Getting professional legal help to advise you throughout the process is essential but it’s also important to understand the term sheet yourself so you can be certain you’re setting your company on the road to long-term success. One way to begin understanding term sheets is to find templates that generally match the needs of your particular situation and that investors will most likely provide you with. Then you can get a better sense of what goes into good term sheets for startups to create a win-win situation for both your company and investors.

How to read a term sheet by using a template 

In most term sheet templates, you’ll see that the key terms include the valuation and all financial drivers of the investment, the rights of investors, and the deal closing process. 

Most simple term sheets for startups follow the same outline and include the following sections:  

1. A brief paragraph that summarizes the principal terms and conditions. 
2. After the summary, the offering terms are addressed, including pre-money valuation, securities, investors involved, amount of the offering, the issuer of the document, closing date, and conditions for closing.
3. Listing of the dividends including non-cumulative, cumulative, anti-dilution rights, and liquidation preferences.
4. Participation rights.
5. Board of Directors and voting agreements (provisions on how it will be structured and who will control critical Board votes).
6. The option pool and share purchase agreement.
7. Space for signatures and the date of the agreement.

To dive deeper into the meaning and ramifications of each of these particular terms, you can check out our in-depth guide for startup founders that includes a complete breakdown of each one.

re-money valuation is the valuation of the company before any investments are made. This economic term is linked to the idea of post-valuation which includes the pre-money valuation plus the amount of money raised in the round. This determines the percentage available to investors in the round. 

Securities cover the type of securities being offered, for example, common or preferred membership interests, and the type of preferred such as convertible or participating. The series that is currently being offered such as Series A, B, C, etc will also be included.

The offering amount describes how much is being offered for investment within the series. The listing of the investors involved defines which investors are participating in the offering along with the offering amount. The listing of the dividends specifies the way that invested funds are distributed to investors. 

The anti-dilution right is a clause that protects investors from dilution in their equity position. If the company’s business fails and ends up having to sell its assets the liquidation preferences dictate how the process will be undertaken. 

General voting rights outline the voting rights of the equity being offered for certain major events such as the sale of the business or an initial public offering. The conditions for closing are the customary pre-conditions that are required for receiving investor funds, which typically include the completion of due diligence, the execution of a formal distribution agreement, and the delivery of closing certificates.

Unfavorable terms to avoid in a VC term sheet 

Although it is an uncommon occurrence for a term sheet to contain lots of aggressive terms, there are some that you’ll need to watch out for. Here are some unfavorable ones that you may not want to agree to in a term sheet:

Super pro rata rights

Super pro rata rights give an investor the right to purchase a larger percentage of a company than their initial investment in subsequent rounds. For example, a VC that owns 10% of a company during the initial round can request 15% in the next round. This differs from regular pro rata rights that only give investors the ability to keep their current ownership amount through future rounds to protect their investment from being diluted. 

Participating preferred liquidation preference

Participating preferred liquidation means that if a sale, merger, or acquisition takes place investors will receive their investment back at a multiple along with their proportional share of the remaining proceeds. Essentially, this is “double-dipping”. Common stockholders and founders only get their proportional share after investors get their first dip. This can contribute to an investor making money even in a lower valuation exit while the founders will end up with much less. A high multiple (e.g. 2x) is a potential red flag for the deal. A good compromise is a capped participating liquidation preference. 

Accrued dividends

Accrued dividends (also called cumulative) give investors a specific annual return that is typically a percentage of the original per share price of preferred stock. Investors usually prefer cumulative dividends in order to get a minimum annual rate of return on their investment. It is often tied into the liquidation preference so that when a company is liquidated or sold it results in giving the holders of preferred stock their entire investment along with any accrued dividends.  

Full-ratchet anti-dilution protection

Full-ratchet is the most drastic type of anti-dilution protection. Accepting this in your term sheet means that if funding is raised in the future at a reduced price than what is currently being paid, the investment made now will be repriced to that lower amount in the future. It’s less like a priced round than a loan with a cap. Full-ratchet anti-dilution can result in you selling more of your company than you originally thought if the next round is at a lower price.   

It’s also important to keep in mind that a great valuation doesn’t necessarily compensate for disadvantageous terms. And remember that you can potentially renegotiate terms that are unfavorable with investors.    

Where you can find sample term sheet templates

For first-time founders, the intricacies of a term sheet can be a bit overwhelming and include legal and technical jargon that’s not easy to understand. This is why it pays to become familiar with the main provisions and key terms even when you have professional help. 

Here are some trusted places you can visit online to download a sample term sheet template in Word (or other file types) to look over:

• Y Combinator
• NVCA

Conclusion

Knowing how to understand and negotiate a term sheet is critical to ensuring the best outcome for your company. Most investors are motivated to achieve a fair deal that will meet both of your needs. But you can’t completely rely on the other party to keep your best interests in mind. 

So, in addition to becoming familiar with the terms by looking at term sheet templates, you’ll want to consult with a lawyer to guide you through the process. Meanwhile, take the time to educate yourself so you’ll be prepared for discussions with both lawyers and investors. 

Digify’s document security and data room services can help you manage all your confidential business documents during the due diligence and fundraising process. You can also send pitch decks and track them to get an indication of investors’ interest and be able to quickly follow-up. Feel free to sign up for a 7-day free trial to see if Digify’s services work for your startup’s needs.

Choosing which terms to accept and which to negotiate is important for building the best relationship with your investor and ensuring the success of your company. There are certain red flags to look out for in a term sheet that indicate an investor doesn’t have your company’s best interests in mind. Since you’re committing your company to a financial relationship with your investor, you’ll need to make sure they’re someone you can work with far into the future.    

Reaching out to an attorney is a good idea before you agree to any terms. And knowing your priorities beforehand can help make it easier to evaluate an offer. Consider what a realistic valuation for your company may be, how much control of your business you’re willing to give up, what terms you’d ideally like to see, and what some serious deal breakers may be for you. 

Here are some important tips that startup founders can follow to effectively manage the process of reviewing and evaluating a term sheet and potential investors.  

Before getting a term sheet: What are your priorities?  

Achieving a great deal for your company doesn’t start with talking to investors. It begins with understanding your company’s priorities. You may not get all that you want but knowing them will give you a framework for assessing an offer when you receive one. 

You can use these guidelines to begin considering your priorities before getting a term sheet: 

Aim for a realistic valuation of your company

Try to figure out a realistic valuation of your company before getting term sheets so you’ll know if what you’re being offered is in line with your company’s actual worth. 

Know how much control you want to maintain

When it comes to staying in control of your business, you’ll want to have an idea of how much of your equity you’re willing to hand over to investors. When financing through venture capital, the reality is that a startup founder will have to hand over some control. But if you negotiate properly, you can keep your control from being diluted so you can build your company in the way you envision.   

Determine what terms are deal breakers 

Familiarize yourself with all the terms in a typical term sheet so that you know what is being offered and the implications. It pays to know what you can compromise on and what you absolutely can’t accept. Making a list of deal breakers forces you to explore what really matters for your company.

Get multiple term sheets if possible

Do your best to get more than one term sheet so you can compare different offers against each other. Try to strategically time the process though because term sheets typically have an expiration date. It’s a good idea to begin collecting them when you think you can get 2-3 or more term sheets within a short timeframe.

After getting a term sheet: Why a high valuation isn’t always better 

Every founder wants a high valuation for their own company but for some new startups, this can become a problem. In the course of financing, many startup founders try to maximize valuations to avoid dilution of their stake in the startup instead of aiming for realistic ones. 

