# Fundraising Playbook From timing to close. What investors actually look for, how valuation works, and the term sheet clauses that matter. --- ## 1. When to Raise **Optimal timing:** ``` Target: 18-24 months runway post-close Minimum: 12 months runway post-close (leaves no buffer for slip) Start process when: 9-12 months runway remaining → 3-6 months for process (typically 4-5 months for Series A/B) → Leaves 3-6 months buffer if process drags Never start when: < 6 months runway → You're negotiating from desperation → Investors can smell it → Terms get worse, or you don't close at all ``` **Rule:** Your leverage is maximum when you don't *need* to raise. Raise from a position of momentum, not necessity. --- ## 2. What Investors Look For at Each Stage ### Pre-seed - Team (are these people credible for this problem?) - Problem clarity (is the problem real and meaningful?) - Early signal (any customers paying, waitlist, prototype) - Market size (worth building a VC-scale company?) **Typical ask:** $500K–$2M | **Typical valuation:** $3M–$10M pre-money ### Seed - Product-market signal (customers using and paying) - Founding team with domain expertise - ARR: $100K–$1M (or strong usage for PLG) - Clear hypothesis for what Series A looks like **Typical ask:** $2M–$5M | **Typical valuation:** $8M–$20M pre-money ### Series A Investors are buying a *repeatable sales motion*. Not just customers — a machine. **What they need to see:** - ARR: $1M–$5M growing > 100% YoY - LTV:CAC > 2.5x (and improving) - Net Dollar Retention > 100% - CAC Payback < 18 months - Gross margin > 65% - At least 5-10 reference customers (not just lighthouse) - Sales motion that converts without the founder closing every deal **Typical ask:** $8M–$15M | **Typical valuation:** $25M–$60M pre-money ### Series B Investors are buying *scalable go-to-market*. Can you pour fuel on the fire? **What they need to see:** - ARR: $5M–$20M growing > 100% YoY - LTV:CAC > 3x, CAC Payback < 18 months - Sales capacity model (hiring plan → pipeline → revenue) - NDR > 110% (expansion motion working) - Some proof of market expansion (new segments, geographies, use cases) - Path to category leadership **Typical ask:** $15M–$40M | **Typical valuation:** $60M–$200M pre-money ### Series C and Beyond Investors are buying *market leadership* and *path to profitability*. **What they need to see:** - ARR: $20M+ (often $30-50M for credible Series C) - Rule of 40 > 40 (or credible path) - Gross margin > 70% - NDR > 115% - Evidence of market leadership (brand, win rates, analyst mentions) - Clear path to $100M+ ARR --- ## 3. Valuation Methods ### Revenue Multiples (Primary Method for SaaS) ``` Pre-money Valuation = ARR × Revenue Multiple Revenue multiple benchmarks (2024-2025): > 100% YoY growth: 8x–15x ARR 50-100% YoY growth: 4x–8x ARR 20-50% YoY growth: 2x–4x ARR < 20% YoY growth: 1x–2x ARR Adjustments: NDR > 120%: +1x–2x premium Gross margin > 75%: +0.5x–1x premium Burn multiple < 1x: +0.5x–1x premium Capital efficient: Investors pay up for efficiency Declining growth: Compress multiple aggressively ``` ### The Investor's Math (Know This) Every VC has a required return. Work backwards from their constraints: ``` Investor targets: 3x fund return Fund size: $200M, check size: $15M (initial), $25M (with follow-on) Ownership at exit needed: 15% At 15% ownership: needs $25M / 15% = $167M post-money valuation Exit needed to return 3x on that check: $25M × 10 = $250M company value (10x because most deals fail, winners must carry the fund) Implication: If you think you'll exit for $150M, that VC will pass or price you accordingly. ``` This is why Series A investors rarely lead rounds where they can't see a $300M+ exit path. It's not about your business being bad — it's about fund math. ### Comparable Company Analysis For later stages (Series B+): ``` 1. Find 5-10 comparable public SaaS companies 2. Calculate their EV/NTM Revenue multiples (use latest data) 3. Apply a private market discount (typically 20-40% vs public comps) 4. Adjust for your growth rate relative to comps Example (2024): Public SaaS comps: 6x NTM Revenue (median) Private discount: 30% Adjusted: ~4.2x Your NTM Revenue: $8M Implied valuation: ~$33M pre-money ``` ### DCF (Late Stage Only) DCF is unreliable for early-stage startups (terminal value dominates, growth rate assumptions are fantasy). Use it as a sanity