In Which Country Should I Incorporate My Company?

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An important decision that companies often ask when starting a company outside of the USA is ‘where should I incorporate?’.

The reason why this question comes up is often because there are a series of benefits pulling founders in different directions and many times founders can receive conflicted advice from well-intending advisors. Some of the issues that founders may be balancing as part of a decision on where to incorporate include things like tax implications (tax breaks or penalties), local grants, and paperwork. This is particularly the case when they are also thinking that the USA might be where they will end up in the future.

Therefore, the purpose of this post is to identify WHAT ISSUES to think about when making the decision so that you can feel more confident about it and it is NOT about recommending a specific jurisdiction to incorporate.

Let’s start by stating that, for the most part, incorporation decisions aren’t necessarily permanent. Yes, there are cases where you make things increasingly hard for you to ‘flip’ your company (flip = taking your company from one legal jurisdiction to another), but for the most part, you can almost always find a way to move your company later if it benefits you to do so. Generally, the cost of doing this will be proportional to the complexity and legal jujitsu your lawyers will have to do in order to make this happen (more on this later). So while not permanent, worth considering all options before taking the easiest or most obvious choice.

Now that you perhaps feel a bit more ‘relieved’ about the not-so-permanent nature of your decision, let’s look at some key factors to consider which will affect your decisions down the road:

1) Tax implications & Tax treaties – One of the key things that can really impact your personal returns and that of your investors, now and in the future, is whether there will be a tax impact to you (and your employees and co-founders). Consider things such as tax relief on returns as a founder or if you flip to a different geography in the future. Consider income tax liabilities as well as capital gains liabilities (note: links are to UK site, but there for definitions, which are universal). Additionally, for potential future investors, consider whether your local jurisdiction has a negative tax impact further down the line for them. These questions can sometimes be answered by tax specialists within your lawyer’s firm (particularly if your law firm has offices abroad) or your accountants.

2) Investor implications – As mentioned above, one reason why the jurisdiction of choice matters is because investors are optimising around what they know their tax implications are, but additionally, there are other matters in the final legal docs which they may prefer dealing with in their local jurisdiction rather than in new ones they are less familiar with. Additionally, they may have a preference where you incorporate due to tax relief they may receive as part of investing in your company. Company governance may also be affected by where you are incorporated. Certain company governance structures are enforced on your company depending on where you incorporate and investors may have an opinion on that one way or another.

3) Paperwork implications – Paperwork is clearly one of the bigger headaches of making this decision. This includes the interval in which you need to report as well as other requirements such as company filings required by Company’s Law of the country where you incorporate.

4) Residency implications – Some geographies may have a residency requirement for the founders, but others not. Keep this in mind, in particular if you don’t have the appropriate immigration status or it is hard to get it.

5) Human Resources implications – In some countries it may be harder for your employees to move to if necessary, and/or hiring may also be a problem because of lack of human capital or cost to hire and retain. Additionally, there may be restrictions on how you can hire / fire employees that might affect how you upscale / downscale your company’s employees. João Abiul Menano of CrowdProcess also suggests: “One should also considered tax over labor, in some cases a tax incentive given to an early stage start-up can largely help to keep the burn rate low (more important even for companies in which labor costs account between 70% and 90% of monthly expenses)”

6) Governance implicationsCorporate Governance requirements tends to vary from country to country. Since you’ll have to abide some of these requirements, you might as well familiarize yourself with these variables before making your decision.

7) M&A implications – When your company does eventually get sold or merged or floated, it’ll have to go through a process. In some countries this process is straight forward and simple and easy for potential acquirers to understand and do quickly. In other countries, it may be less known and thus may cause delays or complications.

8) Free Information Availability –  Although you will likely have a Lawyer helping you through many of these topics, it’s always great when you can learn on your own from others’ experiences. Some jurisdictions have more founders sharing on forums and the like, how they overcame their specific problems. This can be a very valuable way of reducing your cost to learn and thus reducing your legal costs as you know which issues to flag to your lawyers.

