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Tips on Financing Your Startup | Facebook Live Q&A on Entrepreneurial Finance

Tips on Financing Your Startup | Facebook Live Q&A on Entrepreneurial Finance


– Hello and welcome to another
Rewire Facebook live Q and A. I’m Maribel Lopez from Rewire.org,
happy to be here today. If this is your first time
joining us for one of these, we’re really glad that you found us. And if you’ve hung out with
us before, welcome back. Today, as part of our work with the Entrepreneurship
and Innovation Exchange, and our partnership with the
Schultz Family Foundation, we’re really excited to
talk all about financing that business that you’ve
always wanted to start. And if you’ve been considering
starting a business but you’re not exactly
sure how to finance that, or you want to learn
more about what options are out there to do so,
should you seek out investors or get a loan or crowdfund or what, that’s what we’re here
to talk about today. So joining us for this
discussion is Sarada. Hey, Sarada. – Hi. – She is the Professor of
Entrepreneurial Finance at the University of Wisconsin-Madison, Wisconsin Business School. We’re really glad to have her here. She’s an expert in the
economics of entrepreneurship and she’ll be sharing her knowledge on that subject with us all today. And she’ll be taking questions from all of you who are watching. So please know that she’s not a lawyer, and so what we talk about here today is for educational purposes and it doesn’t replace professional legal or financial advice. So, just note that. But we do wanna hear from
all of you that are watching, and we hope that you’ll
submit your questions in the comments and we’ll do
our best to get to them today. So, Sarada, thanks again
for being here today. And why don’t you just go ahead and give us a little bit
of background about you. – Yeah, thank you so much for having me. I am Sarada, I am a assistant professor at the University of Wisconsin-Madison. I’ve been here for three years. I have a PhD in economics, but currently I am in the
management department here. I teach in both the finance
and the management department. And I teach entrepreneurial finance, and I teach entrepreneurial
growth strategies. So those are the two
classes that I teach here. And my research is primarily in the space of entrepreneurship, from
a trying to understand why people become entrepreneurs, what their financial returns are to this, and I also have some work in understanding innovation and patenting. So, that’s what I do. – Awesome, yeah. Well this is gonna be great
for our conversation today. Why don’t we just go
ahead and get started. – Sure. – With one of the most basic questions. What are some of the most common ways to fund a new business? – So there are two main
categories of funding. One is debt and one is equity. I think we’re all familiar
with what debt means. It’s basically taking a
loan and you get that loan and you pay some rate
of interest on that loan and the lender really cares
at that point about safety. Why? Because the loan lender, the maximum they can share in
the upside is the interest. The equity lender on the other hand, is probably gonna be willing
to take a little bit more risk. So what is equity? Equity is really just getting
capital from an investor who takes some percentage of your firm. This means that the equity
investor gets to share in the upside of your firm. If you do really well
then they do really well. So they’re gonna incur
just a little bit more risk than a debt lender would be simply because the equity
lender gets to share in the spoils of your firm. Whereas the debt lender is sort of limited to what they can get. So in terms of thinking
about where you can get debt, there are the classic
channels you think of, which are banks, local
banks, national banks, the Small Business Administration, there are loans that
come from the government, and friends and family. And your own savings, of course. But that’s not debt, that’s
just your own savings. Equity is a little more complicated. There’s a gambit of places
in which you can get equity. So you can divide them
into institutional funding and non-institutional funding. The non-institutional equity
comes from angel investors. Angel investors, that
term just really comprises a whole group of people. Anybody from your fiends who
are willing to give you money, to high net worth
individuals, who are going to, just wealthy individuals
who have an interest in the enterprise you are engaging in. Either a social interest
or a financial interest. And they will invest in you. And then angel investors, they
can even sort of syndicate to create these very large
formal looking groups and these are called super angel groups. And there are super
angel groups that exist across different geographies of the US. So these guys are willing
to invest in equity as well. And then you can also
find venture capitalists and private equity investors. And venture capital is a
very small clubby industry, but it’s an industry that has
funded pretty much, I’d say, the vast majority of technological
innovations we’ve seen, a lot of them have been, a
disproportionate fraction of technology in the US has
been funded by venture capital. So this includes companies
like Apple, Google, Facebook, Yahoo!, everybody, Microsoft,
all these companies have been venture capital funded, and that’s another
source of equity funding. And then you can also think
of strategic investors. Strategic investors are
any company that might have an interest in what you’re doing. They can take equity in it, rather than developing it in house. That’s another alternative. And then there’s