In the short term, receiving a high valuation gives the founder validation for their successful business idea and its results. It also decreases the dilution effects due to the capital increase and can allow the founder to retain more shares. 

Typically, a high valuation also comes with high expectations from investors. If these are not met, it can cause your startup to get less funding in the next round of investment. For instance, if stated benchmarks are missed in the first round, investors in subsequent rounds may insist on lower company valuation. This results in down rounds, or funding rounds where your company may have to offer additional shares for sale at a lower price than the previous round. A down round can negatively affect company morale, market confidence, and reduce ownership percentages.   

Be aware of term sheet red flags

Many first-time founders can’t help but focus on the valuation and other general terms on the term sheet. If you’ve taken the time to define your priorities about accepting startup funding for your company first, you may not be as prone to overlooking any small-print terms.

You’ll also want to stay alert to specific red flags that could indicate that an investor may not be a good fit for your company. If you find terms that limit fundraising in the future, or other harsh terms, you’ll want to negotiate those. 

A competent investor will typically be willing to address any concerns you may have and clarify their intent.    

How to protect sensitive information during fundraising 

Before getting a term sheet, you’ll need to keep your proprietary company information secure when sharing it with investors. You can securely share confidential documents such as intellectual property by using a document security solution like Digify.

You can set copy protection, restrict access, set expiration dates, and track interactions with your documents to make sure only the right people can see them. 

Startups use Digify to send pitch decks to their investors. You can get stats on how many times your documents have been viewed and opened by your recipients. In the early stages of fundraising, these stats can help you prioritize your engagement with investors, by focusing on those most interested and trying to close them first. 

After getting a term sheet, you’ll also need to review and share the documents during the due diligence process. This is where a virtual data room (VDR) comes in handy to streamline managing partnerships, deals, and business growth.

Using a data room portrays a professional and credible image to your investors. It has additional features that make the fundraising process easier and faster to save you time and effort. For example, Digify’s virtual data room helps to automatically number your files and folders and inform your investor of new file updates.  

Final considerations

While it can be overwhelming for startup founders, especially new ones, to make countless difficult decisions throughout the formative and funding periods of the company, these decisions are vital to a successful venture. So take the time to educate yourself and find the legal help you need to be able to effectively negotiate for your company’s best interests. 

After all, any investor you choose will have a long-term relationship with your company. You’ll want to set a strong foundation from the start to create a partnership that works well for everyone. Meanwhile, check out a free 7-day trial of Digify’s virtual data room and document security solution to make sure you’re ready to secure your startup funding.

Educating yourself is part of your responsibility as a startup founder. Not all terms are equally important, so knowing where and what to negotiate for is essential. If you’re confused by the terminology it may negatively impact the negotiations because you won’t know what elements to avoid.  

Successfully negotiating the key terms generally makes it easier to negotiate the other less essential terms as well. In a typical fundraising process, startups can receive multiple term sheets from different investors. Understanding the terms will help you better compare offers as the terms may vary greatly.

Companies often heavily focus on valuation during negotiations but sometimes this is not the right approach. Other terms also affect the economics of financing, such as the size of the option pool and the liquidation preference. Plus, the right investors can often add immense value to a company. Even if these firms come in at a lower valuation, they may provide significant added value and influence the eventual successful outcome of your venture. 

Here is a useful guide to help you understand the basic terms, how they affect you, and how to land the best possible deal for your startup. 

What is a term sheet? 

A term sheet is a summary of the proposed key terms of an investment in your startup. The terms outline the conditions between your company and your investors. 

The term sheet serves as a blueprint for the formal legal paperwork later drafted by lawyers. Typically, you agree to confidentiality and not to enter into negotiations with other investors at the same time. 

What you need to know are the key terms, how they affect you, and the best ways to negotiate them for your startup.  

Understanding a term sheet’s key terms  

A term sheet dictates who gets what financially and who gets to take legal action in any specific future situation. Among the key terms is a description of the valuation of the company, the price per share, and the economic rights of the new shares.   

Usually, term sheets aren’t full of aggressive terms against the startup because most investors realize that creating a win-win situation is best for getting a good return on capital. But there are some cases where certain terms can result in a founder unwittingly giving up more control of their business than desired. This is why being aware of the potential consequences of specific terminology is vital.   

Key terms and clauses: What you need to know

Shares in a company can be broadly categorized as common or preferred stock. Common stock is usually the form of equity given to founders and employees. Preferred stock gives certain investors special rights that are  negotiable and included in your term sheet. 

Economics and control

Economics and control refer to the percentage of the company the new investors will own based on the company’s valuation and the amount of money invested. This is a critical part of the term sheet because it lays out who owns what and how much each shareholder gets if the company sells. It also sets a foundation for future term sheet valuations. 

When it comes to valuation some critical terms to understand include:

1. Pre-money and post-money valuation

A pre-money valuation refers to what the value of your company is before receiving funding. The post-money valuation is the estimated value of your company after receiving venture capital investment.

Here’s an example of how a pre-money and post-money valuation is calculated:

As a founder, you’ll need to aim for a valuation that is not too high or too low. If a valuation is too low, it can result in the unnecessary dilution of founder shares. If a valuation is too high, it can increase the pressure to perform and the difficulties of raising a subsequent round in the future. 

The valuation is usually determined by many factors such as industry comparables, growth rate and traction, startup location, market, and the strength of the team. Experienced advisors will often encourage early-stage founders to choose the right investors offering a lower valuation over the wrong investors with a high valuation.    

2. Liquidation preference 

A liquidation preference is commonly considered one of the most important terms to look out for in the term sheet for preferred stock. When a VC investor is issued shares of preferred stock it grants specific rights, including the liquidation preference, which makes it more valuable than common stock. In the event of a liquidation, the preferred stock will have priority over common stock in receiving the distribution of assets.

• Straight (or non-participating) preferred
  [Favors company] When the company is sold, the preferred stockholders can choose a liquidation preference with a liquidation multiple. This means that preferred stockholders are entitled to get paid back their entire investment (plus dividends) and to a multiple amount of their original investment (e.g., “2X multiple,” 3X multiple”, etc.) before the distribution of any proceeds to those with common stock. 
  Or the preferred stockholders can choose to convert their preferred stock to common stock and to be treated the same as the common stockholders (allowing them to share ratably in the proceeds).

• Participating preferred (double-dip)
  [Favors investor] The preferred stockholders are entitled to the return of their entire investment (plus dividends) before the common stockholders get paid. However, the preferred stockholders will still be treated like common stockholders and share ratably in the remaining proceeds — effectively being paid twice. 
  For instance, if an investor invests $1 million in a company at a post-money valuation of $5 million, this gives him 20% ownership of the company. The company later sells for $10 million. The investor will initially get paid $2 million, and then 20% of the remaining $8 million for a total of $2m + $1.6m = $3.6 million. 

• Capped (or partially) participating preferred 
  The preferred stockholders have the same rights as participating preferred, but their aggregate return is capped. Once they receive the capped amount they cannot share in the remaining proceeds with the other common stockholders. This is often seen as a compromise.

If your company is a runaway hit, liquidation preferences will matter less as your company valuation is far greater than the original amount the investor put in. In a more modest exit, the liquidation preference can greatly diminish the number of proceeds given to founders and employees. So, this is a term that should be carefully negotiated.

3. Conversion rights

The ability to convert shares of preferred stock into shares of common stock is called a conversion right. There are two main types of conversion rights including optional and mandatory rights. 

Optional conversion rights are typically non-negotiable and allow an investor to convert shares of preferred stock into common stock, typically on a one-to-one basis. The investor’s interest in liquidation preference guides this process. This allows the investor to choose between getting their liquidation preference or participating in the proportional share of the proceeds. 