Having reviewed all of these issues with your current and/or future shareholders, you should at least have a better starting point to make a well thought-out decision.To further elaborate on these topics, and to be more specific about one particularly common case for UK founders, let’s look at UK vs US incorporation.

Tina Baker, of JagShaw Baker breaks down what the key pros and cons are of incorporation in each:

UK Pros –

· Simple to set up

· Form (Template) documents available (Seedsummit and BVCA)

· Good for companies with international investor base – The UK is one of the most friendly of the European jurisdictions

· SEIS/EIS tax relief for investors may be available for your company –  helps more investors take an interest in investing in early stage

· EMI (for employees) may be available – helps to attract talented staff

US Pros –

· Well-developed template documents for seed investment (lowers legal cost)

· Lighter touch, more founder friendly

· Simpler mechanisms to issue shares (except for US securities laws)

· Document execution streamlined – can be easier than the UK at times

· Privacy – company information (board, shareholders) and financial information not publicly available for private companies

· Large and seasoned US investor base

· Can sell easily to US buyer via merger mechanism

UK Cons – 

· Many US investors will not invest in foreign entities (even if the UK is probably the best 2nd option if International)

· Information about the company (board, shareholders) and financial information publicly available (in some circles, this is seen as a pro….)

· Depending on investors funding rounds can be over-complicated – not all investors are familiar with using the streamlined forms that are readily available

· If you have US investors that are funds, you may be required to give tax covenants/indemnities

· Merger mechanism may not be possible if there is a sale to a US buyer, so exits may be more complicated

· A US listing may be more complicated

US Cons –

· Can be expensive, especially if there is no business in the US

· May not be as easy or as tax efficient to operate in Europe through a branch

· Possibly inefficient tax-wise if not generating major revenue in the US

· US Securities Laws are more complicated

· Filings required with the US Department of Commerce

· SEIS/EIS and EMI may not be available

While this decision is clearly not a black and white one, hopefully, the 8 factors to consider before incorporating highlighted above + the UK vs US example help you better understand how to approach making this decision for your specific case and which questions to ask your lawyers. It may very well be that there are some similarities between the above two countries and your own, but the best way to finalise this decision is by having a conversation with your lawyers about what is best for you, your investors and the jurisdictions in question.

If you have any additional points for founders to consider as they go through this process, feel free to post them in the comments below. Additionally, if you have any feedback on the points above or have a good story to tell about your experience through this process, feel free to post as well.

 

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What Tier is your Investor (or what to look for in an investor)?

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One question that I often get from founders is what ‘tier’ a prospective investor is. As in, what differentiates their prospective investor over another as ‘better’ or ‘worse’, relatively speaking, and on what basis.

Just to clarify, although there is no formal ‘ranking system’ for the tiers of investors, generally speaking, every investor sort of knows where they ‘rank’ relative to others or at least relative to the top investors. The best funds, generally known as ‘Tier 1 investors’ are the most in demand, and then, the tiering is largely subjective from that point onwards as to whether a fund is Tier 2, or Tier x, so there isn’t a huge benefit to spending too much time trying to actively find the ‘objective’ rank of an investor.

That said, what IS worth exploring is what differentiates the better ‘tier’ investors from the rest. Below are the seven attributes that I believe differentiate ‘the best from the rest’.

As you seek out potential investors, keep an eye out for these variables, the more of these your prospective investor has, the likely better off you will be as a founder.

1) Has a great network – the biggest value-add, in my opinion, that an investor can bring to the table, is their network. The larger their network, the more doors they can open for you. Nothing beats a direct intro to someone you need to meet.

2) Has a great brand-name – this helps with the network, but having an investor with a great brand name, either as an individual or fund, can help not only open doors indirectly (as in not requiring an introduction), but also to provide your startup with instant validation to potential customers, partners, and new investors.