corporate venture capital. So companies like Google
Ventures, Qualcomm Ventures, these companies have venture capital arm. Several also engage in equity investment. And for those people who
are not as far along, if you don’t have a
prototype, for instance, but you want an equity investor, you can look to places like accelerators. Accelerators like Y Combinator, Techstars. So what’s an accelerator? An accelerator is
basically an organization that gives you some
small amount of capital, maybe $20,000, maybe $50,000, and they give you a working space and you basically have to
get into the accelerator. And there’s variation, by the way, in quality of accelerators. You want to make sure you’re
with a good accelerator. And here in Madison, Wisconsin, we have a great accelerator
called gener8tor, that’s done really well. And here students and
locals pitch their ideas to the accelerator, some
of them get accepted. They get some amount of capital. The accelerator takes some equity. But the nice thing about accelerators is if you’re not at the stage where you know venture capitalists and you don’t have connections yet, accelerators can connect you. The good accelerators can connect you to future funding for you to grow. And entry barriers are a little bit lower. So VCs are a little bit harder to access, actually quite a bit harder to access, accelerators in some senses are local and perhaps a little bit more
democratic at the local level. You can get into them
if you have a good idea. Yeah, so those are to name a few. But then, currently, there have been a number of technological innovations so you can see companies
like Lending Tree, like Funding Circle, crowdfunding websites like SoMoLend and appbackr,
these are all places that you can actually
access funds as well. Equity funds as well. – Okay. – And ready for your business, yeah. – Very cool. Thank you for that overview. We’ve got a few questions
that have come in. One viewer asks, “Do investors frown on startups “where the owner is holding down a day job “while bootstrapping the business?” – So, I think there’s variation. It depends on the investor. But I think a good
question to ask yourself, is how would you view this? At the end of the day, I as an investor need to know that you’ve
got skin in the game. And at the same time, you’ve
got to eat and live, right? So if you have a day job, and you’re creating a
prototype on the side, I need to see that you’ve
developed something far enough in order for me to then want
to come and invest in you. Once I invest in you, I need you to be fully
invested in the firm. And this will turn up
actually in the contracts that the investor creates with you. The contract will insure that you are gonna be fully invested in the firm. So that question’s hard
question to answer, but by and large, you have to ask yourself if you were an investor, would you want somebody
to have skin in the game, how far a long would you want them to be and if those things check out, then perhaps it becomes less relevant, whether you have a job or not. It just depends how much you have to show. – For sure. Yeah, we actually had one of the entrepreneurs that we featured here on Rewire.org, Alex French, who started Bizzy Coffee. They got some investors and he chimed in on that part of the conversation too, that yeah, they kind of want you to have your skin in the game if they’re
gonna give you this money to get going on your dream, right? – Absolutely. A part of it is just trust. It’s not just trust, if they
know that you’re invested it makes it easier for
them to trust that you will make something of their
investment as well. Otherwise you’re just
taking money from them while you have other sources of income. So you have to ask yourself what you would do as an investor. Would you do the same
thing and then recognize that most people operate
in fairly rational ways. – Yeah. So what are some insights that you have on how to attract an angel investor, if that’s the route you’re looking to go to fund your business. – So if you’re trying to
attract an angel investor, you want to identify which
investors are gonna be interested in the project
that you’re coming up with. If there’s a social aspect
to it, angel investors, with the name itself, angel, that sort of comes from the notion that they have some sort
of non-pecuniary interest. Just non-financial interest. Which is not the case all the time, but you wanna find the
right angel investor. Is that angel investor
investing in healthcare space? Is that angel investor somebody who just cares about
the state of Minnesota, who cares about Minneapolis development? And if you’re gonna register
your firm in Minneapolis, and serve the local community, that angel investor might be
interested in investing in you. How do you go about attracting them? I think having a clear
plan, a business plan, clear business plan,
understanding what your idea is, what you would need to
operationalize it immediately. So what would you need
for the next 12 months? What are you gonna use the investment on? And what can be expected? What is the future market? What can they expect you to produce and how long will it take? If you clearly illustrate to people that you have an idea,
an underlying technology, that is actually operationalizable
in the near future, and show people quite
clearly what they can expect to receive if all of this were to succeed, that becomes much easier
to attract investment, than if you just have an idea and you go tell somebody that idea. So you wanna have a clear business plan, and you wanna target the right person. So going to the wrong person
