This is the second installment in a series: Startup lessons I learned the hard way.

Fundraising can be one of the most nerve-wracking things you do as a founder. In this article, I'm going to walk you through the key things you need to know if you're fundraising for the first time. TL;DR - there is no free money and you'll need to meet high growth expectations to raise your next round.

What to fundraise on

You’re probably familiar with the nomenclature around fundraising. Your very first round is a pre-seed or seed round, then Series A, Series B, and so on, until you either IPO or get acquired.

SAFEs

The most straightforward way to fundraise is on SAFEs (an acronym for simple agreement for future equity), particularly post-money SAFEs.

Standardized by YC, founders and investors like SAFEs because of their brevity, fairness to both sides, and their widespread use.

Most effort goes into negotiating the key terms of the SAFE:

1. Principal – This is how much the investor will raise.
2. Valuation cap - This is how much your business is worth.

SAFEs can also come with conversion discounts and pro-rata. Having a conversion discount means that the SAFE will convert to equity at a discount, typically at 15-20%. Pro-rata, meanwhile, gives investors the right to re-invest at your next round to maintain their ownership. In this current climate, we recommend doing your best to negotiate pro-rata away – it limits your ability to bring in new investors in future rounds.

Equity Rounds

The other (far less common) way to fundraise is via an equity round. You raise money by selling shares of your company (i.e. giving away equity) to investors.

The complicated thing about equity rounds is that you’re actually giving away control of your company. Your stockholders will vote on your board of directors, and could possibly elect a CEO that isn't you. They may also choose a different direction for the company than you otherwise envisioned.

If this already sounds a bit intimidating and complex, you’re not wrong. Raising on equity takes more time and money than SAFEs. If you raise on SAFEs you can close in a day. If you raise on equity you’ll likely take more than a month.

For the seed stage particularly, you should not be conducting equity rounds.

How much to fundraise

Your valuation

A valuation isn’t so much a mathematical exercise as it is an exercise in persuading your investors.

You want a valuation that is:

• Low enough that it is attractive to investors, but;
• High enough so you don’t take unnecessary dilution.

Working out this number at the seed stage is particularly difficult if you only have an idea to work off and minimal metrics.

Your best plan of action then is to look at the valuation of other businesses at a similar stage in a similar industry. Ask around on Elpha to see if anyone can help you sanity check your company’s valuation.

Once you’ve decided, stick with it. Investors are looking to you and your ability to raise on those terms.

How much to raise

Your investors will ask you how much you want to raise. Funding rounds can be anywhere from $100,000 to more than $5,000,000.

The number you propose should be tied to a plan. One of the key reasons people fundraise is to hire. How many people do you need to hire to get to your next milestone within X months? 5 engineers? 3 salespeople? Take their salaries, multiply it by X, and then add another 20% to cover overheads like office space.

I recommend making hiring plans for different funding amounts. You want to give the impression that with or without them, you’ll still be successful, but if you had the money you could reach your goals 2x faster.

You’ll always be trading off between capital and dilution when fundraising. Standard dilution at seed is 15-20%. Avoid going over 25%. You want to make sure you have enough equity for both future investors and employees.

How to fundraise – meeting investors

Warm introductions are the best way to meet investors. Cold emailing is the backup. If you have to resort to cold emailing, get across why what you’re building matters. At the seed stage, investors are betting more on the founder than they are on the company. Explain why you’re the person that will see this through.

When you finally secure a meeting, there are a few simple rules you should follow to prepare:

1. Understand your audience - do research on what they like to invest in and try to figure out why.
2. Write a good pitch - Simplify your pitch to the essential because investors are busy. Answer why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company.
3. Listen > Talk - Make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets.

In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long-term commitment and most investors see lots of deals.

Unless they like you and feel connected to your outcome, they will almost certainly not write a cheque.

After you fundraise

Fundraising isn’t the goal. It is a means to the end of growing your company. Once you’ve fundraised, put that money towards achieving the milestone you envisioned.

Remember:

Fundraising can often seem like a brutal business. Our advice is to finish it as quickly as you can. Get the money in the bank, sign the documents, and go back to building your company. The 'no's may seem never-ending at times, but in the long run, it will only seem like a small blip along the way.