YC
Carolynn Levy - Modern Startup Funding
@ Y Combinator
09/20/19
Takeaways
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Carolynn Levy
09/20/19
@ Y Combinator
I have seen a lot of changes in the startup ecosystem, particularly in how financing is done, and Y Combinator has played a significant role in these changes.
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Carolynn Levy
09/20/19
@ Y Combinator
When starting a company, the first step is to form a corporation, which protects founders from personal liability.
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Carolynn Levy
09/20/19
@ Y Combinator
Most startups raise money by selling a part of their company, typically through preferred stock, rather than common stock, which is not sufficient for raising meaningful amounts.
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Carolynn Levy
09/20/19
@ Y Combinator
Preferred stock financing, which includes terms like Series A and Series Seed, refers to fundraising by selling preferred stock at a specific price per share.
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Carolynn Levy
09/20/19
@ Y Combinator
Convertible securities, which are not stock themselves but convert into stock later, are commonly used in early-stage fundraising events.
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Carolynn Levy
09/20/19
@ Y Combinator
Three major changes in startup financing over the years are the structure of fundraising documents, easier access to these documents online, and a greater focus on minimizing the time spent on fundraising.
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Carolynn Levy
09/20/19
@ Y Combinator
Valuation, which is the value of your enterprise, and dilution, which refers to how much of your company you have sold, are critical concepts in fundraising.
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Carolynn Levy
09/20/19
@ Y Combinator
Communication with investors is crucial, as they expect you to turn their investment into a successful business, and maintaining that relationship is key.
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Carolynn Levy
09/20/19
@ Y Combinator
The traditional method of raising early money involved a Series A preferred stock financing, which was a lengthy and expensive process.
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Carolynn Levy
09/20/19
@ Y Combinator
Angel investors used to form consortiums to write large checks for Series A financings, but this practice has changed, with individual checks becoming more common.
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Carolynn Levy
09/20/19
@ Y Combinator
The old fundraising process could take months and cost between $25,000 to $100,000 in legal fees, making it inflexible and burdensome for startups.
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Carolynn Levy
09/20/19
@ Y Combinator
The cost of starting a company has decreased significantly, allowing startups to avoid raising large sums just to get off the ground, making the old financing methods less relevant.
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Carolynn Levy
09/20/19
@ Y Combinator
Bridge loans, which are debt instruments used between two financings, often involve convertible promissory notes and can include common stock warrants. Bridge loan financing uses convertible promissory notes that convert into shares of stock during the next funding round, making it a flexible option for startups between major financing rounds.
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Carolynn Levy
09/20/19
@ Y Combinator
The SAFE, or Simple Agreement for Future Equity, is a modern alternative to convertible promissory notes, designed to simplify early-stage fundraising by eliminating debt and reducing legal complexities.
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Carolynn Levy
09/20/19
@ Y Combinator
Convertible securities like SAFEs allow startups to raise funds without the burden of debt, making it easier for founders to focus on building their companies rather than managing loans and interest.
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Carolynn Levy
09/20/19
@ Y Combinator
Using convertible securities can lead to a larger number of investors in a startup, which can complicate administrative processes when seeking consent for future financing rounds.
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Carolynn Levy
09/20/19
@ Y Combinator
Investors in convertible securities may write smaller checks and might not be as engaged as those who invest in priced rounds, which can affect the level of support and attention they provide to the startup.
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Carolynn Levy
09/20/19
@ Y Combinator
While priced rounds are still a common method for raising funds, they typically occur later in a startup's lifecycle, often after initial fundraising through SAFEs or convertible notes.
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Carolynn Levy
09/20/19
@ Y Combinator
In Boston, while SAFEs and convertible securities are common on the West Coast, local angel investors may be less familiar with these financing methods, indicating a need for education in the ecosystem. I recommend approaching fundraising with convertible securities because they can be done quickly and flexibly.
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Carolynn Levy
09/20/19
@ Y Combinator
Taking small checks from angel investors does not negatively impact your chances with venture capitalists when you seek a priced round later.
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Carolynn Levy
09/20/19
@ Y Combinator
Raising money from angel investors and achieving milestones shows your focus on rapid progress, which is favorable when seeking a priced round.
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Carolynn Levy
09/20/19
@ Y Combinator
Equity crowdfunding has changed significantly, allowing companies to solicit investments from strangers, but it comes with many regulations and is still in a testing phase.
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Carolynn Levy
09/20/19
@ Y Combinator
If a company never raises a priced round, the SAFE only converts if the company is sold or goes public, which is a rare scenario.
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Carolynn Levy
09/20/19
@ Y Combinator
It's exceedingly rare for a company to raise a small amount of money and never need more funding, as companies typically require additional capital to grow.
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Carolynn Levy
09/20/19
@ Y Combinator
If a VC offers you a significant amount of money for your first fundraising, you should take it, especially if it aligns with your company's valuation and growth strategy.
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Carolynn Levy
09/20/19
@ Y Combinator
The only key term to negotiate in a SAFE is the valuation, which affects how it converts and the dilution involved.
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Carolynn Levy
09/20/19
@ Y Combinator
If an investor wants to add terms to a SAFE to address concerns about conversion, you can negotiate that, but it adds complexity to the agreement.
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Carolynn Levy
09/20/19
@ Y Combinator
Using a SAFE for compensating someone with equity for services rendered is not advisable; it's better to seek cash for services instead.