just ends up wasting time. You wanna understand which local investors are actually interested in your ideas. And there will be systematic differences that you’ll find across
different types of investors. Whether they play in the tech
space, in the farmer space, whether they play in health care, whether they care about social ventures, you want to go to the right person who cares about that
particular type of venture. – So we’ve got another question
that came in from a viewer. And she asks, “What is
the top funding mistake “new entrepreneurs make
and how can it be avoided?” – I don’t know that there
is data that shows us what the top funding mistake per se is, there’s many mistakes. So let me sort of start with
what I think tends to be, in my experience, what I’ve seen as a pretty big mistake people make. And this is when people co-found teams, they fail to think about how to do the equity split at an early part. If you’re founding it with somebody else, when do you decide what fraction of the firm you and your friend take? ‘Cause that’s gonna have a lot of impact on how you can raise
subsequent funding as well. And how your dynamic works. So you want to think about how you’re gonna engage in these equity splits before the time comes
for you to raise funds. You don’t want it to
be a last minute thing where you’re forced to do it. And you also, once you
create these equity splits, you wanna think of something
called a vesting schedule. So if you and your friend
really like each other, you both just split the firm 50/50. Turns out the other friend just
stops doing work altogether but they still own 50% of the firm. That’s a problem. A vesting schedule is a
schedule that allows you to delineate at what point what fraction of their share of the firm actually vests. When do they actually own it? So, can vest across, say, three years. So across three years
that 50% accrues to them in a linear fashion,
or something like that. And you can go online and see what these vesting schedules are. So you wanna have vesting schedules, and you want to have a buyback
clause with your partners, before you’re forced to have to think about it at an early stage. And at an earlier stage, not at the earliest stages, of course. The second thing you
want to think about is, if you’re getting equity investors, you want to be very
careful that you understand what is in the contract. So when you get an investor
to sign a contract, you’re typically looking
at a security type that’s called convertible
preferred security. So this type of security,
basically someone gives you money. They give you money for
x percent of your firm, but it’s not really common stock. It’s preferred stock. And what does that mean? That means that the stock
that you own in the firm, as the entrepreneur is subordinate. It’s less valuable than the
stock that they bought in. They bought preferred stocks,
you have common stocks. Those preferred stocks at some point can convert into common stocks. But the point at which it converts is specified typically
in your term sheets, which are the contracts you
have with your investor, the point at which it
converts is typically the point at which the
firm has done super well. In which case, everybody’s
happy to have common stocks. Now, when you don’t do well
that’s when the problem arises. When you don’t do super well, there are these things called
liquidation preferences in the contracts that you will sign with your equity investors. What are liquidation preferences? Liquidation preferences
are the terms under which their preferred stocks
convert into common stocks if you don’t hit the
best state of the world, if things don’t go super well. Those liquidation preferences can really make the entrepreneurs value go to zero. So even if you think
you own 20% of the firm, or even if you think
you own 50% of the firm, if things don’t go well,
the manner in which the investor’s convertible
stocks converts to common stocks is not gonna be one for one. So if you thought you owned
80% and they owned 20%, that’s only the case if everything converts to common stocks,
in the one to one ratio, and that only happens in
the best state of the world. In a bad state of the world,
their 20% might convert into 60 or 80% of your firm. So they take 80, you take 20. Now all this is stipulated and calculable in a term called liquidation preference. So you want to understand
your liquidation preference, because that can really
throttle you in terms of, how much you control your company and how much you want to put in. So that’s a second sort of mistake I see is people don’t really understand the liquidation preference. So the first is the equity splits. The second issue is, you wanna understand the liquidation preference, you really want to understand
your contracts very well. And they’ll be many terms, I’m not gonna go into all of them, but
you want to understand what the anti-dilution provisions are, you want to understand
what control looks like, who’s on your board of directors, and who controls your company. And once you do have a board of directors, you have to understand
that you become in part, and employee of this entity. And you’re subject to different rules. And your investors might
be able to oust you at some point, under some conditions. You wanna understand all of these things before you walk into this relationship. And while all of this
is, in some instances, to some extent, contractible, the biggest issue is, you
have to trust your investor. And trusting your investor, having a good relationship with them, means that the terms will
be fair and reasonable. But it also means that you
