Startups
Keep your cap table simple
Feld says that, drawing on the troubled financings he lived through between 2000 and 2005, he gives founders two simple rules: know where the capital to fully fund the business will come from, and keep the capital structure simple. He names too much liquidation preference, complex liquidation preference and carveouts as long-run problems, and suggests using a down round to clean them up. He also urges talking about it early, well before the next financing.
“Until you are consistently generating positive cash flow, you depend on someone else for financing.”— Brad Feld, Founders – Use Your Down Round To Clean Up Your Cap Table, Feb 2016
Do this: List every liquidation preference, carveout and note on your cap table this week and mark which ones would hurt you in a down round.
Cash-flow business
Use working capital financing for cash gaps
Wilson explains that as a company grows it consumes cash in daily operations regardless of its profits, which is called working capital. His example is a product business that looks profitable on paper but must wait 60 to 90 days to be paid. He says banks and finance companies lend against purchase orders and inventory, usually through lines of credit, and that even software companies can face such a squeeze.
“Banks will not loan 100 cents on the dollar of working capital.”— Fred Wilson, Financing Options: Working Capital Financing, Aug 2011
Do this: List this week what customers owe you, your inventory and what you owe suppliers, then ask your bank what a credit line against them would cost.
Startups
Weekly CEO updates to your board
Feld argues that board members of early-stage companies should be engaged continuously, and proposes three changes: send monthly financials separately with a written analysis from the CEO, hold quarterly in-person board meetings without devices, and send weekly CEO updates to all board members. He prefers updates that read like a quick email full of substance and requests for help.
“The best CEOs send out short but focused weekly updates to their boards.”— Brad Feld, Monthly Financials, Quarterly Board Meetings, Continuous Communications, May 2012
Do this: Send your board or investors one short email this week covering where you are, what happened and what you need help with, then repeat it weekly.
Cash-flow business
Let customers finance your start
Wilson says the most common way startups get going is by selling something to customers, and that customer financing is typically non-dilutive and helps fit the product to the market. He notes the downsides: a product built for one customer may suit the wider market less, you risk a fee-for-services culture, and it is much harder in consumer services. He says to consider it very seriously if a customer will put up significant capital in advance.
“Customers are a great way to finance a business for many reasons.”— Fred Wilson, Financing Options: Customers, Jun 2011
Do this: Offer one prospect this week the chance to pay up front for the first version, with a clear price and delivery date.
Startups
Safe: convertible debt without the debt
Y Combinator introduces the safe, a standard document created by Carolynn Levy as a replacement for convertible notes. The post says convertible debt makes fundraising quicker but brings debt-related complications such as a term and an interest rate, which a safe avoids while still allowing a valuation cap.
“The advantage of raising convertible debt is that it makes fundraising quicker.”— Y Combinator, Announcing the Safe, a Replacement for Convertible Notes, Dec 2013
Do this: Read the standard safe document this week and decide whether a safe or a note fits the early money you are raising.
Cash-flow business
Don't depend on investor money for rent
Tringas wrote after paying off nearly $60,000 of debt accumulated while building a software startup that failed. He says you should never rely on investor money to pay your living expenses, because pitching with your rent on the line makes raising harder. He still believes in avoiding long-term debt and liabilities that limit flexibility.
“Having your bills paid is critical to being productive.”— Tyler Tringas, Debt Free, Nov 2015
Do this: Count this week how many months of living costs you can cover without outside money before you start any raise.
Startups
A clean Series A term sheet
Kwon of YC Continuity publishes a one-page Series A term sheet with standard, clean terms, leaving price out. He says the terms an investor insists on, such as board structure and non-standard economic terms, can reveal the risks the investor perceives, and that bad terms are hard to unwind. His advice is to aim for a clean deal and get back to work quickly.
“No one ever built an enduring company just by winning their Series A negotiation.”— Jason Kwon, A Standard and Clean Series A Term Sheet, Jan 2019
Do this: Compare the term sheet you have or expect against this clean example this week and flag every board-control and economic term that differs.
Cash-flow business
Growing a startup without venture money
In this guest post on Rob Walling's site, Taylor argues that founders do not need an influx of cash to grow, and that bootstrapped startups need different growth strategies from venture-backed ones. He contrasts product-centered growth with distribution hacking through paid channels, which takes money to test, execute and optimize, and lists lower-cost approaches such as email and partnerships.
“Founders sometimes assume that they need an influx of cash to truly grow a product.”— Bronson Taylor, Growth Hacking Without Venture Capital, Jun 2013
Do this: Pick one growth channel this week that costs time instead of money, such as an email sequence or a partner swap, and run it for a month.