Mandatory conversion rights are negotiable and require the investor to automatically convert shares of preferred stock into common stock through a process called “automatic conversion”. 

4. Option pool size 

An option pool is made up of shares of stocks reserved especially for employees. Usually called Employee Stock Option Pools (“ESOPs”) they help companies attract top talent to a startup and if the company goes public, employees are rewarded with stock. 

In a term sheet, the ESOP is specified as a percentage of the post-money valuation. As a result, this often means that the founders are shouldering all of the dilution. The ESOP is taken from the founders’ stock. For example, the investor has 25% of the company’s shares and stipulates a 20% ESOP on the post-money valuation, so the founders are left with 55% of the company’s shares. 

If your company is sold, all the unissued and unvested options would be canceled. Investors would share the additional sale proceeds proportionally with founders — even though those options were from the founders.

Typically ESOPs are about 10-25%, with different norms depending on your location. When creating an option pool, you don’t want to develop a massive one. This can reduce the chance of unallocated equity. Top-ups can occur later if needed at future rounds.   

5. Dividends 

A dividend is a payment made up of a distribution of profits from a corporation to its shareholders. A cumulative dividend is a right connected to certain preferred shares. It is calculated annually and carried forward to the next year if the company can’t pay. Non-cumulative dividends don’t have unpaid dividends carried over from past years which makes them the best for founders. Not all investment rounds involve dividends.

Investor rights and protections

Investor rights and protections refer to clauses that are used to protect an investor’s investment, such as:

1. Anti-dilution rights

Anti-dilution rights shield preferred investors in the event of a down round (lower valuation than what they invested in). When a company’s valuation decreases from different rounds of financing preferred shareholders are protected by giving them additional shares. These provisions can be devastating to the founders.

There are typically two types of adjustments:

• Full ratchet
  This is rare as this type of adjustment is extremely disadvantageous to the founders and other common stockholders. The adjustment brings down the conversion price to the lowest price at which the stock is issued after the issuance of the investor’s preferred stock, regardless of the number of shares.  

• Weighted average
  This takes into account both the lower price and the actual number of shares issued in the down round via a formula. There are two types of weighted-average formulas: broad-based (takes into account fully diluted capital stock including all issued and unissued stock such as options) or narrow-based (only outstanding capital stock). A broad-based approach is typically a smaller percentage of a larger amount, which is more favorable to founders.

2. Pro-rata rights

A pro-rata clause gives an investor the option to participate in future financing rounds to keep their percentage ownership in the company that would otherwise be diluted. Pro-rata rights are essential to early-stage rounds and are generally positive factors in term sheets. 

Pro-rata rights are typically given to larger investors in rounds and aren’t always enforced. Investors can choose to take up their pro-rata rights in later rounds depending on their strategy.   

3. Right of first refusal (ROFR) and approval of sale 

Having a right of first refusal clause requires that all current shareholders are notified and have the right to buy stock from an investor who is selling. Along with an approval of sale clause, this prevents secretive transfers of stock from occurring, such as an investor selling your stock to a competitor. 

4. No-shop clause 

A no-shop agreement is typically part of the final term sheet once you’ve chosen your lead investor among your available options. Part of the process of negotiating the final term sheet with this investor is agreeing to commit to getting a deal done. 

Founders may want to bind the no-shop clause to a time period of around 30-60 days to make the commitment mutual. The founder agrees not to shop the deal while the VC investor agrees to get things done within a reasonable time period.   

Governance management and control

Governance management and control set the rules concerning who’s in control of the company along with voting rights, board rights, information rights, and founder vesting. 

1. Voting rights

Voting rights consist of the shareholder’s right to vote on company policy. This term sheet clause divides voting rights across various instruments (A, B, Preferred) and sets out for which corporate action a majority vote is needed. 

Depending on how the majority votes, it gives the holder of the instrument the ability to block certain actions such as liquidation of the company, payout of dividends, revisions to the number of board members, and annual spending budgets, and amendments to the charter or bylaws. 

2. Protective rights

These are provisions that protect investors by giving them the right to block or veto certain actions, even those authorized by the Board of Directors. The consent of a percentage of the preferred stockholders is required before moving forward. This helps protect investors from the majority stockholders. 

• Standard protective provisions
  These provisions are viewed as standard and can include a sale of the company or a similar liquidation event, amendments to the company’s Certificate of Incorporation or bylaws to change the rights of preferred stock, increases or decreases in the shares of preferred or common stock, the issuance of any equity security having a preference over preferred stock, redeeming or purchasing preferred or common stock, payment of dividends from shares of any stock, and any revision in the number of directors of the company.

• Non-standard protective provisions
  Some investors may desire extra items beyond the standard provisions. These non-standard provisions may include acquiring debt of more than $100K, hiring, firing or changing the compensation of executive officers, entering into a transaction with a director, executive, or employee of a company, changes to the principal business model, and purchases of assets of another entity.

If you have strong enough leverage, founders can negotiate to push back or knock out most of the non-standard provisions.

3. Board rights

The Board of Directors is a group of people who are selected to represent the shareholders’ interests in the company. The board typically establishes corporate management policies and enacts major decisions. 

After a funding round, typically there is a “balance” in which neither the investor nor the founders control the board. In a five-member board, two directors will be appointed by the investors and two by the founders. The remaining director would be independent. However, founders in “hot” startups can more easily negotiate to retain control.  

The company’s bylaws can set the structure of the board and the number of meetings, which some investors might try to adjust to take more control over the board. Be aware of this risk because if you lose control over the board, you can also lose control of your company.  

4. Information rights

Information rights demand that you share the company’s financial status regularly with investors. Quarterly management reports and detailed annual financials are usually required after the end of the fiscal year.

5. Founder vesting

Founder share vesting makes it difficult for a founder to abandon a company by placing shares at risk. If the shares are returned this gives the company the chance to find a suitable replacement. Founders should negotiate a vesting program that works in their interest, such as excluding part of their holding from the agreement.

Exits and liquidity

The terms that govern exits and liquidity describe what happens in the event of a sale and shareholder rights during the process. Terms to look for include:

1. Drag-along and tag-along rights

If a sale of the company happens, drag-along rights prevent minority shareholders from blocking the occurrence if it was approved by the majority shareholder or by a collective majority. This can be helpful to the minority shareholder as well because it ensures that the same deal is offered to all parties.

Tag-along rights protect the minority shareholder further by giving them the right to join in any action with the majority shareholder. Often majority shareholders uncover more favorable deals from which the minority shareholder would be denied if it weren’t for this provision.

2. Redemption rights

The redemption clause can have a potentially negative impact that has the capability to create a liquidity crisis for startups. Using the clause, investors can demand redemption of stock within a certain amount of time. 

Management may be forced to quickly sell the company to redeem the funds or petition shareholders to provide the funding in a rushed financing round. This is often resolved by the company paying the redeeming party the greater of fair market value and the original purchase price plus interest.  

Term sheets and valuations: How to be a smart negotiator

For startup founders, the term sheet negotiation is about raising capital from VC investors while maintaining as much control as possible and limiting risks. Depending on what rights they push for or don’t, you can get a good feel for who your investor is and where they stand.

Surprises should be unlikely if your startup is raising a round from a well-known venture capital fund. There may be more legal issues to straighten out if you’re dealing with a late-stage private equity investor or a new corporate investor. 

Remember that your investor will have a fundamental role in the development of your company, so do more research than just uncovering how much funding they can invest. Think of the process of negotiation as a two-way due diligence operation. 

