Three key points about seeking investment.
- Whenever you are planning to take an investment from someone the calculation you have to make–and that they should agree with–is will you be able to satisfy their return on investment requirements. So, maintaining a certain level of ownership, while very important to you, will matter less to them than how much and when you plan to pay them back.
- You also need to be very clear as to why you need the money. In particular, your need to keep the business operating or to be paid a salary are not compelling. It’s best if you can present a plan for accelerating an existing business based on proven success and a clear understanding of the market.
- Take careful notice that the terms and conditions that come with a financing (in particular liquidity preferences) and have your own attorney review them. They can often have a much larger impact on how much money you put in your pocket when your (former) business (goes public or) is acquired than the percentage of common stock you own after the first round of financing.
Our focus is on helping teams that are bootstrapping find early customers and early revenue, enabling the possibility that they build a business that deserves investment. So we bring a set of biases to fund raising questions. Four other sources of good information you should consult–in addition to your own attorney–would be
- Brad Feld has an excellent series on term sheets.
- The Venture Hacks site is worth reviewing in its entirety.
- Startup Company Lawyer has a number of good posts on term sheets
- Paul Graham’s perspective on professional investors.