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We talk about getting investment: What are preferred shares, common shares, employee option pools, vesting, convertible notes, safes, and a lot more!
Listen in as groundbreaking leaders discuss what they have learned. Discover the books, podcasts, presentations, courses, research, articles and lessons that shaped their journey. Hosted by: Kevin Horek, Gregg Oldring, & Jon Larson.
Intro / Outro: Welcome to the learner.co show hosted by Kevin Horek and his fellow learner. Co-founders listen in his groundbreaking leaders, discuss what they've learned, discover the books, podcasts, presentations, courses, research articles, and lessons that shaped their journey to listen to past episodes and find links to all sources of learning mentioned. Visit learner.co that's learner with two L's dot co.
Kevin Horek: Welcome back to the show today. We have Marsha Dalwood, she's angel investor and chair of the angel capital association, John and Greg. I'm excited about this episode today. We've had her on the show before, but today we're going to talk all about the different types of shares and different ways to get investment and from convertible notes and safes and whatnot. What are you guys most excited to learn about from Marsha today?
Jon Larson: Well, I think those, like what you just mentioned, we've been talking about them a lot amongst ourselves. Now that we have an expert on really interested in what we can learn from her.
Gregg Oldring: Yeah. Marsha is, I think we can call her if a friend of the show now. Just discerned that point of view, I'm excited to have her back. It's just so great. Also, I mean, even though even having been through fundraising before and doing these sorts of things, it's still always mysterious. It's very different. Someone who's done it a lot. There's so much opportunity to learn from what, what she has seen and what she's, how these things get structured typically. So that's going to be pretty cool. It's very relevant to us. We're a startup. So great. This could be perfect just for our own learning today. So self-interested.
Kevin Horek: Yeah, I think the other thing too, just the fact that she's probably seen more decks and probably done more deals in all the different types she's going to talk about, I think is just fascinating to get her opinion. She's done so many different investments across America and just the different types that based on geographic location. I'm curious to know if that plays in as well.
Gregg Oldring: Yeah. And even over time as well. I mean, there's definitely been, I mean, from what I've heard anyways, there's trends of things and how it's changed and she's been investing long enough to be able to probably have experienced some of that, if it's true or not, it that's going to be cool.
Kevin Horek: All right. On with the show, Marsha, welcome to the show.
Marcia Dawood: Hey, thanks for having me, Kevin. Great to be back.
Kevin Horek: Yeah. I'm really pumped to have you back to talk about what we're going talk about today. If people want to hear more about our previous interviews, they can go to the website and check it out. I really want to dive into what we're going to talk about today. And that's just shares types of shares. What, when and how, when you're raising money. Because I think as an entrepreneur myself, it's incredibly difficult to figure out what to do when you're trying to raise money. Maybe let's dive right in and talk about what's what is a preferred share and a common share. What's the similarities and differences. Why would you pick one over the other?
Marcia Dawood: Great. Why don't I kind of walk through of an example of like a real company. Perfect. If someone is looking to start their company, usually they definitely should get a lawyer who knows about startup world, not don't get your brother's best friend or something like that. You really want to make sure you're talking to somebody who has some experience with this. This does not cost a ton of money upfront. So you shouldn't have a lawyer. Who's going to charge you oodles of money in order to get this set up. The reason why you want to do this, as you want to make sure that you're getting yourself set up properly with your co-founders. Now, if it's simply a company of, that's just you, that's fine too, but you really have, you want to establish the company itself. In most cases, investors, aren't going to want to come into invest in your company unless you are a Delaware, C Corp LLCs are difficult to, for investors to invest in.
Marcia Dawood: Not that not that we don't ever, but LLCs are a pass through and I could go through a whole, we could do an, a whole other episode on that. Basically what that means is if there's tax implications with your company at the end of the tax year, it's going to come back to the investor. Investors don't like that, we don't really want to have to deal with your tax problems. We have our own tax problems to deal with. Again, just as a disclaimer, I'm not a tax person, I'm not an investment advisor. Just take everything I say with a grain of salt, this is just from my own personal experience. When it comes to setting up your company, you want to establish the common shares, which are the shares owned by the founders, and basically figure out who has, which shares, like how many do you own, how many does your co-founder own?
Marcia Dawood: Are there other people that have been helping you? We, as we know, in a lot of cases, very early on, there's a lot of sweat equity going on. Well, people will want to know this is this for, how much am I going to get up this? Or how much are you going to get of that? So that's all good. You want to get that set up. That is how you'd want to issue common shares. Now, in some cases, a founder will want to possibly give out some to in the very early stages when you're just getting set up. Again, you want to talk to your lawyer and your tax person about this, but you're going to want to get that set up. Sometimes you might have people that are helping you, but you don't want to give them all the equity that you want to give them right upfront.
