The Ultimate Guide to Fundraising: How to Get Ready, Find the Right Investors and Negotiate the Deal that Works for You

Fundraising is a daunting challenge, even for the best finance professionals, and downright scary for startup founders with no finance experience. According to Fundable and Entrepreneur, 565,000 startups are launched every year and just under 3% receive angel and VC investments. 

That is why we decided to dive into this subject in the next three months in three parts:

GETTING READY

Our first section is focused on what you need to do before you start looking for investors.

“Rome wasn’t built in a day” and it takes time to prepare for fundraising and make sure that all your ducks are in the row. You need a compelling pitch deck, a financial model adapted to your stage and business model, and incorporation and other legal documents. 

LOOKING FOR INVESTORS

When I meet first-time entrepreneurs, almost every initial conversation eventually turns to “How and where do I look for investors”? It’s the elephant in the room. It’s Everest all founders looking for funding must climb, whether or not they know how to rock climb and whether or not they have experience with extreme temperatures and altitude.

This is why our second section is focused on different approaches of looking for investors as well as how to understand their feedback and effectively address their concerns.

NEGOTIATING YOUR TERM SHEET

For any early-stage startup founder, there are several key moments that mark the trajectory of the company’s growth and serve as a testament to the founding team’s hard work. It could be the MPV launch, your first customer, and, of course, your first term sheet.

Sadly, not all term sheets are created equal and sometimes, as difficult as it is, sometimes it is better to walk away from a deal than to take it and jeopardize your company’s future.

That is why in the final section we focus on startup finance and situations that you should watch out for in investor negotiations.

PART 1. GETTING READY

Getting ready for fundraising is like preparing for a marathon. It requires meticulous planning, strategic thinking, and the right tools in your arsenal. In this section, we delve into the essential steps every startup founder must take before embarking on the fundraising journey. From crafting a compelling pitch deck to ensuring legal compliance, we provide actionable insights to help you lay a solid foundation for your fundraising efforts. This part of the guide equips you with the knowledge and resources to navigate the complex terrain of startup finance with confidence and ease.

If you’re diving into the world of fundraising for the first time, it’s totally normal to feel a mix of excitement and anxiety. However, some of the mistakes are common even for the experienced founders. This video will guide you through the pitfalls and help you navigate the path to funding success and do it fast.

Once you decide to fundraise, it is important to understand the investors’ mindset, what they are looking for, and make sure you meet investment eligibility criteria. 

Investors aren’t just interested in flashy products—they’re after businesses with serious growth potential. While some may have noble secondary goals, like backing female-led ventures or green innovations, the bottom line is always about profit and managing risk.

Watch this video to learn  which five main criteria early stage investors use when conducting their due diligence.

It is important to tell your story the right way and to back it up with solid numbers you can justify. Public speaking jitters can strike even the most confident people, but for startup founders, the pressure is on a whole new level. You’re not just presenting for the sake of it— you’re laying your heart and soul on the line, pitching the culmination of months of hard work and passion.

In this video, we’re diving into four game-changing strategies to captivate investors and fast-track your funding journey. 

Finally, the numbers. Watch this video to understand how to create and use your financial projections so that you can explain to investors how you plan to turn your vision into reality. We will go over the most common investor questions, why they ask it and how to best answer them.

PART 2. LOOKING FOR INVESTORS.

Investors are not running a charity. The reason why investors make investments is that they believe they will make a profit. For them, it is a business transaction that is researched heavily and thoroughly thought through. This further means that investors want to know the business they are bankrolling really well and minimize their risk as much as possible. Thus, knocking randomly on their digital doors to ask for cash is not the best way to get funded fast. In fact, contacting investors only when your company needs capital will elongate the search needlessly.

After speaking with multiple investors, The Startup Station recommends a far more successful way to secure funding faster by building relationships with investors three to six months before you actually need it. We discuss it further in this blog and video.

This is all great advice, but if you are fundraising for the first time, finding which investors you need to be building relationships with can still be a challenge. Where do you go? What do you say? How do you get their attention effectively? 

In the video below, we talk about the following five ways you can raise capital even if you don’t have a network:

1. Utilizing your network 
2. Applying to an accelerator
3. Entering a pitch competition and attending startup conferences and events
4. Using crowdfunding, and 
5. Applying to an angel group

Getting investors feedback is crucial to honing your pitch and assessing if you are targeting the right investors and meeting their eligibility criteria. 

However, sometimes investors’ feedback can be confusing and while you understand it is a “No” or “Not right now”, you may not know exactly what to do about it to get a different response.

What does it actually mean when investors say,  “You are too early”. “Come back when you have traction”. “We already invested in a similar company before.” This is exactly what we address in our next video 

Finally, we wanted to talk about the gender funding gap. Did you know companies with at least one female cofounder generate 78% more revenue per invested capital and deliver 2.5x revenue than male founded counterparts?

Yet, female-led companies get very little capital allocation from VC and PE firms worldwide. Globally, women entrepreneurs only raise 2% of overall available VC funding. Further, women led companies have limited access to mentoring and advising resources to guide them.