can have a decent conversation if things are not going,
if things go terribly, then in some senses, you’re
kind of in a bad shape. They’re probably gonna trigger all the stuff they can trigger. But if things are kinda shakey, you want to have the chance
to negotiate with them. And that’s gonna go above and
beyond what’s in the contract. You want to have a relationship such that you can talk to them. And so that’s the second thing. The third thing I think
that’s quite important is, you want to make sure
you raise enough capital such that you’re not constantly
trying to raise capital, whether it’s debt or equity. So raise enough capital
to get to the next stage. Raise enough capital for 12 to 18 months. Make sure you understand how much you need for 12 to 18 months, and then
go out and raise that amount. Otherwise, you’re constantly gonna be on this fundraising bandwagon, and that’s a lot of energy that takes away from what you could do with
your startup otherwise. So those are three big things
you should think about. – Those are some great insights, thank you so much for sharing. We’ve had another question come in. I really wanna, just really quickly, for people who have jumped on, say hello and welcome. We’re here with Sarada. She is an entrepreneurial
economics entrepreneurship expert from the University of
Wisconsin – Madison, Wisconsin School of Business. We’re really excited
to have her here today. We’re talking about
entrepreneurial finance, and getting that
financing for the business that you’ve always wanted to start, getting that up and running, and hearing some insights from her as you submit your questions. So if you just jumped
on, feel free to chime in and give us your questions. I’m gonna go ahead and share with you all the next question that we have, which is from Jamie Glover. She helped found Asiya,
which is another company that Rewire has featured at Rewire.org. Asiya is a modest athletic wear company. And hi Jamie, thanks for you question. “Where slash how do you recommend “social enterprises seek out investors? “We’ve found that it’s a
different type of investor “than those seeking purely high returns, “but don’t know the best resources
for connecting with them. “Thanks.” – Yeah so, social enterprises, again so the classic investor, the question really, does
your social enterprise also have a profit angle, or are you looking to
be a non-profit company? There are venture capital companies, and off the top of my head, I actually can’t think
of the names of these, that actually do specialize in dealing with high impact investment. So you want to search for
which venture capital companies are interested in high impact investment. Another source for social
enterprises is crowdfunding. So crowdfunding can be an excellent source for social enterprises. In fact, there is a particular
crowdfunding company, and let me find her name for you. It’s called Crowdrise. And Crowdrise is a crowdfunding website that sort of intends primarily to work with charity causes. And another place you can go to, actually this is a new startup, actually they’re not that new, they’re probably about 10
years old at this point, but they’re still sort
of a growing startup, they’re called Classy.com. So they’ve just done a big
round of fundraising recently. And Classy.com, the company’s primary goal is to basically… match lenders for not-for-profit enterprises, lenders and investors, with
people who need that money. So this is a harder route
because you need to, basically get investors or donors who are interested in this
not-for-profit endeavor, whatever it is. Or whatever it is, you want to find the right investors there. And there are platforms. So crowdfunding platforms
are places to look. Look for high impact investing. High impact investing and
the venture capital space, and otherwise. And if you are a not-for-profit company that is doing something that’s, in part, substituting for government services, so social services for instance, then a great source of money there is local government actually. So if you’re substituting
for what they’re doing, they will likely either be
willing to contract to you, or invest in you. So there are many sources
for you to think of, but they’re not as easy as it is if you have a profit motive. – Okay. We’ve had another question that’s come in. And Katie asks, “What are
some non-traditional ways “to raise money that actually work?” – Okay, so what do you mean
by traditional ways, banks? – Some non-traditional ways. – Right, so what do we
think traditional ways, banks, is that what it’s relative to? – Yeah, I think so. – Okay, so non-traditional
ways to raise funding include again, we talked about venture capital, it’s very hard to access. Non-traditional ways
include friends and family. Non-traditional ways include crowdfunding, crowdfunding is another source. Don’t forget that there
is always the government, small business loans,
understanding what Business Plan Competitions locally have. So that’s a way, Business
Plan Competitions locally, so you have that, these
arise from universities and from local governments. These are a great source of funding because they are non-diluted. So what we mean, is nobody
takes any equity right, this is just funding that arises, so if you have a great idea, you actually probably
stand a reasonable chance of winning some of these
Business Plan Competitions. So that’s another resource. But crowdfunding is really probably the most non-traditional
way of accessing funding, if you are averse to asking
people around you, so. – Yeah, we’ve featured a
few companies on our site that have used crowdfunding.