Marcia Dawood: You can put it on a vesting schedule so that maybe none of it, they don't get any of it until even on paper until a year. That's called a cliff when you're cliff, and then they could set it up so that you get it every quarter or every year you get more. Okay. So that's really the common shares. Now you want to be setting up your company and get those common shares distributed before your company starts to have a whole lot of value because once your company starts to have value, now those common shares are worth something. In that case, you're going to have to pay taxes on it. Again, not a tax person, but definitely want to get with your tax person and make sure that you figure all that out ahead of time. Okay? So that's common shares. Now, when you have investors, you will get into wanting to issue preferred shares.
Marcia Dawood: Preferred shares simply means that if there's some type of a liquidation of the company, meaning you run out of money or you get bought for pennies on the dollar, or you have an incredibly amazing exit and you get, everybody gets tons of money. The investors will get paid first. That's all that means. We're preferred. We sit higher on your cap table than the common shares, and there's all kinds of terms related to that. If you want to know more about that, I would highly encourage you to go to the angel capital association website. We have a whole course on term sheets because we don't have time to get into all the term sheets today, but preferred shares. That's pretty much the difference between the preferred shares and the cultures.
Kevin Horek: Got it. Nope. That makes a lot of sense. What about setting up an employee option pool for future employees? What are your thoughts around that? Should you do it at what point should you do that as well?
Marcia Dawood: Yes. That's a fabulous question. You want to set up a pool of common shares early on when you're starting out and you, that will be through an option pool and then as your company is growing, you're gonna also carve out more shares and more shares. Basically at any given time, depending on the needs of the company and not everything is going to be, a straight shot, but for the most part, you would want to have somewhere between 10 and 15% available to give to your incoming people that you haven't hired yet. For example, good example is like, you've got two founders they're working on something it's sorta, tech-related eventually they're gonna need a CTO, but right away they don't. Down the road they're going to, and what happens is if you don't have those shares carved out ahead of time, then in the end, you're not raising a priced round right now.
Marcia Dawood: You end up getting into of a pickle because you don't have any shares to issue to somebody without diluting the FA the investors and the founders that are already on your cap table. If it's just founders on the cap table, at that point, it's not as big of deal, but always good to have a cushion so that if you wanna attract talent, you have the shares to offer as well as a salary.
Kevin Horek: Got it. You don't have to basically reopen and go through the whole process legally, is that correct?
Marcia Dawood: Well, the best time to carve out options is when you're doing your price rounds. You can't really do it on a convertible note because you haven't priced anything, which we'll get into notes. I know in a minute, but we, you want to make sure that each time that you have a price round or that you're taking on investors, and you're actually setting up a firm valuation that you put aside 10 to 15%, depending on how big your team is. If you don't, if you have a very built out team, let's say of like four founders or five founders in each of you've already established what everybody's equity is going to be. It's, no big deal that you really don't feel like you have to hire some bigger C level people. Maybe you don't need 10 to 15%. Maybe you only need like 5% or 10%.
Marcia Dawood: If you have two founders and you haven't really built out a C level team yet, and you know that you're going to need some people with, to help with operations, supply chain technology, whatever it is, you're going to want to make sure that you have those carved out ahead of time. Because if you're trying to go, like, let's say you just finished raising money. Now all of a sudden you wanna hire somebody, but you don't have enough in the option pool. That means you have to go back and tell all of the investors that just invested that you're going to dilute them more because whoops, you forgot to take enough out in your option for.
Kevin Horek: Got it. Okay. A follow-up to that then is, okay. In your CTO example that I'm going to hire in six, nine months, whatever it doesn't matter, do I, and I want to offer them equity, whatever the number is. It doesn't really matter. What's your thoughts on like, do you give them a certain percentage right off the bat and then the rest like vest over time? Or when do you give them the full percentage or that you're going to offer them when you hire them? Because I've seen where people give like 5%, for example, and the CTO in this case leaves after a year or two, and then you have to hire a new one, but then you don't have that, obviously those options to give to them. If you only give them 1% of that five, then at least you have 4% left, or what's your thoughts around that?
Marcia Dawood: Yeah. Typically what I have advised my comp my portfolio companies to do is to offer, whatever they're going to offer, whichever, whatever makes sense for the company, but the terms of the options are it's over four year period, four year vesting period. You don't get anything until one year out. So there's a one-year cliff. After the one-year cliff, then the shares will start to vest on. Usually quarterly is a little fast, just because it's a lot of paperwork to have to keep doing quarterly. If you want it to make it super simple, you could just do it every year, then a certain amount would vest.
Kevin Horek: Got it. Nope. I think that makes a lot of sense. Let's dive into convertible notes and saves, I think most, this is where I think he gets very confusing for a lot of people.
Marcia Dawood: Yes, yes. So, first of all, a convertible note is actual debt. It sits on the balance sheet as debt. It would be owed first, if there was any kind of a liquidation event, a safe is stands for a simple agreement for equity. Basically does not have the types of terms or structure that a convertible note has as debt, because a safe is like you and I are sitting at a coffee shop and I say, well, I'll, invest in your company. We go get a napkin and we write on it. That's that's about how much structure there is around a safe. Now, some people who are very pro safe would probably argue with me on that. Cause there's a lot of controversy between whether or not safes are good and you will find that on the west coast, they're much more accepted and appreciated than on the east coast.