check at Series C+, not as the primary valuation method. --- ## 4. Term Sheet Breakdown ### Liquidation Preference (Most Important Economic Term) This determines who gets paid first in an exit — and how much. ``` 1x Non-Participating Preferred (BEST for founders): Investor gets 1x money back OR converts to common (their choice). At acquisition: investor takes larger of {1x invested} or {% ownership × proceeds} Example: $10M invested, exits at $100M, owns 20% Option A: $10M (1x) Option B: $20M (20% of $100M) Investor takes $20M. Founders split $80M. 1x Participating Preferred (WORSE for founders): Investor gets 1x money back AND participates in remaining proceeds. Example: same scenario $10M (1x) + 20% of remaining $90M = $10M + $18M = $28M Founders split $72M instead of $80M Cost to founders: $8M (10% of exit value) 2x Participating (RED FLAG): Investor gets 2x back AND participates. Only accept under duress. Push hard against this. Full Ratchet Anti-Dilution (AVOID): Down-round triggers full repricing of investor shares to new (lower) price. Founders get massively diluted. Never accept if alternatives exist. ``` ### Anti-Dilution Protection ``` Broad-based weighted average (standard): Adjusts investor conversion price based on all dilutive securities. Most founder-friendly anti-dilution. Accept this. Narrow-based weighted average (slightly worse): Same mechanism but uses smaller denominator. Gives investors slightly more protection. Usually acceptable. Full ratchet (avoid): Price drops to whatever the new round prices at. Devastating in down rounds. Fight this. ``` ### Pro-Rata Rights ``` Standard pro-rata: Investor can maintain their % ownership in future rounds. Reasonable. Accept for major investors. Super pro-rata: Investor can increase their % in future rounds. Caps your ability to bring in new lead investors. Avoid unless the investor is exceptional and you want them in future rounds. Major investor threshold: Typically investors with > $500K–$1M check get pro-rata. Don't give pro-rata to every small check — clogs future rounds. ``` ### Board Composition ``` Seed (3 members): 2 founders, 1 lead investor Series A (5 members): 2 founders, 2 investors, 1 independent Series B (5-7 seats): Watch for investor majority — negotiate hard Rule: Founders should retain majority through Series A. Independent director should be your choice, not investor's. Never accept investor majority before Series C. Board observer rights: Common for smaller investors. No vote but present in meetings. Limit to 1-2 observers or meetings become unwieldy. ``` ### Other Terms That Matter ``` Drag-along: Majority can force minority shareholders to vote for acquisition. Standard and reasonable. Check what threshold triggers drag. Information rights: Investors get financial statements. Standard. Monthly for major investors, quarterly for others. Redemption rights: Investors can force buyback after X years. Push to remove or add carve-outs for insufficient funds. No-shop clause: You can't shop the term sheet to other investors. Standard (14-30 days). Reasonable. Exclusivity: Stronger version of no-shop. Sometimes includes no other fundraise discussions. Acceptable for 30 days; push back on > 45 days. ``` --- ## 5. Cap Table Management ### Dilution Planning Model Run this before every round. Know your number before walking into any negotiation. ``` Pre-Seed Post-Seed Post-A Post-B Post-C Founder A 45.0% 36.0% 26.5% 21.2% 18.7% Founder B 45.0% 36.0% 26.5% 21.2% 18.7% Angel 1 5.0% 4.0% 2.9% 2.4% 2.1% Angel 2 5.0% 4.0% 2.9% 2.4% 2.1% Seed Fund - 12.0% 8.8% 7.1% 6.2% Option Pool - 8.0% 12.0% 10.0% 8.0% Series A - - 20.4% 16.3% 14.4% Series B - - - 19.5% 17.2% Series C - - - - 12.6% Round size / pre-money: Pre-Seed: $500K / $9M pre = 5% dilution Seed: $2M / $8M pre = 20% dilution (includes 8% pool) Series A: $10M / $38M pre = 20.8% dilution (pool refresh to 12%) Series B: $20M / $80M pre = 20% dilution Series C: $30M / $170M pre = 15% dilution ``` **Option pool shuffle:** Investors often require you to create/expand the option pool *before* the round closes, which dilutes existing shareholders (not the incoming investor). Model this explicitly — a 20% round with a 5% pool expansion is really 24%+ dilution to founders. ### Cap Table Hygiene ``` Tools: Carta, Pulley, Capshare (all acceptable) Never: Track cap table in a spreadsheet past seed