– Yeah. – I know Asiya, Jamie
commented, they used, I believe it was Kickstarter,
to get going with some of their products and things like that. – Also there’s one other example . So Airbnb, we all know
what Airbnb was, right. Do you know how Airbnb
got their early money? They got creative, okay. So they were, I guess they were located, I could be wrong here,
but they were located close to where the Democratic
National Convention was occurring that particular year. And they sold cereal boxes called Obama O’s and
McCain Cains, or something, I actually don’t remember the names. And they sold each of those boxes for $40. And so they were these two creative kids who came up with, not kids, adults, who came up with this idea. And they sold each box for $40 and raised some of the initial capital they needed to show some semblance of a prototype to then get more institutional funding. And those guys also, they
also they got admitted into, I wanna say Y Combinator,
one of the accelerators. So you can be creative
in how you get money, I mean accelerators are
fine, but you can think about what you would need to
produce right now to raise, if you only need $5000 or $10,000, you don’t need to dilute your equity, you can get that in some other ways, either by coming up with a cool trinket and selling it on Etsy, or by joining in an accelerator, which would be great for
you because you would then get access to venture
capitalists after that for subsequent rounds of funding. So you can be creative. – We had a question that
was submitted earlier, “What are some ways to finance “if you don’t have good credit?” – Well, so I think that’s a hard problem. If you don’t have good credit, getting debt’s really hard. It’s gonna be really hard. If you don’t have good credit, I actually don’t know how to answer, I’m not sure I know the
answer to that question. So, I’m sorry. – Okay, yeah, no that’s all right. We suggest that folks consult, obviously we have Sarada here. She’s got a lot of knowledge, but she doesn’t have all the answers. And we highly recommend
that people do consult with legal and financial professionals for questions like that. So thanks to that question
that was submitted earlier. – But one possible source for credit might be government agencies. – Okay. – So Small Business
Administration for instance. But I’m not entirely sure, but
that is one potential source for– – Okay.