Marcia Dawood: For example, I've seen now more recently, we're safe. Do have more structure to it. The main reason why a lot of investors don't like safes and believe me, I've invested through a safe, a convertible note, preferred shares, all that good stuff. You typically an investor would never invest in common shares. Those are for the founders, but I've done all of that. It's not that I'm against it. I think, everything ends with it depends, which means that with a safe, you really want to make sure that the investors have some visibility, I guess, is the best word into what is going to happen with that money that I'm giving to company X. If an investor invests through a safe and there isn't a lot of structure as far as like, well, when are you going to raise a price round? When, what kind of a discount could I, or is there any interest?
Marcia Dawood: Well, there wouldn't be any interest on the safe, because it's not a debt instrument. So, those were the kinds of questions that investors are thinking when they see that the instrument that the company wants to invest in is through a safe. Now with a note typically has interest rates and it has a discount into the next round. Most importantly, to an investor, it has a valuation cap. It doesn't mean it's the valuation of the company, but it's a cap. It's the most money that an investor would actually pay per share for the sh for the preferred shares that they're going to get once the company raises that priced round. We talk about a price round, it may say, it's just that it means that you've now set a price on exactly how much each share is worth. The investors can come in and pay that exact price.
Kevin Horek: Got it. Okay. You mentioned safe, sir, bit more popular on the west coast compared to the east coast. Why do you think that is?
Marcia Dawood: Because the people who came up with safes or who put the structure together, we're trying to make it very entrepreneur friendly, which I'm totally for. They came out of Y Combinator and Y Combinator is primarily on the west coast.
Kevin Horek: Got it. Okay. That makes sense. Does it, whether I'm going to go with convertible notes or safes, or can you go with both or for, depending on investors or you have to pick one.
Marcia Dawood: Okay. That's a good question. You really well, legally really can only have one offering at a time. You can't, it's even now with crowdfunding, if a company wants to raise money through crowdfunding platform, you can't have another offering out at the same time. You have to stop all other fundraising and go just with a crowdfunding platform. Like we funder, whoever you use. Let me go back to like using a company as an example. Okay. If, so, let's say that company X decides that they now have set up their common shares. They got all their founders all squared away. Everybody's happy now they want to go and raise money. My number one piece of advice is don't raise money until you absolutely a hundred percent need it. I see people think, oh, of course, that's kind of that simple, but no, actually that is not simple because people tend to think, well, if I just had more money, I could do X.
Marcia Dawood: If I just had more money than I could do, Y and then I could get, I could attract more investors because I had gotten my product to where I really want it to be, but there's a balance there. I really encourage entrepreneurs to be a scrappy as they possibly can get something out into the, so that you can start to get feedback on whatever it is that you're working on. That then you can attract the investors by showing what you've already done, as opposed to showing pictures of things that you haven't developed yet. It is important for an investor to be able to kind of see and touch the product just like when you buying anything. Yeah, I would say definitely you want to be a scrappy as you can at the beginning. Once you get past a scrappy phase and you're like, okay, look, I, I really have to raise the money.
Marcia Dawood: Typically lawyers will are the first people to advise companies to say, okay, well, let's start raising on a convertible note. I'm not opposed to this at all, because in a lot of ways, it's very hard for a company to value themselves when they are so young. Sometimes you don't want to have your valuation be too low in your first price round, because then you could end up giving away too much of your company. Right? I will advise that when you are putting together a convertible note, that you be super careful about the terms on the note and the amount of money you're going to take in through the note. That is probably the most critical part of the sentence I just said is the amount of money you're going to take in on the note. And here's an example. Company X let's say that the entrepreneur is like, Hey, I need to raise some money.
Marcia Dawood: Great. Not the one of the number one entrepreneurial friendly pieces of a convertible note is that you can go out, find an investor. If they say, yes, I'm going to invest in you. You can get that money and you can put it right in the bank and you can start using it with a priced round. In a lot of cases, you have to escrow money. There has to be a close. You have to wait until you get a whole bunch of investors together. Then you call the capital. It's a lot of different moving parts with a convertible note. It's simple. The agreement is relatively simple. It's maybe seven or eight pages. You can go out and you can say, Hey, I I'm fundraising. I need some help. Great said person said, investor wants to put in, let's say $50,000. What I've seen happen in the past is that the $50,000 turns into another person putting in 50 or a hundred or whatever.
Marcia Dawood: Then, okay, so let's say now a couple months have gone by and there wasn't a real strategy. It was more like, Hey, we got somebody to give us money and let's go ahead and take in as much as we can. There wasn't like a set time or amount of money that they were going to say is the max. Before it, when those notes go to convert into a price round, the entrepreneur hasn't realized, oh my gosh, I just gave away like 10 or 15 or even 20% more of my company than I wanted to, because I didn't realize I was, I kept taking in the money because I was getting the money right now. I didn't realize, oh my gosh, I did all this. Now I need to raise the price round. That's going to cost me 20% equity. Oh. Wait, I still have all these notes.
