6-raising-investment.md

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Raising Investment in your Startup

Startups always need money for resources such as computers, Internet, travel, mobile phones and server bills or paying salaries to employees. These resources when brought in by the founders and or generated from operations and sales by the startup is known as bootstrapping. Bootstrapping is a great way to build a startup in its early stages.

Sometimes the startup needs more resources than what the founders can bring in. At this point, you need to raise investment from investors to pay for these resources and in exchange for the money they invest in our company, you will be issuing them shares in your startup.

What follows is a basic understanding that all founding team members should have when you are raising investment.

Pro Tip: Investment need can arise at any stage of your startup life. At that point, you need to find someone who believes in your story and give you money in exchange for shares in your startup. Normally, if you are a first time founder, it's after you meet around 20 investors that one investor gives you cash in exchange for shares.

Finance Lingo

As part of incorporating your startup, you have to determine and fix your authorized and paid up share capital. Both these are covered in greater detail in relevant Governance sections. However, as a recap, the authorized share capital is the maximum allowable share capital that the startup is allowed (authorized) to issue to its shareholders.

The paid up capital the amount of capital that the startup actually issues and has received payment from the sale of its shares. Paid up capital can be less than or equal to the authorized capital, but never more.

A common example is when your paid up capital is INR 1Lakh (INR 100,000/-) the number of shares is 10,000 and each share thus has a face value of INR 10.

When you Raise Investment

Before you meet with potential investors, it is important to determine what you believe is a good pre-money valuation for your startup.

The easiest way to look at pre-money valuation is the valuation of your startup before an investment or financing. The post-money valuation is the pre-money valuation plus the value of the investment that has come into the startup.

Pro Tip: The pre-money valuation is something you should feel strongly about and believe that it exists from the value that your startup has created. It is the one metric that you will spend a fair amount of time negotiating, in addition to the value of investment that you will bring into the startup.

Below is an illustrative example of valuation and dilution when you’ve agreed with an investor to invest in your startup.

1. Let us assume you have determined your pre-money valuation and hence your price per share. Lets assume the valuation that you’ve determined is INR 1 Crore.
2. Using the same shares as above, i.e. 10,000/- the market value of your share is pre-money valuation/number of shares or 10,000,000 /1 0,000 = INR 1,000 per share.
3. This means that your share has a face value of INR 10, from above and a premium of INR 990 (thus the total of INR 1,000)
4. Now let us assume that the investor agrees to invest INR 10 Lakh, based on discussions with you.
5. Based on the agreement you’ve signed with Startup Village, Startup Village has an option to add to this investment round and co- invest up to 30%. This means Startup Village can invest up to INR 3 Lakh (30% of 10 Lakh) at a 30% discount to your market value of INR 1,000 per share, i.e. at INR 700 per share.
6. The total investment you have raised is thus INR 13 Lakh. Once the investment process is complete, you will need to issue new shares to the investor and Startup Village in exchange for the investment into your startup.

Continuing the above example below is the share detail to be issued.

• Shares issued to the investor INR 10 Lakh / 1000 = 1000
• Shares issued to Startup Village INR 3 Lakh / 700 = ~428
• There is no change to founders shares which is still 10,000
• The total number of shares in your startup is now =10,000+1000+428 = 11428 shares

Pro Tip: The post money valuation of your startup is now 11428 shares x 1000 = 1.1428 Crore, i.e. the valuation after the round of investment has come into your startup.

Thus, the new shareholding in your startup is as follows

• Founders now own = 10,000 / 11428 = 87.5%
• Investor now own = 1000 / 11428 = 8.75%
• Startup Village now own = 428 / 11428 = 3.75%
• Total ownership = 100%

At Startup Village, we hope you will do well and grow and along with your growth, all your shareholders (Founders, Investors & Startup Village) will make money.

Here are some other tips to help you along the way:

• Always start discussions with potential investors with your pre-money valuation and never the post money valuation. It is what you believe you are worth before the funds come in, and hence it is the biggest driver in the discussion. In addition, it illustrates the value that you believe you’ve created till date, i.e. till the date of obtaining outside investment. Finally, this also makes calculations very simple and easy to work through for all parties involved.
• Always issue new shares to investors and do not transfer existing shares.
• The market value of your share is constant before and after investment. Your company valuation has increased however with new money coming in.

Next Steps

You can now read more in depth about term sheets. Or, proceed onto what it means to Graduate.