Decoding Equity And Convertible Notes - Startups 101

Decoding Equity And Convertible Notes - Startups 101

STARTUP FUNDRAISING STOCK 101 (00:00:47)

  • Stock represents company ownership, distributed in shares.
  • Shareholders' ownership percentages are determined by their shares relative to total issued shares.
  • Ownership can be acquired via cash investment or other valuable contributions like hard work.
  • Shareholders' ownership determines dividend entitlement and voting power on key decisions.
  • Example company FounderHub, started with 1 million shares, split evenly between two founders for equal 50% ownership.
  • Most startups incorporate as Delaware C-Corporations for investor familiarity, easy setup, management, and tax benefits.

STARTUP FUNDRAISING A PRICED ROUND: RAISING MONEY FOR STOCK 101 (00:02:17)

  • Priced rounds are traditional capital raising methods where company valuation is agreed upon, and investors receive shares.
  • FounderHub, making $10,000/month, decides to raise $500,000.
  • Company valuation considers many factors like addressable market size, unique technology, and potential margins.
  • Tech startups are often valued based on scale potential and margins rather than current revenue.
  • An average valuation in Silicon Valley for tech startups could be around $4 million pre-money.
  • Investor Gus agrees to invest $500,000, representing about 11% of the company.
  • Companies issue new stock to investors, diluting the original shareholders' percentage ownership.
  • FounderHub issues 125,000 new shares to Gus, diluting founders' ownership to 44.4% each.
  • Post-money valuation of FounderHub becomes $4.5 million.
  • Priced rounds require negotiations on share voting rights, liquidation preferences, and board composition.
  • Legalities and agreement complexities can prolong a priced round, encouraging the use of convertible notes.

STARTUP FUNDRAISING CONVERTIBLE NOTES 101 (00:08:36)

  • Convertible notes act as a more rapid fundraising instrument by delaying the valuation.

DELAYS THE VALUATION CONVERSATION (00:08:40)

  • Convertible notes expedite investment process with fewer negotiations and legal expenses.
  • They function like a loan with company stock as collateral, where future valuation is to be determined.

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