Marcia Dawood: I forgot about those. I got to convert all those. That's another 20% now you've given away. Like, when you add it all together, it ends up being like 35, 40% of your company. It's a problem.
Kevin Horek: Okay. Interesting. There, well, I guess it's going to be company specific and it just, people just need to be aware that this can happen. Or what advice do you give to people to make sure that, that doesn't happen? Like just that they are educated enough and learn enough about this stuff.
Marcia Dawood: I guess the best thing to do is like start with the end in mind. I know that's hard because you're thinking, well, I want to build this company, but you really want to sit down and think through what do I want to sell this company for? What, what's the end game? What, how many, how much money do I think I need to raise? Over what period of time in order to get to the end goal, which is to exit the company, then take all of those statistics that you write down and double them. Okay. So if you think.
Kevin Horek: It's going to take,
Marcia Dawood: If you think it's going to take, three years, it's going to take six or nine. If you think it's going to take five years, it could take, I mean, it just, it always takes longer and it takes more money, but the idea is have a plan. Planning is very good, obviously, but, and we know that of all plans, they probably don't, work out exactly like you plan nothing ever does, but you have an idea of what you think it's going to take. If you know that you're building some kind of a software and you need tech developers, and you need this out of the other thing, you can kind of get a sense of what's what that's going to cost you. If you're building a hardware or something that is very, that is extremely capital intensive, then that's going to be a different model than what you would be looking at if you had just software.
Marcia Dawood: I always tell people, like, try to just at least have some kind of insight to that because you can then kind of back into, well, how much of the company do I want to own at the time that I exit? Of course, everybody's going to be like, well, I want to own a hundred percent. Well, great. Then don't ever take an investors. So, but if you're, but there has to be a balance and good investors and good entrepreneurs, they'll find that balance. They'll figure out a good investor is never going to want to be like, Hey, I want to take, 25% of your company. When they're giving you very little amount of money. If, if you find investors like that, just run the other direction, because this is a long-term relationship. These companies take a long time to grow. They need a lot of help and a lot more money than they think, even down the road.
Marcia Dawood: It's very important that investor entrepreneur relationship is strong so that you can help to get the company where they need to go while still incentivizing the founding team. Because what happens is if you end up as an investor taking too much equity in the company, and then the founders get diluted too much. Well, what's their incentive to stay and keep working on the company.
Kevin Horek: Right. Interesting. No, I, I think no, that's really good advice. I just want to go back to something you mentioned a few minutes ago. If I'm raising, say a seed round, I need to be either doing that as a safe or safe as, or convertible notes. If I'm raising a series a I can go the other way. Like I can go convertible note where it was safe for the seed round. Is that correct? What you said earlier?
Marcia Dawood: No. Okay. A convertible note or a safe is oftentimes a bridge to a series seed a B you can call it whatever you want to. Anytime you hear that the terror series a or series B or series seed S E E D, that would before the a or the B, that is a price round. A convertible note raising on a convertible note is not a seed round. Raising a convertible note is something that you do to get yourself in a position to be able to raise the price round. For example, w ideally a company would start to raise on a convertible note. They would raise, let's say 500. I'm just going to use whatever numbers. Okay. $500,000, then they say, okay, well, I think I can on 500,000 from the note, I can get my MVP up to a point where I could attract enough investors who will want to come in for my seed round.
Marcia Dawood: The very first round that you're going to price. Now that 500,000 that you took into the note, that's going to convert at the time that the seed investors close. So then let's say that all happens. And now you have some money. Usually it's good to have a S a priced round last minimum, 12 months, more like 18 to 24 months, because you don't want to get into the situation where you start to run out of money before you've hit your next set of milestones. Okay. So, but let's say that now you have enough runway. Let's say you have 18 months of runway and you're think, okay, in 18 months, I'm going to be able to do all these great things with my company. At that point, I'm going to be able to attract a series B and or sorry, series a investor seed was first.
Marcia Dawood: Now we want to attract a series a investor, but guess what? You had of a hiccup along the way, and you haven't been able to get quite where you want it to be. So, but you're going to start to run out of money soon. You really want to have, if you start to get to a point where it's looking like you're going to run out of money and you only have maybe six months left, that's the time you've got to start going out and fundraising, you don't want to wait until you have like one or two months of runway in the bank, because no investor is going to get, be very comfortable with that. At that point, let's say, you're not quite ready for the series a, but you need to go out and get more money. You could again, use a convertible note or safe in order to get the money.
Marcia Dawood: Once you got to a point where you started to raise your series a, then you would do a price round and whatever safe or convertible that you had, that would all convert into the price round.
Kevin Horek: Okay. If I go to series B, for example, if I make it that far, how does that kind of work?