3) Has sufficient levels of capital to support you – Although different investors have different strategies around this (eg. an Angel rarely can follow-on as much as an institutional fund), it is generally a good thing to have an investor who can invest in your company throughout the lifecycle of your company.

4) Has sector expertise – One way that investors can differentiate themselves as a top tier investor from the usual suspects is by having focused experience in your sector. For example, an investor could be a generalist Tier 2 fund (remember that this is subjective), but as an ecommerce investor they may be a Tier 1, great if you are a ecommerce company, but just ok if you’re a fintech company. This is because they will likely have a large network (see point 1 above) in their sector of expertise.

 5) Has deal experience – You will go through a lot of unique and stressful situations during a fund raise. It really helps to have someone who has gone through the process before and can help smoothen things out between all parties involved if needed.

6) Isn’t burdensome – An excellent investor does not burden the founder during the investment process with unnecessary or unusual diligence requirements for the stage your company is in. For example, a company that is very early stage will likely not have much to be ‘diligenced’, if an investor is requiring you to have an accurate version of what will happen in your company 5 years from now and you started your company three months ago, question whether they truly think the information you will give them has any likelihood of being true (and whether you think they’d make a good investor for you).

7) (Lastly, and most importantly) Has a big vision – Good investors on your board will help you by working with you on best practices for company building, but great investors will help you by helping you set the right vision for your company. The better investors help you think big because they think big themselves. This means not only having an attitude of can-do vs can-not, but also having the experience on how to coach you through this type of thinking.

Now, keep several things in mind, however, after reviewing this list:

1) There are many new investment funds and or individual angels that come to the ecosystem and therefore may not have an established brand name, but have great networks and experience. Don’t dismiss them prematurely, however, do ask others that they’ve worked with what it’s like to work with them.

2) Although founders that have done well and gone on to join a fund can be awesome people to have on your board, however, investors don’t have to have been founders themselves to be great investors. Experience as investor, having done many deals and knowing how the best companies operate, can count for a lot, so look for  a blend of all attributes in your investor and not just look for a founder-turned-investor that can empathetically relate to what you’re going through, but provides little beyond aged anecdotes about how they did things.

3) If you’re ever stuck between two potential investors, really really consider that the person that will be working with you on the board will help you define many things about your company over the coming years. Choose wisely and ask yourself who you would rather work with long term, you wouldn’t want too chose someone on a brand name alone, but causes you hair loss, heart burn, and emotional stress on a regular basis.

I hope this helps you in your quest to find your potential investor.

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Setting Appropriate Milestones in an Early-Stage Startup

Madagascar milestone

Updated Post on Nov 11, 2013 – See bottom of post for updated notes.

When looking to plan for your company’s growth strategy or to go fundraising, it’ll serve you and your company well to break down what you need to do in terms of projected milestones. Technically speaking, I believe a milestone is a future ‘marker’ within your company’s stated growth trajectory.

Therefore, milestones, in the context of startups, are effectively points in time along the company’s timeline prior to a future event or goal. These points in time are usually defining points in a company’s history…  such as a key hire, a product launch, a certain number of users, a retention rate, first revenues, first profit, etc.

Rather than the goal itself (an example goal could be to create a successful, cash-self-sufficient company, that provides tangible value to its customers and is floated on the public market), milestones are a subset of ‘the goal’. As such, milestones of any size can be created throughout the lifetime of your company as it progresses to your company’s ultimate goal.

Milestones are important from a fundraising point of view because they can define whether a company is caught with little to show to potential investors at the point of fundraising or with a strong showing of what the company’s been able to accomplish to date.

Lets, for example, look at the following points in a company’s history (I’m making the timing up for example only, don’t assume these are ideal timings):

  • Month 3: Minimum Viable Product
  • Month 5: Private Beta Launch
  • Month 8: Key Hire
  • Month 11: Public Beta Launch
  • Month 12: x% daily growth rate in subscribers

If a company knows how much money they need at all points in the timeline (see the article on how much money should I raise), then the question is which is the best milestone to fundraise on?

