A Financing Trick to Run Faster
Posted by Dave McLaughlin
The hardest investor money to get is the first check. That starts the wheels turning. With Vsnap, the video messaging startup where I’m CEO and Co-Founder, I built a little wrinkle into the financing that put real money in the bank within two weeks of my going out to investors.
Speed matters a ton, especially for consumer internet startups. And with a small team, there’s a high opportunity cost to seeking investor money. Please don’t misunderstand me – finding aligned investors takes time, and this is the last thing in the world that you want to rush. But there is a point of diminishing returns and the more you get beyond that point, the greater the price you will pay.
Personally, I’m not confident that I have enough investors in my network who are comfortable with convertible notes, so I chose to price Vsnap’s seed round. I see this as me optimizing the process for speed and quality of partner, rather than for some illusory perfect price.
How did we set a price? We looked around at what other teams were getting and picked something in the middle. We gut-checked that with a few investors and a few entrepreneurs. We figured in the option pool from the founders’ share. We worked through the current dilution and sketched a range of scenarios for future dilution. We measured the total raise against our P&L then grilled ourselves on whether it would give us enough runway to generate the proof points to raise an A round. We tweaked the numbers a bit. And that was our price.
What matters most to me is that we get great investors with a minimum of bullshitting each other, and that the founders and the team retain enough equity to land key players in the future and to be deeply, viscerally engaged and incentivized through the dilution of future financings. Whether that’s precisely a pre of x.x or x.y…I don’t sweat that so much.
Now here’s the little trick, which I used to buy me the time to focus intensely on product and team – rather than on financing – through our alpha pilots and now approaching our beta launch.
We simply discounted the first half of the round.
I don’t often hear of people doing this, but it is not at all complex legally. It wasn’t a huge discount where the second half investors feel they’re getting screwed. Just enough to create a carrot and introduce a bit of urgency.
The result: three investors wrote meaningful checks within two weeks.
And we just kept right on running hard. We launched our alpha and ran pilots in the US and Europe. We’re about to launch vthankyou.com with some awesome celebrity partners, providing our alpha product to help people say thank you to America’s veterans. And our beta will launch in November, web and iPhone – with an amazing integration that is going to create tons of value for our users.
And now I need to get back to raising the rest of the seed round!
Dave McLaughlin is CEO and Co-Founder of Vsnap, a simple video messaging tool that helps consumers and businesses drive action from the people they communicate with. Formerly, he was Co-Founder of Fig Card (acquired by PayPal) and Boston World Partnerships.