Marcia Dawood: Same thing. So, yep. You're gonna, when your series a and, or your series, seed investors, your AE investors, they're all going to say, okay, so what is it that you're going to do with this money? They want to know use of funds. You're going to tell them, I'm going to hire these people. I'm going to build this thing. I'm going to use it for marketing to get customers, whatever your things are. You're going to put some KPIs, key performance indicators on those particular things that you're planning to do. Once you hit those milestones, then you're going to you've already kind of established with your series a investors. This is what I want to do in order to get the company to, this bigger place. Once you get to the bigger place, then you can say, now I can attract the series B investors, and you're going to go through the same process.
Marcia Dawood: You'll if you can't quite get there without raising a note ahead of time, but then you raise some money on a note that will convert in. Ideally you just go right for the price round without having. Cause you're always as a, again, as a founder, you're giving away more equity than you might want to because the notes have a discount and they also have an interest rate. I will tell you a lot of times, founders don't realize that even a 6%, that seems to be relatively standard, 6% interest rate after a year or two years, three years, that adds up. You really want to make sure that, that interest rate is also taking away from your equity. It's not like you're going to pay them in cash for the interest that's been earned. No, it gets converted with the rest of the note. Then, so for example, if somebody, if you had a hundred thousand dollars in convertible notes that you took that has to convert in, but now if there was a 6% interest rate, you're giving away another $6,000 for every year that a hundred thousand dollars was, working for you and you hadn't converted it into equity yet.
Kevin Horek: Got it. Okay. That makes sense. I want to go through valuation with you because it's incredibly difficult, I think. I always joke that I, sometimes I think it's like you just ask the magic eight ball, especially in the early days of like what your valuation should be, but obviously that's not accurate and that doesn't really help you here, but how does somebody come up with a valuation? I guess the caveat to that is say, you think you're raising a million dollars and your investors come to you and say like, no, we think your valuation is we give you, we think you're better off raising say 800,000 instead of a million bucks. Like how does all that play out and how do you decide what your valuation is and then what to actually take or ask for? Because that's really hard.
Marcia Dawood: You're right. It's very hard. The magic eight ball, the crystal ball, all of those things are handy. I'm not going to lie,
Kevin Horek: But I'm glad you said that.
Marcia Dawood: Yeah, no, it is. It's, it's really, it's tough. It's one of the toughest things that I think a founder comes across is trying to figure that out. Because again, it's a marriage. I mean, the investor and entrepreneur relationship has to be solid from the beginning. It has to be one where the, one of the parties doesn't feel like the other one is taking advantage or has too much of a share in it. So there's a couple of things. First of all, there are resources on the angel capital association website that you can go and look at related to valuation. There are a couple of methods out there that you can use, but at the end of the day, really the price round, whoever is the lead investor, or whoever's really helping to set the terms on the price round for a company is what somebody is willing to pay.
Marcia Dawood: If you are, and you can kind of back into the numbers let's say that you want to raise a million dollars just to be easy round numbers. Well, if you only want to give away 20% of your company, then you're going to have to value your company at $4 million because your post-money valuation is going to be five because you have the 404 million, which is pre money, the million that you just raised, your post-money five, that million dollars represents 20% of the company. That's like the simplest math I can do for you. And, but what that means is that you is that really does that make sense for the investors? Does that make sense for the founders? It may be that a company doesn't have enough of an, of a product built out yet to justify the investor saying that they will pay that kind of evaluation.
Marcia Dawood: Maybe they're going to say, look, if you want a million dollars and you've got pretty much nothing right now, you're going to have to give up more, a bigger percent of the company. And, but then if a founder does that can lead to a lot of problems down the road. Imagine if it's like half that, well now you've given up 50% or 40% of your company. What now, when you go to raise around again, you're, you don't have that much equity to continue to give out. It's really important to think about all of these things as you're going through and getting to this place of like, okay, where am I really going with this? Back to the end in mind, you want to see what do I really think it's going to take for me to build this company and, going and saying, Hey, I'm just going to raise as much money as I can and see what happens.
Marcia Dawood: That's not a good strategy.
Kevin Horek: Okay. What if just, I guess my, like we're raising a million bucks, but investors saying, well, we'd maybe be more interested at 800,000. Like, what's your thoughts on saying like, okay, well, if we can raise it 800,000, instead of a million bucks, we should do that. Or should you hold out on the million dollars? Does it really depend? Or what are your thoughts around that?
Marcia Dawood: I think that depends. I mean, if you have an investor that's arguing with you over raising 800 or a million dollars, and that's not a lot of money to be talking about in the grand scheme of things. I would rather see an investor or I'd rather see an entrepreneur raise more money if they can, as long as they're sticking to the plan, there should be like, if you're going to raise a million, you should be comfortable raising a million and a half on that valuation, which means you would be giving away more equity, but you and your board should be talking through that and saying, okay, what's the maximum amount of money we'd be willing to take at this particular valuation or whatever it is. That then you can say, okay, we're going to rate, or we're going out to S to raise, you could even start with saying, you're going out to raise 800 and then you get to 800.