Top red flags to look for in a term sheet

Certain terms have implications that may not be founder-friendly. It pays to get objective advice from a lawyer with a background in this area. Your investors’ recommendations don’t necessarily have to dictate who you hire. Make sure you get a lawyer that can catch provisions that could have negative unintended consequences for your startup. 

Meanwhile, here are some important not so founder-friendly terms to look out for:

• Protective provisions – These provisions can limit how much debt you can have without the consent of VCs, place restrictions on increasing authorized shares to take on new funding or give to employees, and add revisions to the certificate of incorporation.

• Full ratchet anti-dilution – This protection can wipe out common shareholders in a down round. A down round is when a company’s valuation decreases in consecutive funding rounds. A broad-based weighted average is the most founder-friendly form of anti-dilution followed by a narrow-based weighted average.

• Cumulative and PIK dividends – Cumulative dividends essentially guarantee investors a certain level of return, which is not standard for early-stage deals. Payment-in-Kind (PIK) dividends increase the liquidation preference for preferred stock and dilute the founder’s control over time. When it comes to dividends, the word “noncumulative” is the most founder-friendly language to look for.

• Participating preferred stock – This type of stock is not considered the standard so founders can make a case against it in negotiations. These participation rights heavily favor preferred stockholders.

• Anything above a 1x liquidation preference – If the preferred stock has a 2x liquidation preference, this guarantees that investors get double their money back before common classes of stock can receive anything.

Why some deals fail after a term sheet is signed

Many types of deals can miss the mark at any stage of the process. Never assume that a great valuation equals a great term sheet. You can create a win-win situation for both VCs and founders by keeping your request in line with your industry and your company’s stage of development. Even if VC investors are willing to throw funding at a product until it meets expectations, it’s up to the company to not fall short of its promises. 

Where to find a sample term sheet template

There are numerous sources online for viewing sample term sheet templates. The National Venture Capital Association (NVCA) is a public policy advocate for entrepreneurs and the venture community and is a leading resource for venture capital data and education. This may be a good place to start for finding a general term sheet template depending on your particular situation. 

If you’re looking for a Series A term sheet template, Y Combinator offers a one-page term sheet that covers everything and shortens the legalese to be more user friendly. This became common over the last ten years as investors sought to standardize the process to make it easier, faster, and friendlier.   

Final considerations 

It’s important to keep in mind that the fundamental goal of a startup is to have a sustainable and scalable business model that can raise consistent capital from VC investors. If you don’t have this, there’s no point in raising millions because venture capital can’t save your startup alone. Founders’ goals should be to retain as much control as possible while limiting risks.

Choosing the right long-term investment partners can also significantly influence the outcome of the investment as their involvement doesn’t end after the check is cashed. When founders are armed with knowledge, they can not only avoid pitfalls but also use term sheets as protective measures for their interests.

Digify can help you manage confidential company information for fundraising, due diligence, and investor updates. You can use Digify’s document security feature to send pitch decks with tracking features, so that you can better gauge the interest of your investors and follow up in a timely manner. Digify’s virtual data rooms are also used by many startups (see examples here) and VC/PE funds for their due diligence to close large rounds. See for yourself if Digify’s document security and data room services are right for your needs with a 7-day free trial.

One of the best first steps is to learn as much as you can about the fundraising process itself. To help you on your way, we’ll first share some startling startup funding analytics below. Then we’ll take a deep dive into the differences between the various stages of startup funding. We’ll begin with the critical distinction between the angel/seed round and the Series A round. Then we’ll explore what lies beyond Series A, and how many rounds of funding your startup can or should seek.

Finally, we’ll help you factor in your niche, location, investment stage, professional network, and mentorship needs as you narrow down your list of ideal investors to approach today.

Startup survival: what are the odds?

After tracking more than a thousand U.S. startups for nearly a decade from initial seed funding onward, CB Insights offers us some sobering, but also promising analytics on startup fundraising:

• The average seed round was $700,000.
• Less than half of seeded startups went on to a second round (i.e. Series A).
• Well over half (61%) of those that landed Series A funding went on to Series B.
• 28% of seeded startups eventually exited via merger, acquisition or IPO within the first six rounds.
• 70% eventually failed or stopped seeking (and perhaps needing) funding during this time.
• Less than 1% became unicorns (i.e. were eventually valued at $1B or more, although Slack, AirBnB and Uber were among them).

What’s the difference between angel, seed and Series A funding?

Although entrepreneurs and the investment community will continue to debate the nuanced differences between angel funding and seed funding, from a bird’s eye view they are practically identical. Far more substantive differences are uncovered when comparing and contrasting angel/seed funding on the one hand, and Series A funding on the other. Let’s explore them:

Dollar Amounts

There is no fixed dollar amount that defines a seed or angel round. However, you will generally see dollar figures in the tens to hundreds of thousands, rather than millions (at least not many millions). If you’re looking for harder numbers, RocketSpace places the seed range at $50,000 to $2M. By contrast, Rocketspace places the Series A range at $2M to $10M. Of course, Series A rounds in the real world range wildly. But they are generally many times greater than what you could expect from a seed round.

Levels of difficulty

Generally speaking, the first round is the hardest. This should come as no surprise. Despite the lower dollar amounts, seed and angel rounds pose the greatest risk to the investor. Therefore, you are up against the greatest scarcity of funds, and the fiercest competition for it.

Therefore, if you succeed in securing seed or angel funding, then you will have already made it over the highest barrier-to-entry. Yet you will face new challenges in Series A, such as a thorough due diligence process.

Runway

An angel/seed round can happen relatively quickly, if not overnight. This is primarily the case because there are so few hoops you have to go through, at least when compared to later, institutional rounds. However, if you’re transitioning from seed or angel funding to Series A funding, then it’s time to cultivate patience. In all likelihood, you will need a far longer runway to land Series A. With this in mind, start the fundraising process as far in advance of your projected financial deadline as you possibly can.

In some cases, VCs may sit on the sidelines for years as you work out other ways to stay in the game. Therefore, it’s important to start thinking in terms of long-term relationships, rather than quick deals, as you enter the world of VCs.

Formalities

Fundraising best practices will also change dramatically as you transition from seed/angel fundraising to Series A.

Seed and angel rounds tend to be relatively informal, often involving a loose string of conversational meetings taking place in coffee shops or other public locations. Series A is a different story entirely. Named after Series A Preferred Stock, Series A is the first truly formal funding round. This will become increasingly evident as the institutional fundraising process unfolds.

To prepare for Series A, you will definitely want to start going through your due diligence checklist, which will prove to be an essential step in every funding round from this point forward. In most cases, you will also need to make room in your organizational chart for a board of directors and advisors.

Document-security practices

During a seed round, you will often use informal platforms to share documents with potential investors. However, if all parties agree that document security is paramount, it’s well worth considering a virtual data room (VDR). Nonetheless, a VDR is usually perceived as a mere nice-to-have for seed and angel rounds.

However, once you reach Series A, a VDR is a non-negotiable must-have. Institutional investors will always expect to have access to an enterprise-grade VDR in order to review your documentation in a secure space.

How does fundraising change with Series B, C and beyond?

Some investors characterize companies that have reached Series B as having moved out of the development phase and into the expansion phase. If you progress still further into Series C, rapid expansion may transition to mature scaling. Throughout these later rounds, mergers and acquisitions may also come into play.

Many successful companies may even begin to consider the prospect of going public to raise further funds. However, for those that prefer to remain a private company, but still need funding, Series C and beyond will likely involve progressively larger cash infusions, often ranging in the tens of millions. Yet along with the far greater dollar amounts will come far greater expectations of market leadership and consistent revenue growth.