From an investor’s psychology point of view, risk is what is being managed. Minimization of risk while not losing an opportunity to invest in a hot company is the balance game that all investors play. Investors are constantly trying to find the least risky point to invest in a company relative to what they afford to invest (valuation) and the ability for them to invest (there is space in the investment round for new investors).

As such, the best time for a company to fund raise is either right before the completion of a key milestone or right after the completion of key milestone but before too much time lapses right after its completion such that there isn’t a sustainability of the reached milestone.

Let me explain. First, let’s look at the psychology of investing right before a key milestone is completed:

If an investor feels confident that the company is on track to hit its milestone, the investor knows that once the company succeeds, the company will inherently be more valuable to the outside market because it has been meaningfully de-risked by some amount. As such, the investor wants to ‘get in’ on the deal right before ‘launch’ for example, so that they can get a specific valuation while the company is still a little bit riskier, but not overly so.

This makes sense and is therefore quite simple to understand, but only companies that can instil confidence in potential investors of managing growth post milestone completion, generally get investors rushing to get this done. However, it’s a great for a start-up to be in, because generally, for things like a product-launch milestone, it is easier to control than say, a specific user growth rate.

Now let’s look at the psychology of investing post a key milestone being completed:

If an investor feels like he wants to ‘stall’ to see if the company is completed, or the number of users hit, etc.… then he is trying to effectively fully de-risk the investment before committing cash. However, he knows that being playing the cards this way, other players will also be on the table quite quickly because the company is not only attractive to him, but also to many others that were standing by the sidelines waiting to see what the company would do (relative to their risk profiles as in, this doesn’t mean that late stage investors, for example, will change their mind to invest in your company). Therefore, the investor in question wants to get in before the company is too valuable for them to invest in.

Therefore, the art of picking milestones is trying to determine which ones are the key ones to focus on.

As a rule of thumb, these are the biggest ones:

Human Resources  – Hiring key people that will make a huge impact on your organization (not just employees for workload purposes, but like a shit-hot marketing person, for example).

“In terms of team growth, I believe there are other significant milestones, where organization changes happen roughly every doubling in size:  founding team (usually 3 -5) expands to 7 -12, expands to 25-30, expands to 50-70, then above 100 and beyond. More often I see companies do quick jumps rather than continuous growth, and the jumps are always followed by significant growth management challenges.”*

Product – Product launches vs. version releases

Market – Market validation. As in, first customers, or first paying customers, etc.

Funding – Maybe some money being committed to a round that the investor in question can lead or participate in.

You can break these down into smaller and smaller ones if you’d like, but that’s where you start having to make judgement calls as to what is meaningful and what is not.

Other examples of milestones include*:

  •  Proof that you can work together as a team, usually historical evidence
  •  Proof that you can build something, i.e. working prototype
  •  Proof that it’s useful to someone – first users and clients
  •  Proof that you can talk to investors – every financing round, even small ones
  •  Proof that you can talk to audiences – 100k users or 1M users or 10M users…
  •  Proof that the initial team is able to attract talent – key hires are C- ad VP- level professionals, which will drive your growth further. Every startup will eventually need a functioning management team consisting of CEO, CTO, COO, VP Sales, VP Marketing, and possibly some others depending on what you’re building.
  •  Proof that ecosystem agrees with your ideas – bringing respected industry advisors or partnerships on board
  •  Proof that there is market – $1M annually
  •  Proof that you can manage your finances – cash-flow positive operation
  •  Proof that you can scale – $10M annually
  •  Proof that the market is big! – $25M annually and beyond

Just keep in mind, milestones are all about moving from one stage of risk to the next. As you start planning your fundraising strategy, you want to make sure you time it so that you have ample time to fundraise so that you are in control of which milestone your company hits when. You just want to make sure your fundraising strategy uses these milestones to your benefit and not get caught between them and stranded for cash.