Marcia Dawood: You're like, okay, wait a minute. I'm oversubscribed. I will tell you that people do have FOMO, as we know, across the world, everybody in some way. Having an entrepreneur tell an investor that they are oversubscribed usually means that they're, they've got all the money that they need. In a lot of cases, investors hear all the time, please, please invest in my company. If then investors start to hear, wow, what? I really don't need your money. I'm like, whoa, wait a minute. What's that mean? So they're gonna being oversubscribed actually can be a good thing.
Kevin Horek: Okay. Interesting. You touched on something that I want to dive deeper into too. At what point do you recommend having and creating a board and do those people get equity, or how should they be compensated? If at all,
Marcia Dawood: Typically board members are compensated with very, very small amount of options. Usually like a quarter of a percent. I mean, it's very small. Your board really should make, be made up of in our very early days. Three people. One is the CEO. One is another person from the company record that represents the common shares. The third person is somebody who's representing the investors and the investors should kind of, put their heads together and figure out who's the best person to be on the board. When I say best person, that doesn't mean the person who wrote the biggest check. It really means who's the person that's going to help the company the most who has the expertise, the background, the network in order to really help this company grow then. That should be early, pretty early on. I mean, as soon as you take on investors, even in a note format, I mean, you could still form a board, but then as the company grows, especially once you get to like a series a, then you've got, you could have seed investors and you could have series a investors.
Marcia Dawood: Now a five-person board makes more sense. You have the two people originally from the company, you've got the original seed person representing the investors. You have somebody. Now who's a series a investor, and you may want to go out and get an independent meaning somebody who isn't necessarily tied to the company from an investment standpoint. Let's say a good example would be, let's say you had some kind of a medical device and you needed a specific type of doctor or PhD. That would be an excellent person to put on board in that case.
Kevin Horek: Got it. Just, I guess, to go a bit earlier in the show, then when were talking about setting up like an employee option pool and whatnot, would you also set up of shares for people on your board at that point? Or when would you work that in?
Marcia Dawood: Yeah, that's all included. I mean, you would able to all be from the same four.
Kevin Horek: Got it. Okay. Nope. That makes a lot of sense. This has may be kind of a weird question just based on geographic region seems to call things and rounds different. So like why is that? And where did these names come from? There any advice on what people should do? Like is there east coast is generally this at this stage or west coast is generally this or in the middle, is this, or what do you go by? Or what advice do you give people with that?
Marcia Dawood: What it all kind of depends in all honesty, people use all different kinds of names. You hear somebody the other day was using a series, a three. I, I'm like, I'm not a hundred percent sure what that means, but okay. But no, I do. What ends up happening is sometimes a company will open, let's say a series, a in this case, what they meant was the open a series a and they raised some money on it, but then they, they keep working on the company, but maybe they didn't get as far as they wanted to stay. Instead of like doing a convertible note or thinking that they're going to try to do a B round, when they really haven't gotten to the milestones, they wanted to, well, then they're going to open a round again, meaning they're going to take in more money, same valuation.
Marcia Dawood: That would be like a series, a one, or an a two or whatever you want to call it. It just depends on the company and kind of where they're going with that. But, tip I a couple of years ago, it was kind of the wild west people were naming things, all kinds of stuff. I have seen it get more streamlined in the last couple of years, a seed round, pretty much people. They, they know that's like your first real money in, and in some cases it might mean that you are really early and you don't have a lot of you haven't taken much in convertible notes, but you've really developed your product because maybe the founders either had money their own or put in a whole bunch of time on the weekends and evenings. They've really got something pretty built out series. A usually means that there's a lot more to the product to the company.
Marcia Dawood: You have more employees, you might have some revenue at this point. So, a lot of it is of it and it depends. I don't usually care so much about what they call it. It's more about what is it that the what's the offering and how much, the first thing I want to do is look at the cap table to show who owns what, and, you made a comment earlier about like, what happens if you have somebody who leaves? Now that person took a bunch of equity. I mean, that happens all the time. That's why early on being more cautious about how much you're giving away and having people earn that over time on investing schedule, especially with the one-year cliff. It's not like you're gonna not reward them, but you want to make sure that they're going to stay with you through the hard times when you're trying to get the product to where you really want it to be.
Marcia Dawood: That then you can attract more investors, more, staff, a different team, as the company's growing.
Kevin Horek: Sure. Where does the term like series come from? Like obviously series a, B and C, but like where does the term series come from and what does it mean?
Marcia Dawood: Well, that's a good question. I'm guessing it's just because of the way that the legal documents are written.
Kevin Horek: Okay. No, that makes sense. I'm curious to get your thoughts on, so you mentioned a few minutes ago about people that maybe are they're working full-time maybe they're not, but let's say they're bootstrapping their company in the evenings and weekends, and it doesn't really matter where they are in the product at what point, or should they potentially consider getting venture capital because it's not always for everybody and it's not for every company. What advice do you give to people to say, like, do you actually need money or what do you say to people around that.
Marcia Dawood: As far as whether or not they should actually raise at this particular time.
Kevin Horek: Or ever really.
