What is a "Good" Fundraising Story?

In a perfect world founders would never need to fundraise and would go public owning 100% of the company, but that’s very rare. For a startup that is going through the typical fundraise stages, what should each stage look like? How much equity should founders be aiming to give away/keep? Giving away too much too early can doom future fundraising efforts, while being too “equity greedy” can do the same. Where is the line?

Here are some tips:

Angel: At the Angel round it’s normal to sell around 10-15% of your equity. Depending on your startup’s level of maturity this could be $100k on $1M, $250k on $2M, etc. Angels should NOT get board seats or have any type of control and should invest via SAFE notes where allowed and Convertible Notes (CNs) where not.

Pre-Seed: This is typically when Accelerating Asia Ventures (AAV) invests and is often a bridge to your first large ($1M+) round where the lead VC takes a board seat and things become more formalised. At this stage you should also be aiming to give away a maximum of 10-15% equity. Similar to the Angel round, you should not be giving board seats unless someone invests USD500k+. Rounds at this stage are usually $300k-$750k.

Seed: Often the first round where there is extensive due diligence and the total investment crosses $1M. The lead (usually a VC) will take a board seat. Often this is the first priced equity round (instead of SAFE or CN) and the previous investors will have their notes converted into preference shares defined by the lead investor. VCs will typically want 15-25% and will also want to include an Employee Stock Option Plan as part of the round. ESOP should be ~10% at this stage. These numbers are fairly normal, but of course if the founders can keep more % that’s usually better.

Let’s create a scenario to explain further. While the math can get a bit complicated we will keep things simple for the uses of this article. Startups should use SAFEs or CNs at the earlier stages, but we will do the math as if the rounds are equity rounds. Founders raising on SAFEs/CNs should be mindful of where the shareholding would be should the notes convert.

In this scenario there are two founders: A CEO who starts with 70% of the business and a CTO with 30% of the business. They open their company with 10,000 common/ordinary shares.

Let’s assume that the new startup eventually secures Angel investments of $100,000 at a post-money valuation of $1,000,000.

The founders now own 90% of the company after the round which is great. $100,000 can get most startups pretty far, especially in emerging markets. Don’t try to raise much more than you really need to get to the next stage of maturity (even though many people will tell you to raise much more). Also don’t get stuck on a high valuation that will prevent you from raising capital to grow your business. Calculate what you need plus 30-50% overage to compensate for the over optimisation of yourself as a founder.

OK, now the startup has invested this capital into growth and has started accumulating paid users and some early traction. As a result they were able to join the Accelerating Asia Ventures Accelerator program and alongside the AAV investment they also received investment from some of the investors in AAV’s network. The total round was $500,000 on a post-money valuation of $3,500,000. Now what would the cap table look like?

The founders still own 77% of the business after the round which is great. This is a solid cap table for this point in the business and leaves plenty of room for future fundraising while still giving the founders a large stake in the business.

OK, with this money the business is really starting to scale up and grab market share. There are early indications of product market fit and early stage venture capital firms are keen to invest. Eventually a $1.5 million round is closed at a valuation $7 million. What does the cap table look like now?

The founders still own 60% of the business which is good. But wait a second… usually an Employee Stock Option Plan is implemented as part of a round like this. At this stage the size of the option pool should be ~10%. How do things look when we include the 10% ESOP pool?

ESOPs can have a large effect on your cap table, so pay attention to the details when you’re negotiating a round. OK, now the founders own about 53% of the company. I generally advise founders to aim to still own >50% of the company before Series A so this is a pretty good number.

And yes, for most startups, fundraising is a NeverEnding Story…

For reference, these numbers are from my experience as an early-stage founder and investor in Singapore and the majority of my investments are in South and Southeast Asia. Silicon Valley, etc. may have different rules. Act accordingly.

Here are some resources on this topic (and many others) to help you learn more with examples to help you create your own version. Credit to one of our favorite Accelerating Asia super mentors, Rupam, who also helped me with the calculations and provided the resources. We’ll create some other articles based of these resources soon.