How many funding rounds are there?

Generally, very few. The hard truth is that the vast majority of startups fail before reaching a third or fourth round. So although it’s wise to think long-term, it’s generally not necessary to plan beyond one or two rounds ahead. Of course, there are always exceptions.

For example, if you are involved in a startup with a multi-year, manufacturing-dependent project, such as building a better graphics card, then it’s probably best to approach a single set of institutional investors with a multi-stage investment plan in advance. This way you can follow your long-term project through to the end without the floor falling out along the way.

Who are the best investors to approach?

Knowing who to approach, and who to avoid, is one of the most important skills you can learn as you enter the maze of startup fundraising. 

There are at least five factors to consider as you narrow down your list of investors to approach: your niche, your growth stage, your location, your professional network, and your mentorship needs. Let’s take a close look at each:

Your niche

It’s no secret that you need to stay well within your industry when courting startup investors. However, it’s important to tune your fundraising strategy still more precisely. You need to find investors that are particularly interested not just in your industry, but in your niche. To find the sweet spot, look for angels, VCs and firms that have consistently and successfully invested in companies that are active in your precise market, but that aren’t your competitors.

Your stage

You need to make your list of potential investors match your stage of investment. For example, there’s no point in courting an angel investor if you’re seeking Series A funding. After all, the amount you need to raise is quite likely an order of magnitude larger than what an angel investor can deliver.

On the other hand, if you only need a hundred thousand dollars of angel funding, it’s equally unwise to court a late-stage institutional investment firm like Kleiner Perkins.

Your location

Generally speaking, investors like to live near their investments. Keeping this principle in mind, it’s best to start with the investment community in your nearest metropolitan area. And despite all the hype to the contrary, this doesn’t have to be Silicon Valley. Although there are indeed more investors per capita in Silicon Valley than perhaps anywhere else on earth, there are also many more entrepreneurs competing for their attention.

Moreover, the Bay Area is a prohibitively expensive place to live and run a startup. You can certainly stretch your investment dollar further by raising funds where you are, and helping your local startup scene grow at the same time.

Your professional network

If you already have a robust professional network to tap into on LinkedIn or elsewhere, then it’s time to start navigating it. Work tirelessly to uncover every direct or indirect connection you have to a qualifying investor.

If you don’t have much of a professional network, it’s time to build one. You can start by attending leading industry and niche-specific conferences where investors frequently look for prospects. 

Your need for mentorship

Investors are anything but passive ATMs. They will often want to be involved in every key decision you make with their money. So be sure to find an investor who you trust to be a frequent co-pilot, and that you get along with well.

Ideally, the angel or VC should know enough about your business and market to be a trusted resource, rather than an overbearing nag. Think of it this way. Ultimately, if you can find a trusted mentor in your investor, then you have essentially landed a new, seasoned executive that likes your business enough to work for equity.

Keep in mind that once you have factored in all of the above and narrowed down your list of investors to approach, you will still need to approach them. Because you’re competing with hundreds of others for every second of their attention, this is going to be hard work, and you will need to be in it for the long haul. As startup CEO Bill Radar emphasizes, it generally “takes hundreds of introductions, calls, pitches and meetings to find the right investors.”

Startup fundraising in 2022

Despite the strongest startup investment market in years, startup fundraising remains a persistent challenge in 2022. Here we’ve tried to help you meet that challenge by tackling key questions that lie at the core of the venture capital funding process.

First, we looked at the raw stats reflecting a wide range of venture capital fundraising concerns from seed to exit. Next, we explored the deep differences between angel/seed rounds and Series A rounds, including dollar amounts, levels of difficulty, runways, formalities, and document-security practices. Then we explored what lies beyond Series A, and how many funding rounds your company might wish to seek.

Finally, we showed you how you can factor in your niche, location, investment stage, professional network, and mentorship needs to narrow down your list of ideal investors to approach. By taking all these tips to heart, then putting them into practice, you should be well equipped to weather the exciting storm that is raising funds for your startup in 2022.

As if balancing the daily operations of your startup or small business isn’t enough, now you have to come up with something witty and brilliant to win over a busy VC. No big deal, right?

But fret not.

You’ve already done the hard part.

After all, if you’re trying to get the attention of a VC or investment firm, chances are you have a product or service worth bragging about — and maybe even investing in.

Now you just need the right approach to pique the interest of a VC (or the highly-trained gatekeeper of their inbox) and take you to the next level.

Today we break down the anatomy of the perfect cold email pitch to increase your chances of hearing back from a VC.

We’ll give you a few examples to work with, explain why they crush it, and share three templates to help you brainstorm emails for your business.

Everything the Perfect Cold Email Pitch Should Include

The better a VC understands your product/service and what you’re asking for, the easier it will be to evaluate your company.

VCs don’t have time to waste analyzing your pitch. So the easier your pitch is to understand, the better your chances of them opening your email and responding.

Follow the KISS method, or the one that says Keep It Simple, Stupid.

Use these 8 steps as a checklist to not only stay on track but make your pitch stronger and harder to resist:

1. A Clickworthy Subject No Longer than 6 Words (or under 45 characters)

Short, attention-grabbing headlines that get straight to the point show you know how to sell your brand.

Stay away from cliche subject lines (Ready to revolutionize [blank] industry? Get in on the ground floor!) as those are easily routed to the trash without an open.

Use the name of your brand or product and the details of your pitch’s raise.

Examples:

• Unique catnip subscription box seeking $50k
• Like AirBnB for Tools: $100k Ask
• [Company]’s Raising $75k for Expansion

When your VC clicks your email, greet them with a warm welcome to make them stay.

2. Introduce Yourself and Your Brand In One Sentence

This isn’t the time to spill your guts about how dedicated you are to making your brand a success. VCs don’t have time to waste on your Shark Tank story of drama and determination.

Show your VC who you are and why you’re different from the thousands of offers they receive every day. Make it memorable.

Examples:

• I’m from CatnipUnlimited, the first and only organic farm-to-kitty catnip subscription box for picky feline palates.
• As one of the co-founders of NewPetFace, a social media site partnering with local animal shelters to encourage adoptions via pet selfies…
• Our app makes it easy to organize activities with your entire crew on-the-go.

Now that your VC knows who you are, tell them why they should be interested in your company.

3. What Your Product/Service/Brand is Doing to Solve a Problem

As VC Sean Park says, “Think of your email as an elevator speech. You should only provide the key points.”

So write a few short sentences about why your brand even exists. Keep it short and sweet; no more than 2–3 sentences max.

The better you are at communicating what your brand does and what problems it solves, the easier it will be to sell your pitch.

Examples:

• We help [specific customers] with [a specific problem] so they can [do something].
• The app tracks and predicts the optimal time to clean your fish tank so you get more time between cleanings.
• Our new discount platform has already surpassed the savings algorithms created by our biggest competitors, racking up over $2 million bucks for our users!

So your VC may find interest in your brand, or they may not find it so cool. That doesn’t really matter. Once you show them the numbers, they may only be interested in investing for the return — and that’s still cool.

4. How You’re Currently Crushing It (with concrete numbers)

Similar to a stellar resume, adding specific numbers shows you know your business inside and out. It also helps your VC evaluate your traction and trajectory.

Find 3–7 main points to highlight to show VCs your current and future potential.

Lacking solid financials for your startup?

No worries; add a few key figures about your target audience, like spending habits of those in your market, to flesh out your pitch.

Examples:

• We’ve grown from 10k subscribers to over 1 million.
• From three founders to over 200 employees…
• CatnipUnlimited has already raised $500,000 via crowdfunding.

