. After all, it’s 11:00 (on a Thursday night rather than a Firday, but close enough), I’m working right now, and I LOVE IT!
That’s the thing about being an entrepreneur. Work isn’t really a job. It’s a way of life. I don’t spend my evenings sitting at my computer getting work done late into the evenings because people are forcing me to. I do it because working is what I love.
If you’re the same way — and I’m betting lots of you reading this are — embrace that obsession. It’s what makes you an entrepreneur. As the old saying goes: “Love what you do, and you’ll never have to work a day in your life.”
The viral TikTok sensation took the field in my hometown, and I was there to see one of sports’ most innovative entrepreneurs in action. There was so much to admire (and learn!) that I had to write an entire article about the experience.
You’d be surprised by what kinds of unexpected things can make investors say cringe and say “no thanks”
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Office Hours Q&A
Aaron – my dude.
I found you two years ago, and you’ve helped me so many times I’ve lost count. Love your articles. They always inspire me and make me work harder as an entrepreneur.
I finally have a question that I think other entrepreneurs have to have, too. I’m raising my first round of funding for a startup and I have no idea how to price my round. Nobody else gives good advice on this, especially because when you ask entrepreneurs they never share actual numbers. Would you be willing to explain the best way to price a funding round?
Even if you don’t want to answer this question, I still love you and will keep reading regardless. Thanks again for everything you do to help startups and entrepreneurs like me.
Keep on being you!
Wow… how could I possibly say “no” to a question like this?
At the same time, giving specific advice about pricing a round is difficult without knowing the company, so the best I’m going to be able to do is give you a bunch of things to consider as you price yours. Is that fair? I promise, when applicable, I’ll use real numbers, too.
Also, based on your question, I’m assuming you’re a new-ish entrepreneur who, as you’ve written, is raising your first round of capital and doesn’t have a ton of traction. In other words, I’m guessing you’re searching for investors rather than having investors banging down your door. I mention this because my advice would be different to someone with more experience/traction.
Consideration #1: Investors always lowball you
In an ideal world, you identify an investor so excited about your startup that the investor wants to lead your round and proposes a price. This rarely actually happens, but it’s nice when it does because it gives you an anchor point for starting the negotiation. More often, however, you’ll have to set the target price you’re looking to get.
Regardless, whether you’re first to say a price or an investor is, always remember that investors want the best deals possible, so they’re going to lowball you. As a result, set your target number 15% - 20% higher than what you’d actually take so you have room to negotiate.
By the way, there’s a reasonable chance that, if you don’t try to negotiate your price, you could scare away investors. After all, a fundraising negotiation is similar to all sorts of other kinds of negotiations entrepreneurs have to do (for customers, employees, partners, etc.), and, if an investor feels like you can’t negotiate effectively with them, they aren’t going to trust you to be able to negotiate effectively with other people.
Consideration #2: There’s more to deal terms than price
Yes, price is the focal term, but other factors will impact your outcome, too. Think carefully about things like follow-on rights, vesting schedules, employee equity pools, warrants for future investments, board seats, and any number of other things.
Since most investors will focus on price, as you negotiate you might be able to tweak other terms to your advantage in ways that make a lower price less problematic. Conversely, savvy investors will often try to do the opposite, so don’t get so obsessed about price that you let someone slip in a term that comes back to bite you in the you-know-what.
Consideration #3: Convertible notes and SAFES
There’s a reason convertible notes and SAFES exist. They allow investors and entrepreneurs to make deals before having enough information to set a reasonable price.
To be fair, this is only partially true. No halfway decent investor is going to accept a convertible note or SAFE without some sort of cap, which, in essence, acts like a priced round. However, investors tend to be more flexible on a cap than a price because they know they’ll get a discount.
Consideration #4: Ignore what you’ve read about other valuations
Any sort of fundraising announcement you’ll read about from other companies is likely going to set your expectations for what your company is worth way too high. Simply put, whatever you’re reading about company valuations doesn’t tell you the full story. Valuations get inflated, funding rounds drag out for years, strange deal terms allow for inflated numbers, personal money gets included in the round, and all sorts of other cheeky shenanigans. Or, more simply, there’s a good chance the company you’re reading about is being launched by a serial entrepreneur who’s already had multiple billion dollar exits, and, as a result, the entrepreneur can get a much better valuation than a first-time founder.
To give you a better anchor, the valuation I got for my first company when I initially raised money was $1.5 million, pre-money, and I raised $500k. In other words, I gave up 25% of my company for half a million dollars. Yes, it was a very low valuation. I wasn’t in Silicon Valley, for starters. Also, in retrospect, I was a very young founder who didn’t know anything, and I had very little progress. I’m lucky I raised as much as I did.
Just as importantly, that company failed, which means the valuation never actually mattered. This brings me to…
Consideration #5: Focus on a successful outcome
If you genuinely need to raise capital in order for your venture to be successful, then ask yourself this: Would you rather have a smaller percent of a successful company, or would you rather own 100% of nothing? The truth is, your chance of success is already astronomically low. However, some well-timed capital can help change that. If your choice is raise capital or perish, then focus on getting the money, and don’t worry too much about a few percentage points of ownership. Most entrepreneurs build more than one business, so consider what you’re doing now a stepping stone to something bigger. Focus on getting the resources you need to succeed and don’t worry too much about optimizing for an outcome that’s almost certainly not going to arrive if you can’t pay attention to more important things than the price of your first funding round.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!