– Yeah. – Okay. All right, so let’s go
here to another question. Let’s see. So we had another question
that was submitted earlier. “Sole proprietorship LLC or a partnership, “is there a financial benefit to either in a small business?” – Well, depends what you want. So the three differences are gonna be tax implications, so whether
you face double taxation. If you incorporate as an LLC, you can be taxed at both
the corporate level, and your income’s also gonna be taxed at the personal income level. So there’s taxation that’s
the first difference. The second is liability protection. You’re not gonna get liability protection, i.e. you can’t file bankruptcy
at the business level, you’ll file bankruptcy
at the individual level. So liability protection,
you are not gonna get that with sole proprietorships or partnerships. And then the third thing is how easy it is to transfer ownership. It’s gonna be easier to transfer ownership being incorporated. So really depends. Depends whether you want, if you want to raise for instance, if you actually are
looking to raise capital, you want to incorporate, because it’s much easier to raise capital. If you want to grow, you also
probably want to incorporate cause it’s easier to grow. Banks can be more willing to lend, investors are going to be
more willing to invest. There’s more security for everybody. So the big difference is being an LLC, the setup cost is higher
than being a sole proprietor. So you want to think, the three angles I think that are important
is the tax implications for the different types of incorporation, the different business forms, liability protection, and
how easy it is gonna be to raise capital and transfer ownership. And depending on what the
objectives of your firm are, you can pick the best
type of incorporation. Another thing to think about
if you’re trying to raise external capital is not
just how you incorporate, but where you incorporate. So a state like Delaware, for instance, has really business friendly laws. The Court of Chancery in Delaware is very very friendly to businesses. And that’s why you see a lot
of venture-backed companies are incorporated in Delaware. So you also want to think about where you want to incorporate, locally, or if you want to incorporate in a state where the laws are very business friendly. – Okay, all right, good tips there. For those of you who are
just tuning in, welcome to our Facebook Live Q and A here. We’re chatting with
Sarada who’s a Professor of Entrepreneurial Finance at the University of Wisconsin-Madison, Wisconsin School of Business. And we’ve been taking
questions from our viewers, so if you have a question, go ahead and submit it in the comments. We did have one come in, and this is from, excuse me if I mispronounce
your name, Sangeetha Iyer. “What challenges do female
entrepreneurs typically face “in funding compared to males? “Is there a difference in treatment?” Do you have any insights on that? – Yes. This is hard, I think one
of the bigger issues is– So there is a lot of talk
about discrimination, right. And to really isolate
whether it is the fact that there are fewer women
who are raising funds, or if they are raising funds for things that are less profit motivated, or if it’s in fact discrimination, is something that I don’t
think we know for a fact yet. But anecdotally, I mean, of course. People, there’s a lot of homophily, people like others whose
ideas they understand. So if you’re pitching
an idea about sports, perhaps it’s easier to attract an investor who understands sports as compared to, you’re pitching an idea
about, I don’t know, eyebrow threading, whatever. And so there is some extent of, my guess is there would be some latent extent of discrimination. But in terms of how to go about
circumventing the problem, I think one thing we can do, and the burden, unfortunately, I can’t change how others behave, so the burden ends up being on us, is to create a very clear
financial business plan, to understand our market very well. Create a clear business plan, and at the end, I think, even if one investor is discriminatory and doesn’t want to invest in your firm, someone else is going to see the profit, bottom line, and invest in your firm. But I think this is a problem. I don’t have an answer as to
how to get around that problem. I think if we just have
clean and clear plans, we can probably get someone to invest. – Absolutely. Thank you to everyone for their questions. So Sarada, is there anything
else before we wrap up, that you want to make sure we touch on when it comes to this topic, any final words of wisdom,
insights that you’d like to share with people who are looking to finance their business endeavor? – Yes. So you want to approach
the right type of investor for your company. And there are three
margins, I think you should think about understanding
before you approach an investor. How risky is your idea? How technologically innovative is it? How long will it take for your company to become cash flow
positive, for your company to actually become profitable? And how much capital do you actually need? And if you have a highly risky idea, that you expect to
become cash flow positive between five and eight years, and your capital needs are
between 100,000 and five million, you want to approach a venture capitalist, because you’re sitting
in their sweet spot. If you have an idea where you capital needs are 50,000 total, you want to start a small business, you want to start a food truck, you want to start a restaurant, that’s not very risky in terms of the technological innovation. The amount of capital you
need isn’t super high, and how long it’ll take for you
to become cash flow positive isn’t very long. So you’re not gonna attract
an institutional investor. You’re not really even gonna
attract an equity investor. So then you want to think
about the right source of capitalists, probably
small business loans. And so this is sort of an area I think people approach
the wrong investor, and that can actually be a problem. You want to think about which investor, and what their timeline returns are. You want to think about which