Now it’s time for the hard part: the ask.

5. Define Your Ask

This is the time to be direct and ask for exactly what you want from your VC. Time is money so don’t waste time mincing words here.

Decide if you’re emailing a VC for their advice, their capital, or for a referral to someone else in their network of investor contacts.

Think about it this way: If a VC asked their inbox-watching assistant what your business wanted, could they reply in one, quick sentence?

That’s important; if you can convince someone with less experience to push your email forward based on a simple ask, your chances of gaining approval from top-tier level VCs in the next round also improves.

Examples:

• I’d love your feedback and expertise about how we should scale profitably in this market.
• We’re asking for $100k to meet our $500,000 goal.
• I’m happy to connect however you prefer.

Before you hit the send button, don’t forget to add your contact information.

6. Close with a Signature and Your Contact Info

There’s nothing worse than trying to get in touch with someone who just wrote an awesome pitch and finding zero contact info at the end of their email.

A solid email signature should include:

• Your first and last name and title
• Phone number (cell and work)
• Company address
• Website address
• Work-related social media links (i.e., your LinkedIn page)

Here’s where you’ll present yourself, not your brand, to your VC. And if you pass the test of marketing yourself, you’re a step ahead of most cold emailers.

7. Finish with a Strong CTA

Your VC will have a lot to think about by this point (if you’ve followed our lead) so don’t give them any more homework.

So decide one action you want your VC to take and then tell them exactly what you want them to do. No thinking required.

Examples:

• Check out our attached deck for more info!
• Find more financials in our one-pager.
• Let’s connect on [their most active social media platform].

8. Attach Your Deck or One-Pager

Give your VC the ability to peruse the details of your brand and make a decision about reaching out or investing their time.

Always have an updated pitch deck or one-pager ready to go. You never know who you’ll virtually e-meet during the day and it provides a great overview of your pitch.

Attaching either of these to your email is the ideal way to give your VC the intel they need without bombarding them with too much information to sift through.

Let’s go over a few other tactics you should avoid.

What Not To Do When Cold Emailing Pitches to VCs

Want to know what increases your chances of a VC hitting the delete button more than misspelling their name?

[Don’t] Start with “To Whom It May Concern” or “Dear Sir/Madam”

You don’t want your VC to think you fired off the same generic email to 17 other investors. Would you read the rest of an email that started so impersonally or would you immediately mark it as trash or spam?

Look up the name of the venture capitalist you want to speak to directly and don’t be lazy. Most VC firms publish their email address online and via their social media networks. This isn’t an application for the local burger joint, ya’ know.

[Don’t] Send it off without getting someone else to vet for Formatting Issues, Misspellings, Grammatical Errors, and General Lack of Attention/Care

We all make mistakes and even the autocorrect spelling wizards don’t get it right 100%. Send your email on a test run to someone else in your company and have them point out all the flaws before a VC does (and sends it to the trash).

[Don’t] Waste your VC’s time with Jargon and Details

Aim for quality, not quantity. Trim any words you can while getting across your brand’s best, most attractive features.

This shows your VC that you value their time and won’t waste it if you partner together in the future.

Your email should be no more than half a page long. Avoid big blocks of text and format your email to make it as easy to read as possible.

Don’t get too deep in the technical jargon of your app’s details either. Your VC wants quick stats; if they have time to read, they’ll probably pick up something more interesting like a paperback.

[Don’t] Pitch outside your VC’s interests

Leo Polovets worked for Google and as an early LinkedIn engineer before becoming a Partner at Susa Ventures. According to Polovets:

“The hands down best way to introduce yourself to a VC is through a mutual connection, so always try that first. Either connect on LinkedIn, mention your shared contact, or best yet, get a warm introduction from your friend or another member of the investment firm.”

If you don’t have this luxury, you’ll need to do a bit of research to find the right VC for your product or service. A VC specializing in health app startups probably won’t have a business plan or need to invest in your subscription drone racing channel.

When you do your homework, try to find connections between your brand and your investor.

Polovets says pitches that mention these connections also form a bond between you and your VC instantly.

If you can’t find any ways to relate to your VC, move on to another one. It’s 10x easier to find a VC who’s looking to invest in your niche than convincing one to take a leap of faith.

[Don’t] Expect a response or take too long to respond if you get one

All cold emails are standard lead generation in that you cast a wide net and hope you land at least one big fish.

Once you form a list of investors to work with, tweak your pitch email slightly to make a connection with each specific VC and keep sending them out.

But don’t ever expect a response.

Sending follow-ups every day is too much. Wait a week and send a follow-up email to touch base. Hear nothing back after that and you may want to try elsewhere.

Let’s say you follow all our advice and a VC responds to your email,

Geoffrey James tells Inc. you have two days at a maximum to move the conversation forward because:

• VCs have a short attention span, so it’s easy to get off their radar.
• VCs like go-getters, not procrastinators.

Let’s talk about putting them together to create a cold email pitch template you can reuse whenever you find a VC to partner with.

Putting The Pieces Together:
Cold Email Templates to Pitch to VCs the Easy Way

Customize these basic template examples to make your brand shine for every VC you email:

Template 1

Hi Olivia!

My name is Ted and I’m one of the co-founders of RateYourCup, a social media site for coffee addicts to share and rate their favorite local brews.

I’m reaching out because you backed BeerReviewsNearYou, which I’m a huge fan of, and I wanted to get your advice about taking our site to the mobile app market.

BeerReviewsNearYou and RateYourCup operate on the same idea and could have the same mega earning potential.

You probably don’t have time to meet for a cup of the city’s highest-rated coffee, but if you’d share a few minutes of your time, I’ll send a hot cup straight to your office.

Attached you’ll find our pitch deck with more info.

Thanks for your time — I look forward to hearing your reviews about a different sort of brew in the future!

To get all 6 of our cold email templates, click here to download the swipe file.

Send The Pitch and Find Out which VCs are Viewing and Sharing your Files

Attach your pitch or one-pager to your cold email and you won’t ever know if your VC actually opened them or chucked your email in the trash.

Using Digify’s email plugins, send secure files right from your email inbox — and track their activity. You’ll receive mobile notifications anytime your files are accessed.

Digify lets you see:

• Which VCs opened and viewed your files
• How long each file was opened
• Where it was opened from
• How many times your file was opened
• If your file was printed, shared, or downloaded

You can even revoke access if you don’t want your files hanging around when a VC acquires a competitor of yours.

Partner with Digify’s virtual data rooms and you’ll never wonder if your VC saw your pitch — even if they never respond to your well-crafted cold email.

Hopefully, at this point, you’ve cultivated a group of advisors who can give you some solid advice, but more than anything, you could also benefit from the experience of those who have been where you are standing.

Therefore, we’ve compiled a cross-section of advice from startup founders who have been through the experience of raising venture capital – from seed/angel rounds through Series A and beyond – and in most cases went through the “funding wars” recently and experienced the same conditions you face.

In some cases, their advice could conflict because it’s important to realize each startup is different, each founder is different and each of you is going to have a unique experience as you go through your fundraising efforts, so you have to find the avenue that works best for you and your company.

One tool each startup will need is a virtual data room, so after you absorb the lessons from these founders, check back with us to get started with your VDR.

While we only touch on one point from each founder, you can follow the links to their articles for an even greater spectrum of advice.

1. Gut Check

Matt Barba
Company name: Placester
Category: Advertising, Internet, Marketing Automation, Real Estate
Founded date: 2008
Raised $$$ in Funding: $100.9 million through 7 rounds

“Before you take the plunge, double, triple and quadruple check that this is what you want. If you’re not ready to be in it for the long haul, raising money could be a major misstep for your business… raising money isn’t just about funding your business —it also means making commitments to investors, employees and customers.”

