How to start a company right. Key terms when starting a company and fundraising

It’s not often to come across a founder who doesn’t intend on raising at some point. To do a successful raise, you are going to have to pass due diligence (Get a free due diligence template here). This means you need to start a company right.

This blog is a cheat sheet to give you all the key details you need to setup and raise properly.

For incorporation, the guide caters to American founders, but other than the state of incorporation, it’s actually the same. You just set up a Limited company (Only America is complicated). Best to chat to a lawyer if you are in any way confused though.

Incorporation

  1. When to incorporate: The moment you take the idea seriously
  2. State of incorporation: Delaware
  3. Legal entity: C Corporation (Not an S-corp or LLC)
  4. Authorized Shares: 10 million shares of Common Stock
  5. Par value of Common Shares: $0.00001 per share
  6. Initial founders Common Shares: 6 million shares
  7. Founders equity split: Ideally 50/50%, but depends on the team
  8. Founder vesting: Yes, for all
  9. Vesting schedule: 4 years with a 1-year Cliff
  10. Acceleration of shares: Double-trigger acceleration
  11. Intellectual property: Fully assigned to startup (Any patent in the name of the company, not founders). All staff and consultants sign IP assignment and release

Convertible notes (Angel)

  1. NDA: No
  2. Fees to pitch investors: No
  3. Fundraising fees: No (It’s too early and angels won’t like it)
  4. Investors: Accredited only
  5. Type of investors: Angels
  6. Angel structure: Convertible notes
  7. Lead investor: Not really
  8. Incentive terms: Discount (20%) and cap (Around$7.5m), but with phantom liquidation preference clause
  9. Warrants: No
  10. Interest rate: 2-8%, but ideally 2%
  11. Note closing: Rolling note
  12. Average convertible note size: $1 million
  13. Number of investors: The average is 13
  14. Conversion at change of control: Yes
  15. Change of control premium: No. If used typically it is 2x their money back
  16. Duration/maturity of note: 12-24 months
  17. Secured notes: No. Never supported by personal or company assets
  18. Board seats for note investors: No
  19. Most Favoured Nation: No
  20. Preemption/pro-rata rights: Yes

Priced round (Seed+)

  1. NDA: No
  2. Fees to pitch investors: No
  3. Fundraising fees: No (It’s too early and angels won’t like it)
  4. Investors: Accredited only
  5. Type of investors: Angels, family offices and micro-VCs (Some large funds like Sequoia sometimes will participate)
  6. Seed structure: Priced round (Convertible if round size less than ~$1.5m)
  7. Share type: Preference
  8. Lead investor: Yes
  9. Liquidation preference: Yes, 1x
  10. Participation: None
  11. Dividend: Noncumulative and “when and as declared by the Board of Directors.”
  12. Pro rata rights: Yes
  13. Liquidation preference: this is standard, every investor will ask for one, there is no point in fighting this.
  14. Anti-dilution protection: Yes, ‘broad weighted-average”
  15. Redemption: No
  16. Right of first refusal and co-sale rights: Yes
  17. Board seat: Yes, but only 1 (And no board observer)
  18. Drag along rights: Yes
  19. ESOP: Yes, from pre-money

You can read an analysis of what terms and standard here.

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