In this blog, we talk about five most common challenges female entrepreneurs face and how to overcome them. 

PART 3. NEGOTIATING YOUR TERM SHEET

So now that you got ready for the fundraising and found the investors who are your allies, what’s left? Negotiate the best deal possible. Investors have been through this millions of times, they know how to look out for their interests. Do you? After reading this part of our guide you will learn:

• Three main financing vehicles used to fund startups
• When to do investors offer you too much or too little money, and 
• When to walk away from the deal

1. Introduction to Startup Finance and the World of Term Sheets. How to Understand what Works for You?

Raising money is an arduous journey for any first-time entrepreneur, and thus getting that first term sheet from a professional investor is an incredible validation of your vision, product quality, and persistence.

However, money needs to come in on the right terms and in the right form. Here are the three main startup financing vehicles to help you choose what might work best for you:

Equity: Equity represents company ownership and is determined as the capital required divided over pre-money company valuation. The catch here is that it is NOT easy to value an early stage company. As a result, the investors and founders may have vastly different ideas of how much a company is worth, which, of course, makes it very hard to agree on what equity stake investors should get.

To solve this problem, investors came up with two other financial vehicles which delay a company valuation until a later point when more data is available.

Convertible Debt: A debt instrument that converts to equity based on certain rules and upon occurrence of certain events, or triggers. You will have to value your company only when the conversion happens, but not before.

Important to know: In the event of non-conversion, you MUST repay the outstanding principal together with accrued interest on the due date. You can also repay both at any time before the due date and before the debt converts.

Investors love this financial vehicle because it helps them mitigate risk in the event of non-conversion, or when the company is not doing well. For comparison, if they made their investment in the form of equity, they would simply lose their investment. Now, they can get it back PLUS interest.

This, of course, is not great news for startup founders. In fact, if not structured properly, this vehicle may cause a lot of problems for the company and even make it more difficult to raise money in the future. 

Simple Agreement For Future Equity (SAFE)

This financial vehicle is similar to convertible debt, but without a debt component. Like convertible debt, it converts to equity based on certain rules and upon occurrence of certain events, or triggers. Just like with convertible debt, you value your company only when the conversion happens, but not before.

However, when a SAFE does not convert, it simply remains outstanding, unless there is a provision that forces conversion after a certain period of time. 

We recommend this vehicle as opposed to convertible debt, precisely because it does not need to be repaid in the absence of a triggering event.

Read this blog and watch the video below for more details about the three main financing vehicles.

Now that we discussed three main ways in which you can take money, let’s talk about other aspects of the deal.

2.What If  Investors Offer too Much or too Little?

What do we do if the deal that we get is not what we asked for? Is it a threat, a wake-up call, or an opportunity?

In both cases, when a round is oversubscribed and undersubscribed, it is important to consider legal and financial implications of the offer. 

Here are some of the questions to ask your legal and financial teams:

1. What other conditions are involved in taking this deal? 
2. How many seats on the board do they want? 
3. What control do they want to have over what decisions? 
4. Are there other conditions that may make raising future rounds of capital more challenging?
5. How does this raise affect your long-term strategy? Will you be able to continue to reach future milestones? 

Watch the video below as I walk through these considerations in more detail.

3. When Should You Walk away from a Deal?

For any early-stage startup founder, there are several key moments that mark the trajectory of the company’s growth and serve as a testament to the founding team’s hard work. To name a few, these are the MPV launch, your first customer, and, of course, your first term sheet. 

Sadly, not all term sheets are created equal and sometimes, as difficult as it is, it is better to walk away from a deal than to take it and jeopardize your company’s future. 

There are three situations which warrant you saying “No” to investors.

1. Unfair valuation terms
2. Investors want too much control
3. Disadvantageous anti-dilution rights

In this blog, and the corresponding video, we discuss these situations in more detail. 

4. Liquidation Preference – is it Always a Deal Killer?

The fourth situation is when investors require liquidation preferences.

A liquidation preference is a clause in the Term Sheet that dictates the payout order. It is there to protect investors in case of a liquidation event and, in certain cases, receive cash from their investment faster.

There are two types of liquidation preferences: participating (in the upside) and not participating. Participating liquidation preferences will get their investment and the bigger of the required return of investment and their prorated share of proceeds based on their equity ownership . Non-participating liquidation preferences limit the investors’ payback to the original invested amount plus the required return. 

Lately, there has been a new wave of liquidation preferences. Such preferences specify paying out investors not only in case of liquidation events, but also upon reaching financial milestones, such as certain revenue or operating cash flow. Those clauses pose great danger to founderse because instead of investing in growth of the company, a startup is forced to start paying investors back early from the very money they need to grow and succeed.

Learn more about the liquidation preferences in the video below.

This guide covers the most common and important things you need to know through your fundraising story. However, all startups and all journeys are different. So, if you have any more questions about fundraising, we are happy to talk. Schedule your free 30-min consultation HERE.