– Matt Barba on Entrepreneur

Your life and your role in your company will change dramatically once you make the commitment to raising venture capital. Hence, Barba recommends you really search your soul before you even begin to make sure that’s the right decision for you, your family, and your company.

If you’ve done a seed or angel round of fundraising, you already realize you’ve had to give up a little control of your company as you become more beholden to your investors.

Preparing for Series A funding also requires a more solid structure to your company, assurance that you have an active Board of Directors in place. You will also go through your due diligence process which entails having all of your financial data and intellectual property information in order and readily accessible to potential investors. A virtual data room will allow you to organize this information in one spot and allow access to it as investors progress along your pipeline.

But most of all, you need to understand that running this kind and size of operation will take you further away from the work and passion that drove you to start the company. Not too many founders start a company with the idea of becoming an administrative leader, but as the CEO of an investor-funding company, that will become a large part of your role.

2. Is Your Team Ready?

Joel Gascoigne
Company name: Buffer
Category: Apps, Internet, Social Media
Founded date: 2010
Raised $$$ in Funding: $3.9 million in 3 rounds (1 seed, 1 angel, 1 Series A)

“It literally takes months to raise funding, and it’s a full-time task easily capable of creating enough work for two people.” – Joel Gascoigne on raising funding as a first-time founder | (Click to Tweet)

In that vein, Gascoigne recommends you make sure you have a team in place — even if you have a partner or partners — that can keep your company advancing toward your goals while you are out of the equation.

Beyond having all of your documentation and financials prepared for making the rounds with VCs, you must be prepared to meet with potential investors at any moment. Investment managers are busy meeting with and evaluating hundreds of startups, and you need to be prepared to meet on their schedule, not yours. If their schedule changes, you need to be flexible enough to change your schedule. Esteban Reyes of Las Olas VC says founders should be ready with an answer to any VC inquiry within 24 hours. If you’ve prepared well in advance, answering those questions should just be a matter of directing them to the proper documents in your virtual data room.

If you found your angel investor over a coffee meeting, you need to understand that closing the deal with a VC fund will require multiple meetings.

Download this due diligence checklist and find out which documents you should prepare ahead.

3. Find Great Co-founders

Eddie Lou
Company name: Shiftgig
Category: Apps, Hospitality, Recruiting, Software
Founded date: 2012
Raised $$$ in Funding; $56 million in 4 rounds

“Find partners who have similar values yet different functional skills. To find great co-founders, network diligently and don’t be afraid to share your idea. Be comfortable having candid and open conversations about roles and responsibilities from the beginning.” – Eddie Lou on YFS Magazine | (Click to Tweet)

If part of building that team means bringing in co-founders, it’s important to choose partners who share the same values but can also fill gaps in your organization. If you’re great with vision, you might consider a partner who can serve as chief operations officer to make sure all the day-to-day tasks are organized. Or maybe you  need someone to manage a financial department, or a marketing expert.

Beyond onboarding these individuals as partners, you might just seek people who are willing to serve an advisory role. As you get into venture capital funding, having well-recognized individuals on your board who can advise about key functions could be sufficient.

But be sure they share your values because creating conflicts about the operation of the company just to appease potential investors could work against your ultimate goals as a startup founder.

4. Focus on Traction

Ajay Yadav
Company name: Roomi
Category: Android, Apps, iOS, Location Based Services, Mobile, Real Estate
Founded date: 2015
Raised $$$ in Funding: $17 million in 7 rounds (6 Angel/Seed and 1 Series A)

“Substantial gains in marketplace popularity impress investors more than any other metric. Focus on building your user base from day one. … The early traction we gained demonstrated to potential investors a genuine marketplace need and interest in our platform.” – Ajay Yadav on AlleyWatch | (Click to Tweet)

Yadav would disagree with Lou about bringing in co-founders as he didn’t want to give up a share of the pie he had put all his effort into baking, but the two agree strongly on the importance of building traction before you consider seeking venture capital.

While seed and angel funding frequently are awarded based on the founders’ idea for a product or service, Series A funding requires financial proof of a product’s or service’s viability. Seed/angel investors go into relationships knowing there’s a high probability of losing money on their investment, but venture capitalists expect a big return on their investments.

Building a customer base not only creates proof of a market, it also creates a base of evangelists who promote your brand to the next tier of customers. VCs love to see evangelists.

5. Start Early

Jay Radia
Company name: Yieldify
Category: Email Marketing, Publishing, Software
Founded date: 2013
Raised $$$ in Funding: $17.7 million in 4 rounds

“I generally recommend raising money 12 months before you think you’ll need it. Considering that 29% of startups fail because they run out of cash, this gives you a nice cushion in case the fund raise takes longer than anticipated.” – Jay Radia on Fortune

Radia went on to note that his latest round of fundraising started nine months before he was due to run out of cash, so he was cutting it close by the time all the deals came together.

Without that time cushion for planning, many startups, if they don’t fail , find themselves lurching from one seed/angel funding round to the next as they try to establish that traction needed to jump into Series A funding. Fewer than half of seeded startups make it to a Series A round.

As far as the timing for when you really want to make the ask, Radia says, his experience with 14 startups has proved the fourth quarter to be the best time. He noted first quarter is normally budget time and summers are slow because of vacations. By the fourth quarter, investors are trying to meet their targets for the year so often will speed up a deal to get it completed before January 1.

Check out this free ready-to-use checklist for organizing your fundraising and due diligence documents

6. Raise More than You Need

Joseph Walla
Company name: HelloSign
Category: Document Management, Legal, Mobile
Founded date: 2011
Raised $$$ in Funding: $32 million in 3 rounds

“If you’re killing it, you now have extra fuel to put in the fire. You can take advantage of a game time opportunity, rather than needing to immediately raise more capital, which takes time.” – Joseph Walla on TheNextWeb

Walla says he fought his advisor on this idea during this first angel fundraising for HelloFax, but because interest remained high, his advisor pushed him into raising double his original goal, which actually gave the company the money to launch HelloSign.

Subsequent funding rounds also surpassed their goals, giving Walla time to focus on growth before he needed to launch the next funding round.

Having extra cash on hand also lets you move quickly should you find an opportunity to buy out a competitor, launch a new product or expand into a related field.

Put All the Pieces Together

Making that step from angel/seed-funded startup to Series A funding will be the greatest challenge you’ve faced to date in building your company. VC investors say only 0.5 to 1 percent of startups succeed in gaining venture capital, so you need to perform your due diligence to attain that elite status.

Heeding the advice of successful startup founders cannot guarantee your success, but it creates many useful tools for your effort.

The first step to getting you on the route to successful VC fundraising is to download our free due diligence checklist to begin preparing your pitch for that elusive venture capital funding. Then learn more about building and organizing your virtual data room for maximum efficiency as you begin to reach out to potential investors.

At this point, you’re already organizing your virtual data room for all the fundraising and due diligence documents. Before you dive into your investment goals, however, it’s critical that you understand these key tips.

The face of venture capital financing has changed substantially over the past several years. Today’s investors are looking for a very different set of milestones before they’re willing to commit the funds your business needs. By ensuring that you’re ready to raise your Series A round and that you know the major things that will help influence its success, you’ll improve your odds of getting in contact with the right investors and having them recognize the worth of your business.