Marcia Dawood: Well? I mean, like I said earlier, I mean, if it, if they can wait to fundraise, that's the best, especially when you have entrepreneurs that are, we call them serial entrepreneurs, meaning that this is not their first rodeo. Those types of entrepreneurs could have potentially had an exit from a previous company. They rolled that into the, this new company. I mean, that's super attractive to an investor. At that point, the founders should really hold on to as much of the equity as they possibly can before they go out and raise more money. I've seen that happen a lot of times where people will rate, roll in even a million, $2 million from another company that they personally benefited from. That's their series a, or I'm sorry, their series seed right there that, so they don't necessarily have to take on investors early on. They take on the investors once the company's really grown.
Kevin Horek: No, I think that's actually really good advice. What are your thoughts around? I, I did this with the first company I sold is we basically were working on a product while doing client work. Obviously it takes longer because, but what are your thoughts around kind of, self-funding it as well? What maybe whether you have money to put in from before, or how common do you think it is still where people are kind of just self-funding some of this stuff, because I know it used to be a lot more common and people talking about it or not that often, but it seems to be maybe a bit of both or what do you see these days? And, and what are your thoughts around that?
Marcia Dawood: I think the better, the more somebody can sell fund their company the better. For so many reasons, it really shows that you care about your company, that you believe in it. Why would I, as an investor, want to invest in an entrepreneur that hasn't put their own money or their family's money or gone to their friends and family I've had people come to me and they said, well, I don't want to ask my friends and family for money, because what if I lose it? We're like, well, what if you lose the investor's money or, that doesn't really make a whole lot of sense. If you don't have that much confidence in your product, then you shouldn't be taking money from anyone. In a lot of cases, especially, when you have a new entrepreneur, a lot of times they're even more cautious because they're thinking to themselves, oh my gosh, I don't want the burden or the, I don't want that responsibility of taking on an investor.
Marcia Dawood: It's nothing to be scared of. It's just, it will make you as an entrepreneur, feel a lot better if you've put in your own money and you've gotten the company to a point where now your confidence level is higher. It's not like an investor saying, well, you have to put in, all of your own money before you take on investors. It's more like put the money in so that, as an entrepreneur, that you have a ton of confidence in and you really believe in the product and you can take it with the help of investors to the next level.
Kevin Horek: Well, and you could argue that if you're successful, you're going to get that money back and hopefully, a hundred times or whatever they may. Right.
Marcia Dawood: That's exactly, that's exactly right. That means that you just get to keep more of your own company. And, and I've actually seen entrepreneurs where they will they'll own some common shares. As soon as they go to do a priced round and they're offering preferred shares, they buy some of the preferred shares. That's okay, too.
Kevin Horek: Okay. So, okay. Let's dive deeper into that. What would you, or what's your advice then? I put in some money at the beginning, say whatever, say five grand. It doesn't matter. Right? And then those would be preferred shares.
Marcia Dawood: Not necessarily in a lot of cases when you're first starting out, it's kind of a given that the entrepreneurs will put in some money of their own, but definitely you want to keep track of that. In a lot of cases you might have, let's say, in this case, you've got three entrepreneurs or three founders. Okay. Well, if one person put in like 50 grand and other person put in three, well, I think the person putting in 50 grand should get more common shares, cause you're just setting up the company right now and you're trying to get that established, but then say that now you've got some traction you've been bootstrapping and now you get to a point where you're going to go out for a price round. I've seen it happen before where entrepreneurs will actually be a part of that price round. If in fact, they have the money to do that.
Kevin Horek: Right. Okay. They would, it, when that comes up, then they would just get the other kind of shares. Okay. That makes sense. Got it. Yeah. Interesting. I'm curious, how have you kind of learned all this stuff and what advice or resources do you give to people that obviously want to learn more about this? Because obviously we can't cover everything in an hour,
Marcia Dawood: Right? I think a lot of it is. I mean, I've just learned by doing it and seeing all that. I, even though it sounds like, well, most companies can all be structured the same way. It, every company is just a tiny bit different about how they went about it. Did they do a convertible note first? When did they decide to take a price round? Every company is going to have it their own. It depends kind of the answers know it's, everything is good. It's going to be different depending on the company. So, in some cases I've seen entrepreneurs who went really crazy on taking notes, taking in convertible notes. I had one guy who actually, he just kept crossing out the terms because he didn't want to pay a lawyer anymore. He would cross out the terms and he'd get a new investor and he'd cross out the terms again.
Marcia Dawood: And, and now he was taking in money through convertible note over years. By the time he went to convert them, he had given away so much of the company didn't realize it. Now when he really had something and he was going out and re, and investors were really interested investing when they went and looked at that, they're like, wait a minute, you don't even have the equity to give us. We had to go back to those original note holders. We had to tell them, look, I know this is what you were promised, but guess what a recapitalization we need to change it.
Kevin Horek: Interesting. Okay. That can't be a easier, great conversation to happen.