* Additional Comments from Bostjan Spetic of Zemanta.com

Update Note from Nov. 11, 2013

You should raise as much money as you can, but at least enough money for you to accomplish your next most meaningful ‘validated’ milestone + some buffer funds to help you spend time fundraising afterwards. This means you should look at a variety of points across your company’s timeline to see which can be made into meaningful milestones.

Whichever country you are in, you will have different fundraising challenges depending on the mix of individual and institutional investors. In a country where the funding comes mostly from individuals, you will likely not be able to raise substantially large rounds, in countries where you have access to organised groups of individuals, you’ll have access to larger rounds, and in countries where you have access to many institutional investors, you will likely be able to raise the largest rounds.

If you want to go for really really big, you should go to the geography where you can get that meaningful amount. Otherwise you will be underfunded, regardless. Keep in mind that in those markets, costs of running startups are going to be higher, so you need to include that in your plan…hiring star coders, for example, in the USA is very very hard these days.

In markets where you are not going to be able to raise the appropriate amount you need up front, try and articulate your requested amount this way: “This is what I need [big number], but this is what I can accomplish [milestones] with this [smaller number]”

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How much money should I raise from an Early-Stage Investor?

An assortment of United States coins, includin...
An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

Raising money for your startup is never fun. It takes time, distracts you from developing your product, is fraught with emotional ups & downs, and doesn’t have a guaranteed outcome. Frankly, many founders would rather go jump into an icy lake than take another fund raising meeting where they aren’t sure what they should say to ‘convince’ an already hesitant investor to open their purse strings and invest in their company.

So, back to the main question… how much money should I raise?

The flippantly short version of the answer is, “as much as you can”… but in some cases, more isn’t necessarily better. Although you should raise as much money as your company needs to achieve major proof-points/milestones, overfunding a company can also have its drawbacks.

Let me explain this last point before going further on the ‘how much money should I raise’ question:

Many founders are obsessed about raising as much money as possible all at once because well, if you do raise a big war chest, then that’s one less problem you need to worry about. However, with a large amount of money come several potential problems:

1) With more money usually come more investment terms and more due diligence. It is probably a fair statement to say that the more money involved, the more control provisions an investor will want as well as more diligence to make sure that their money isn’t going to be misused.

2) A high implied post-money valuation. In order to accommodate a large round, investors need to adjust your valuation accordingly. For example, if your business is objectively worth 1 million, but you are raising 2m, unless the investor plans on owning 66% of the company after investment, they need to adjust the valuation upward (I’ll abstain from giving ranges for now). Having an artificially higher valuation prematurely can put a lot of strain on a startup if things don’t go well and then later need to raise money again, as it increases the likelihood of a subsequent round being a down-round (when you take a negative hit to your valuation) or rather, other new investors passing on the deal in the future because it is ‘too expensive’.

3) A propensity to misuse ‘easy money’. You could argue this point from a psychological point of view if you wanted, but suffice it to say, I know many VCs that believe that over-funding a company leads to financial laxity, lack of focus, and overspending by the management team. Perhaps it is lingering fear over the hey-days of the late 90’s were parties were rife, and everyone got an Aeron chair, but the general fear with overfunding a company is that it will be tempted to expand faster than it can absorb employees into the culture, integrate new systems, or expand real-estate needs without substantially disrupting the efficient operations of the company.

4) A last one, which is hard to really quantify and happens only to very few startups, is the media’s reaction (positive or negative) to how much money you’ve raised relative to what you have. Think about this story, although very rare, it’s what the effect of what too much can cause.

Ok, got it, overfunding can be bad… too much money can be a bad thing, but if you said I should raise as much as I can, where do I start and what is the ‘magic’ number to ask for then?

