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1. Don't Give Away Too Much, Too Early
It’s never too early to start thinking about how you’re allocating equity. It’s one of the biggest liabilities to scaling, after all. Don't put in the work to get traction, then not be able to raise on your terms (or at all) because the cap table is a mess.
2. Allocate Cautiously
Be very careful about the advisors you allocate equity to early on. Before you have product-market fit, it’s hard to tell who will actually be able to add value for you long-term. Find the people who genuinely want to see your problem solved and will help bring in revenue before talking about equity.
3. The Human Behind The Check Matters
Look at the people behind the check - sometimes the value of the person's knowledge, network, and commitment is more valuable than the check itself. One panelist shared that “sometimes a $5k check from an angel who’s going to work to make sure you win can be more valuable than a $100k check from an investor that isn’t going to be as hands on.” If that Angel brings in customers that generate recurring revenue, it gives you the same runway as a bigger check without taking up space on your table.
4. Think Strategically About Your Valuation
Don’t raise at too high of a valuation, too early. It may seem counterintuitive, but founders want to do everything they can to avoid a down round. Raising at a lower, but reasonable, valuation is one preventative measure to avoid what we see happening to later stage startups in today's market.
5. Be THE Expert In Your Cap Structure
Investing in a good legal team that understands early stage cap tables is a must. But, Alyssa reminded us that founders still need do the work themselves. Make sure you have the business side covered. Legal teams help you CYA, but they’ll never know your business like you do. It’s up to you to understand the mechanics of your terms and cap structure and make them work in the near term to get you to the long term.
6. Do The Deep Work With Your Co-Founder Early
Be careful about who you bring on as a co-founder and how you structure the vesting schedules. In the startup world, you hear the term “co-founder divorce” because it can be as emotionally and financially draining. Sometimes it can be the end of the company! Approach your co-founding relationship as a “co-founder marriage," and have the hard conversations about long-term goals, finances, legal structure, and decision making before inking an operating agreement. Do the deep work together to prove there’s an actual revenue generating business to be built. Verify you’re committed to building it together.
BONUS: Advisor Equity Should Be Earned, Not Given
We've kept the conversation going on Twitter and LinkedIn, and loved this insight from Paul Anthony:
Thanks to TechNexus Venture Collaborative, All Raise, World Business Chicago, P33 Chicago, Chicago:Blend, and GET Cities for helping us bring the founder community together!
We've been hearing from founders in office hours that it was a really valuable spark in their fundraising journeys 🙏 Schedule a time to chat with us.
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