Marcia Dawood: Exactly. Not, it's really not the greatest conversation, but considering like you could have a little piece of a big thing or you could have a big piece of a little thing that's worth like kind of nothing. So, so it's, again, everything's a balancing act between the company and the investors. So, in order for people to kind of learn more about it, I would definitely say go to resources like we have at the angel capital association, just start talking to other entrepreneurs, people who have done this before, find a good startup attorney who is willing to have conversations without, charging lots of money. I mean, I, I've met tons of amazing lawyers who are just fully ho ag is a great example. They have some amazing startup lawyers they're out of Boston and we can put the information in the show notes. They will talk to for 20, 30 minutes and kind of figure out what your situation is and then say, Hey, this is what I would say is the best path.
Kevin Horek: No, I think that's really good advice. I'm curious. There any other advice that you would like to give to people that we haven't talked about today in the show around any of the topics we've covered today?
Marcia Dawood: Well, any time that you have a company that is really solving a big problem, and you're not just a solution in search of a problem, and you can bootstrap it and get it to a point that you have something concrete to show. I think that is where you're going to start to really get the interest of potential investors. And you should start those conversations early. There's the saying, and in VC land, which is if you want advice, ask for money and if you want money, ask for advice because in a lot of cases, you'll get the other, depending on what you're asking for. Building relationships with people who could be potential investors down the road early on is great because then you're talking to them without that pressure of, oh my gosh, I have to think about what this person wants me to invest. I don't really know enough about the company.
Marcia Dawood: Now there's already like a defensiveness in the relationship. I found that if people who are trying to build a company, if they really start to just have conversations and let people know what they're doing early on, and they're able to bootstrap, that's really probably the best way to get started because then when it is time to take on investors down the road, you have a lot of people that you've already talked to. Now they're super interested in where you've gotten, because they've been watching you for a while.
Kevin Horek: Nope. I think that's really good advice. The one thing then it's kind off topic but I think it's worth mentioning. I'm curious to get your thoughts on is I was talking to this investor at this big well-known firm and I won't say the name because it doesn't matter. What happened was he reached out to a company called that he wanted to invest in and it took, he met them and flew around the world a couple of times to go meet them in person. It still took him nine months to put money into a company that he was trying to put money into. Why I say that is just because of how long it took when an investor was interested in a company. You may want to talk about some timelines about what people can expect with maybe different rounds, because it's all over the map.
Kevin Horek: I think what I just mentioned is a good example of how long it can truly take, even when an investor wants to give you money.
Marcia Dawood: That's true. It, and it all goes back to building those relationships early and often I invested in 2021 in a founder who I met in 2015. I hadn't invested since, before the 20, 21 investments. So, sometimes it just takes, it takes time. I always tell people, meet people, start to get to know them, start reaching out to groups and learning, what their thesis is so that you can see if you fit in with it. Some groups will only invest in technology. Some when life sciences, some will only invest in women founders, so it's just depends on what their thesis is, but learn that and get to know them and figure out what they would want to do in order to become an investor.
Kevin Horek: No, I think that's really good advice, but sadly we're out of time. How about we close with mentioning where people can get more information about yourself, angel capital association, and maybe if you want to mention that other lawyer or legal firm as well in any.
Marcia Dawood: Yep. You can get lots and lots of great resources@theangelcapitalassociation.org. The law firm is called Foley, F O L E Y ho ag, H O a G. They are located in Boston and you can reach out to them and try to get some more information. You can find me at my website, which is Marsha dalewood.com. You also should listen to my podcast. I have a podcast. That's all about angel investing.
Kevin Horek: And it's on your website.
Marcia Dawood: Yes.
Kevin Horek: Perfect. Well, as always Marcia, I really appreciate you taking the time out of your day to be on the show. I look forward to keeping in touch with you and have a good rest of your day.
Marcia Dawood: Of course. Thanks for having me, Kevin.
Kevin Horek: Thank you. Okay. Bye. Well, John and Greg, what did you guys think of that?
Jon Larson: Oh, it was great. I, it was everything I was hoping for and more.
Gregg Oldring: Yeah. So you just see her totally delivered. That was, I mean, I think people pay a lot of money actually for that kind of information sometimes. So that was a terrific episode. I'll acknowledge.
Kevin Horek: I feel like we just took like a whole course and that would have taken like days or weeks of like reading and research and everything. So I thought it was awesome.
Gregg Oldring: I honestly think for a lot of, young entrepreneurs in particular that are looking at raising money for the first time or people who are interested in angel investing for the first time, just go back to the beginning of the show and listen to it again, take some notes. These are all, some really helpful stuff. That was a great show.
Kevin Horek: Well, and I also think too, just the fact that she's part of the angel capital association as the chair, and she's been doing investments across the country for a number of years now. She seen basically everything at this point and can actually give good advice around it because she's been there, done that and seen the pros and cons of both, I think makes her super valuable.
Gregg Oldring: Yeah. I actually liked too that she gave different perspectives on things too. It wasn't like this is the east coast way is the only way, right. She didn't do any of that stuff. She kind of get pros and cons to different approaches and just recognize their existence. That's super helpful too.
Kevin Horek: Totally. Okay. Cool.
Gregg Oldring: That's a great show.
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