Alright, let’s look at this question from a different point of view, as I mentioned in my previous post on how an investor evaluates your financial plan, an investor (depending on their areas of focus) may not necessarily know what the exact figures your business will need to grow to its next major milestone, but rather, the investor will rely on your ability to communicate this on your financial plan for the investor to then make a decision on whether your accurately understand your cash needs or not. Tied to this cash need is an implied understanding of your company’s milestones.

Let’s define what a milestone is before proceeding:

A milestone is a quantifiable achievement, be it in terms of product development, team expansion, or market adoption of your company’s value proposition.

Your financial plan will likely be a series of chronologically organized milestones. For example:

Month 6 – Hire UX guy to optimize app
Month 8 – Launch mobile app
Month 10 – Start charging on the mobile app
Month 11 – Hit 10,000 users
Month 12 – Launch partnership with key distributor
Month 18- Hire CMO

These are all milestones. Some more important than others, and frankly an investor will likely want to talk to you about the importance of each one of them to get a feeling for which ones are the key ones to focus on to determine if your business is going to ‘take off’.

The reason for this is simple, the best time to go fund raising, is RIGHT BEFORE or SHORTLY AFTER the successful completion of a key or series of key milestones. For example, right before a key milestone, you can woo new investors with the promise of how successful you will be at the completion of the milestone and basically you convince them that if they don’t get into your company by investing now, that they won’t have a chance after you’ve achieved the milestone because many others will also be interested and the competition will be stiff (remember, investors don’t want to lose out on potentially hot deals). Shortly after achieving a key milestone is also a good time to try and convince investors because you’ve effectively accomplished a major thing (like launching a product), which de-risks the investment for them, but they can still get in the company before it ‘takes off’. Frankly, the worst time to go fundraising is when your last major milestone has grown stale and the next one is too far away to be de-risked. So, this is why it is key to know your milestones, and when they are happening.

Parallel to this milestone timeline is the ‘cash timeline’. As in, how much money, in aggregate, you will have spent to get there. So using my examples from above:

Month 6 – 60K
Month 8 – 80K
Month 10 – 100K
Month 11 – 110K
Month 12 – 120K
Month 18 – 240K

Ignore whether this is a realistic example for your business for the time being, but I’ve assumed a 10K cash burn on this example up to the end of year 1, and then starting in Year 2, I’ve assumed 20K monthly cash burn. If you don’t know what your monthly cash burn is, you’re in trouble. Monthly Cash Burn is a KEY figure to know before meeting any investor.

As you can see, an investor could choose any of the milestones above to focus on for your cash needs. The idea is simple, fund your company through the achievement of major milestone(s) (to reduce investment risk and to see if your company has any traction before putting more money in) and then go fund-raising for more money, hopefully on a strong note, where you will have met your timelines and expected outcome (be it market traction, or successful completion of your product, or hiring of the appropriate person).

For example, an Angel investor (someone that usually invests from their own money) typically can’t invest millions, so their investments tend to be less than 300K. However, they’ll want to make sure your business is going somewhere before putting all their money in, so it’s likely they’ll want to come in early to give you enough cash to achieve something plus a little extra to help you fund-raise after, but also to see how you achieve the milestone before putting in more. So, perhaps this Angel may opt for funding you through month 10 with your requirement of 100K plus a few more for fund-raising. This would get you through your product’s launch and give you a couple of months to see how it goes in terms of market traction (all the time you will be speaking to new potential investors) so that you can have something strong to talk about for fundraising purposes.

Alternatively, an institutional investor (one that invests other people’s money as well as their own), say a VC fund, may see that your company has some real potential in what it is trying to do, sees that you have a plan that requires 100K to launch before you start trying to monetize, but with their experience of seeing your kind of business having to do a few pivots before getting the launch product 100% right, think that perhaps the best quantity to give you based on your calculations is about 500K for about a year to a year and a half. This should also give you some breathing room to work on achieving your various milestones rather than having to focus on having to be constantly in fund-raising mode.