stage. Errors compound. Keep it clean: - Repurchase departed co-founder shares immediately (don't let unvested shares linger) - Convert SAFEs to equity cleanly at each priced round - Document every grant with a board resolution - Cliff + vesting for ALL employees and founders (standard: 1-year cliff, 4-year vest) - 409A valuation required before every option grant (IRS requirement) ``` --- ## 6. Data Room Preparation ### Core Documents (Required) ``` Financial: □ 3 years historical financials (or all history if < 3 years) □ Monthly P&L and cash flow (last 24 months) □ Current financial model (18-24 months forward) □ Budget vs actual (last 4 quarters) □ Cap table (fully diluted, with all SAFEs/convertibles modeled) □ Bank statements (last 3-6 months) Legal: □ Certificate of incorporation + all amendments □ All prior financing documents (SAFEs, convertible notes, stock purchase agreements) □ Cap table (Carta/Pulley export) □ IP assignment agreements (all founders and employees) □ Material contracts (top 10 customers, key vendors) □ Employee list (titles, start dates, salaries, equity grants) Product & Business: □ Product demo / walkthrough video □ Architecture overview (for technical investors) □ Customer case studies (3-5 named references) □ NPS / CSAT data □ Competitive landscape analysis Metrics: □ MRR/ARR by month (all history) □ Cohort retention chart □ CAC by channel □ LTV by cohort □ NPS trend ``` ### What Investors Actually Check First In order of typical priority during due diligence: 1. **Cap table** — Is it clean? Any concerning structures? 2. **Cohort retention** — Is churn improving or deteriorating? 3. **Revenue quality** — What % is recurring? Any one-time or non-recurring? 4. **Top 10 customers** — Concentration risk? Any logos at risk? 5. **Bank statements** — Does cash match what was reported? 6. **IP assignments** — Does the company own its IP? (Founders who didn't assign IP kill deals) ### Red Flags That Kill Deals - Missing IP assignment agreements for founders (most common deal killer at early stage) - Cap table with > 20 angels/small investors (messy, hard to get consent for future rounds) - Customer concentration > 30% in single customer without explanation - Revenue recognition issues (booking ARR on contracts that allow easy cancellation) - Cohort data that gets worse in later cohorts - Bank balance doesn't match reported cash position --- ## 7. Investor Communication Cadence ### During Fundraise ``` Week 1-2: Warm intro sourcing, LP/network mapping Week 3-6: First meetings (aim for 20-30 first meetings) Week 7-10: Partner meetings, deep dives, due diligence Week 11-14: Term sheets, negotiation Week 15-18: Legal, closing ``` **Parallel process is essential.** Never negotiate with one investor at a time. Competition is your leverage. ### Post-Close: Investor Updates Monthly investor update (send within 10 days of month-end): ``` Subject: [Company] Monthly Update — [Month Year] Highlights (3 bullets max): • [Biggest win] • [Biggest learning/challenge] • [What we're focused on next month] Metrics: ARR: $X (+X% MoM) Net new ARR: $X Gross margin: X% Cash: $X (X months runway) Headcount: X Asks (be specific): • Looking for intro to [persona/company] for [specific reason] • Need advisor with experience in [specific area] • [Other concrete ask] ``` **Why this matters:** Investors who are informed and engaged are better positioned to help when you need it. The investor who hasn't heard from you in 6 months is less likely to write a bridge check or make a warm intro when you ask. --- ## Key Formulas ```python # Post-money valuation post_money = pre_money + investment_amount # Investor ownership % ownership_pct = investment_amount / post_money # Dilution to existing shareholders dilution = investment_amount / post_money # as a fraction # New shares issued new_shares = (investment_amount / post_money) * total_post_shares # equivalent: new_shares = pre_money_shares * (investment_amount / pre_money) # Option pool expansion impact (pool shuffle) # Creating X% option pool pre-close dilutes founders: pool_shares_needed = target_pct * (pre_shares + new_round_shares + pool_shares_needed) # Solve: pool_shares_needed = target_pct * (pre_shares + new_round_shares) / (1 - target_pct) # LTV:CAC ratio ltv_cac = ltv / cac # target: > 3x # CAC payback (months) payback_months = cac / (arpa * gross_margin_pct) ```