is the ideal investor for you. And the three things to think about is, how risky is it? So how risky and technologically
innovative is it? How long is it gonna take for you to become cash flow positive? And how much money do you actually need? And then find the correct type of investor where you sit in their sweet spot. And how much collateral, if you have something that’s
highly collateralizable, then you want to get debt, because debt’s cheaper than equity. If you don’t have any collateral, and you’re creating risky technology, but a technology that
isn’t gonna take 20 years, but rather that’s gonna take eight years, then you wanna take venture capital. If you’re gonna take 20 years, and you need 100 million dollars because you’re doing some
high capital intensity idea, then you want to go with the
government or universities. So there’s different choices of capital, you want to make sure you access the right source of capital. – Okay. We’ve had one more question come in. Actually we’ve had a couple more. So I think we’re gonna keep
going if you’re okay with that. – Yeah that’s fine. – All right. So one of the questions that come in says, and she acknowledges, “This
question might be too hard “to answer in a short time, but, “what are some important things “to be sure to include
in a funding pitch?” – So I think to be sure to
include in a funding pitch is, so you want to have an executive summary. You want to have a very clear sense of what your product is,
what your project is, what your idea is. You want to be clear on
how much money you need, and for how long you need that money for. So you want to tell people
what it is you’re producing, how it is they can make money off, or how you can make money
off of what you’re producing, so have a sense for that. Have a sense for what your revenues and your costs might look like. And that way, you can actually
come up with a clean way. So if you come up with a
pro forma income statement, if you really make the
effort to think about what your market looks like,
what revenues can look like between now and four years from now, what costs will look like between now and four years from now, and then give people a sense of how much money you’re gonna need in the next 12 to 18 months, and what you’re gonna need it for. Are you gonna need it for working capital? Are you gonna need it
for capital expenditures? So be clear about what you need it for, and then be clear about whether or not the growth opportunities are big. If the growth opportunities are big, and an investor can see
that if things go well, their investment can increase tenfold, then you’re probably
gonna get better terms. You can probably approach
a venture capitalist, cause that’s in their sweet spot. They want to see, they
call it Five-X Ten-X, that’s the language there. If they can see a large
X as a potential exit, they’ll want to invest in you. But in order for them
to see anything at all, you have to do the groundwork and be clear about what your idea is, how that idea will generate money, and what you need money for in the next 12 to 18 months, what are you gonna use it for. And who your team comprises. People care a lot about the team, you gotta have the right people. So if you don’t have somebody
who understands the industry, who actually understands technology. You have two business
students on something that’s highly technologically intensive, then you have to propose to them how you’re gonna find technologists. You can hire them, but
that might be costly. You can have them as a partner, and that dilutes your equity, but that’s a choice you have to make. But you want to be clear and convincing that this is the right
team of people to do this, and this is how much you need,
and for how long, and why. – That kind of goes,
there was another question that came in while you were talking about, from Justin, and he was asking, “One of the first financing choices “to pay for hiring staff
to support the company. “What advice do you have on financing “those first few employees?” – Okay so you need to
have an employee pool. I think it’s very important
that in your equity structure, when you’re thinking about the capitalization of your company, put some of your shares
aside at the start itself in what’s called an employee pool. And what that means is that you get to raise capital
to pay your workers, but you’ll also want to
incentivize them to work by giving them some equity in the company, whether it’s the first few employees, obviously will get more equity than the ones who come in at 25 or 50. But you wanna set aside an employee pool, which is some number of shares,
some fraction of shares, whether it’s 5% of the firm or 3% depends on how many
employees you think you need, and how dependent you’re gonna be on this form of an incentive. So again, you want to
sheppard your equity. Always be careful with it,
don’t give it away willy nilly. But at the same time, you also
want to keep an employee pool in order to be able to attract people. Why? Because they get to
share in the upside, so, yeah. – Great, thank you so much. So now I think we will
wrap up this conversation. Some really great insights and knowledge from you, Sarada. Thank you so much.
– Welcome. – And thank you to all of the
viewers who came and watched, and for especially big
shout out to those of you who left your comments and
your questions in there. Some of the subjects that
we featured on Rewire you can learn more about,
amazing entrepreneurs, especially younger entrepreneurs who are going out there with their big bold ideas
and trying to raise money to start these really cool projects. Check them out at Rewire.org. And if you want some of
that great information sent directly to you, you can sign up for the Rewire newsletter, just click the sign up
button on our Facebook page. And we hope you’ll join
us again another time. Thanks again Sarada. Thanks everybody.
– Thank you so much. Take care, bye!

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