So now you are probably asking yourself, how is it that some investors have different perceptions of how much money I need and wish to give me? Effectively, how much money does an investor ACTUALLY think I need vis-a-vis what I ask for?

Your exact calculations may have said that you needed 100K to launch your product, but an experienced investor may have seen various companies like yours and seen that there are usually mistakes done along the way that consume cash without quantifiable progress towards the agreed milestone (you may have learned something, but you may be delayed in your launch because of some screw up). Because of this, investors some times include ‘buffers’ into the number they offer you in a deal. This buffer could come from the various sensitivity analysis the investor did, such as, what if the company is delayed in launching their product by two months, or what if the company can’t find that key employee, or what if the company can’t start charging for their product for an extra few months, or what if the product needs a pivot, or what if people aren’t willing to pay what the company expected? All these things will affect the cash flow of the company and because of them, the investor may assume some or all will occur, leading to the company needing more money than was planned by the founder. Effectively, your 100K in a perfect execution timeline, may actually be 250K after some minor delays and mistakes, and with the extra cash the investor in my example above gave you, you now may have enough cash to go fund-raise without having to panic about having to get cash in ‘yesterday’ or be constantly in fund-raising mode.

Keep in mind that this larger amount an investor may be willing to give you will also affect your valuation range, too much and it ‘inflates’ the valuation range your company sits in (as per my point number 2 in the intro), so an investor won’t give you ‘excessive’ buffer so that it forces the company to be ‘overpriced’ for them and for the company’s future. Inversely, hopefully you can also see where an investor may deem a company to be ‘underfunded’ if it doesn’t have enough money to get to where it can achieve a meaningful milestone(s) upon which to go fundraising with a strong foot forward for future investors to be attracted.

In conclusion, raise as much as you can but understanding your monthly cash burn and map out your company’s important timelines and the cash you will realistically require to achieve them. Then have an engaging conversation with your potential investors as to how much they think you need based on their experience. As a rule of thumb, try and raise enough money so that you have time to go fund raising after you’ve accomplished your next key milestone(s). In a future post I’ll discuss how much time you should set aside for fundraising, but to make the rule-of-thumb complete, add AT LEAST 6 months to the amount of money you need for your next milestone to include time to go fundraising.

Hope this helps

Update 1:

A friend of mine emailed in and mentioned that perhaps there was a difference in how investors from different geographies look at this issue of how much they want to invest in a company up front, and yes… I would agree with that statement, but the point of my post is merely to provide the reader with a ‘framework’ by which to approach the question of how much to raise, not so much to answer the multiple varied ways that investors might look at the amount required and subsequent fundraise amount. For example, some investors may choose to just want to back the team and thus will just give them an amount that they think startups typically get for the stage the company is in, and others will give an amount of money merely to exclude the investor competition from winning the deal from them!

However, I believe the framework I’ve mentioned in this post can help a founder assess how much money they may need for a period of upcoming time no matter the risk averseness (or not) of the investors they meet with. Whereas a bolder investor may not really focus on minor milestones, but rather just focus on a larger one such as ‘grow the network’ and for that the amounts invested is done with far less due diligence and far more quickly, a more risk averse investor will probably be more specific about what you plan on accomplishing with his money.

In the end, the most important thing, is to be keenly aware of your cash needs on a month by month basis, so that if the question comes up, you know how much you plan on spending and by when. You should also focus on raising enough money in your timeline so that you also have time to accomplish your key milestone(s) before going fundraising again, and lastly you should include enough buffer in your last fund raise to help you through your next fundraising period post-milestone. If you meet an investor that wants to invest a lot quickly, great, if you meet with various investors that are more risk-averse, at least you won’t get caught not understanding your execution plan. If you want another rule of thumb, many Early-Stage VCs will look at the next 12month to 18month worth of cash needs + a buffer to estimate the cash needs of a company. Add to that 6 months of additional cash burn and you have a rough starting point for a ‘headline figure’ from which to start discussions.

Hope this helps clarify the question further..

 

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