Tip #1: Series A funding readiness may not look like you think

You know that you need more venture capital for your company, and you’re ready to go that extra mile to get it — but is your business really ready to start raising venture capital? Many founders jump into the process long before the business is really set up to handle it — and as a result, they may not be able to secure the funds they need.

The milestones for raising this round are very different from the seed or angel rounds. Make sure that your business is truly ready by looking for these key characteristics:

• You have a valid business model that can quickly be scaled and adapted according to the changing needs of your company
• You have promising unit economics
• You’re generating revenue on a smaller scale than what you can manage with the funds you’re asking for
• You know where your product fits within the current market
• You’ve started drumming up customers and have a good idea where you need to go in order to reach more of them
• All of your legal documentation and compliance forms are in order and up-to-date

Realistically, you’ll know that you’re Series A ready when a VC will open your email pitch and offer you investment as a result. You’ve achieved something that works, whether that’s an outstanding business model or a successful product, and all you need in order to take your business to the next level is funding. By ensuring that all of the other pieces are in place before you choose to write your pitch, you increase your odds of hearing a yes and that will help push your business towards success.

Keep in mind, too, that different organizations have different requirements for Series A funding support. Make sure to carefully research the VC firms you’ve chosen to approach before putting your proposal together. Then, check out this due diligence checklist to make sure you have everything in your virtual data room to secure VC investments.

Tip #2: Timing matters

When you’re ready to dive into the Series A funding pool, it’s not just about ensuring that your ducks are in a row and that you have your paperwork — and your business model — in order. You also want to be sure that you’re choosing the right moment to make your pitch. November and December, for example, are notoriously difficult times of year to meet your goals.

You should also pay careful attention to the season when your business will most benefit from raising funds. If you have a seasonal business, make sure to do your fundraising before you need the capital to help boost your business through that important season.

Tip #3: Networking is critical to success

You’ve spent a lot of time building a network dedicated to your overall business success. Now, it’s time to leverage that network — especially the people that you’ve already built in-depth relationships with. Securing an investment from an organization doesn’t happen overnight. Like any other relationship, you must build trust over time, showing your business to be trustworthy and capable.

Ideally, you want to meet with your potential investors as early in the process as possible in order to give them a better idea of who you are and what you’re hoping to accomplish. Just like you wouldn’t offer a loan to a “friend of a friend” you’d just met without a compelling statement of their character, you can’t expect investors to dive in and offer money the first time you meet. Instead, bring investors on board when you have a working prototype or something else you can show them, then give them an idea of your future business goals.

As you continue to prove that you are trustworthy and that you’re meeting those important milestones, you’ll find that it’s easier to attract the investors your business needs. Fundraising is like a marriage: you need a deep relationship with your investors in order for them — and you — to fully benefit from it. 

The dots represent the times you’re meeting a particular investor — starting with a dot. If the investors see that a positive pattern over time in the form of the product updates or customer adoption, then they can tell that you’re making progress in your business.

A word of advice from entrepreneur-turned-VC Mark Suster,

“Meet your potential investors early. Tell them you’re not raising money yet but that you will be in the next 6 months or so. Tell them you really like them so you want them to have an early view (which is what all investors want).”

It’s important to note that seed round is often easier to acquire than series investments. You’ll need to leverage your network more completely when you’re attempting to secure Series A financing than you ever have before — and you’ll need to do it as early in the process as possible to give investors time to understand what you’re trying to accomplish and come on board.

Tip #4: You need a compelling narrative

Your narrative is one of the most important selling points of your business. You don’t just want to present raw facts and figures to potential VCs; instead, you want to give them a strong look at your story. Give potential VCs a look at your story.

What does your background look like — especially the parts of your background that give you experience in your industry? What problems have you found in the world that your business has the potential to address, and how are you planning to meet that goal through your new business? How is your solution going to transform the world or the way people look at similar problems in the future?

This article on Forbes explains how telling a compelling narrative will help potential VCs want to become part of your story. As Mosaic co-founder and CEO Gerard Murphy notes, “Humans are hardwired to love a great story.” The better the story you tell, the more interested VCs will be.

Tip #5: Your pitch should be smooth and practiced

You should never walk into a meeting with a potential investor planning to “wing it.” Securing these funds is serious business, and you want to be sure that you have the right attitude and the right words from the start of your pitch to the end.

These strategies can make it easier to create a great pitch that will help you meet your goals.

• Take the time to put together a thoughtful, practiced pitch that has all of the key details.
• Shorten it down to the “elevator resume” version, then expand it so that you always have the right keys on hand for any room of investors.
• Work with other founders to refine your pitch. They’ll be able to give you advice that will help you succeed.
• Listen for objections and obstacles, then prepare responses to them. This will help you be prepared for whatever comes up when you’re actually issuing your pitch.

Jake Fisher, one of the founding partners of Venture Formations, gave really good techniques on how to perfect your pitch. He recommends practicing your pitch in an environment similar to the one where you’ll actually be giving it in order to create higher levels of confidence in both yourself and your pitch — a strategy that can make it easier to approach the VCs you’re hoping will invest in your business.

Tip #6: Put your paperwork in place early

Your paperwork is one of the most critical steps to finishing the Series A process. How long it takes you to raise the money you need will vary based on the VCs you approach, how much they’re willing to invest in your business, and how much money you need as well as your other fundraising goals.

Having your paperwork in a ready-to-access data room will shorten that time and make it easier for you to get your funds. Make sure you’ve gathered:

• Any information about employees (both past and present if relevant)
• Past financing information
• Your corporate structure
• All client and third-party contracts
• Intellectual property information

All this information should be in place and waiting for your investor’s legal counsel, enabling them to quickly look over the paperwork and make relevant decisions about their investments in your business. Get a copy of this investment due diligence checklist to help ensure that all of your paperwork is in order!

Tip #7: You want the right VC

Knowing who to pitch your investment needs to is just as critical as how to pitch them. You want to start with VCs who are already investing their funds in your industry. Take the time to get to know the investment scene: who’s investing? Who has backed off recently? The better you know potential VCs, the better you can connect with them moving forward. 

Following the 30-10-2 rule can help your business see the investment success it needs. Familiarize yourself with the startup investment scene. Find a way to get warm introductions to 30 potential investors. From there, 10 are likely to want to meet you and 2 of which might want to invest in you.

Realize that if you don’t acquire those two investors from your initial 30, you may have to start the process over again — but don’t oversell yourself, either. If you reach out to too many VCs, you’ll find that many of them are no longer interested in what your business has to offer.

Remember, VCs want to find new things that no one else knows about, then put their funds behind them — and your goal is to become that investment.

Tip #8: Your deal terms matter

When you close that initial deal for Series A, you may breathe a sigh of relief. Even if it doesn’t go as you expected, at least it’s over!

The terms of the deals you write for Series A, however, are unlikely to disappear. Many of them will follow you into your Series B and C efforts and beyond. For that reason, it’s important to make sure that you get the terms of your investor funding right the first time. Work with other founders or a trusted mentor to ensure that you get the terms right the first time.

Tip #9: Close fast

When you see that you have traction with a VC or series of VCs, taking advantage of that traction will make it easier to secure the last of that round of investment. Let VCs know that you have X amount, and that you’ll be closing the round in a certain, usually short, amount of time.

For example, you’re within $300,000 of your goal, so you’ll be closing this round in just two weeks. This will encourage VCs to bring in other interested parties — not to mention motivating investors who might previously have been on the fence about contributing to your company.

Your startup fundraising efforts are a critical part of securing the success you need for your business. By following these key points, you’ll find yourself better positioned to handle the demands of Series A financing, securing the support you need from investors and positioning you as one of the newest up-and-coming members of your industry.