I had a discussion the other night with an entrepreneur about whether to include specific deal terms in the pitch deck or investor meetings. Unfortunately, there is a lot of contradictory advice on this subject. On the one hand some say that investors want everything laid out clearly, but on the other some say that investors do not care. I believe the best approach is to take the middle of the road so as to increase the chances of garnering serious interest and commitments.
Investors all have particular preferences and you are not going to hit the hot buttons on every introduction. There will also be plenty of times where you unwittingly hit some of the wrong buttons. As mind-reading is not a skill that has yet developed in mankind, your job is to be thorough enough with the information while leaving yourself plenty of openings and flexibility to maneuver.
On a tangent, it is also important to note that some investors are simply not worth pursuing. If the information requests start to border on ridiculous, move on. An investor that gets caught up in the minute of what is on certain slides and nitpicking on specific terms is either not really excited about you, your team and your idea or they are a noob investor. Either way, you are spinning your wheels and wasting precious time that can be spent on experienced investors that show genuine excitement for your startup.
There are seven main points to consider when talking about the structure of the deal:
- Raise – The amount of capital you are raising. You always include this number which should be on the upper range of what you have calculated as your cash runway for the next 18 months.
- Type – You can either raise a debt round as a convertible debt note or an equity round. There are pros and cons of debt and equity rounds both approaches which you should rigorously research before setting this in stone.
- Price –The amount it will cost the investor to buy-in to get some share of company. This would be things such as minimum investment amount, valuation, number of shares, and percentage of ownership.
- Closing – This would refer to when you expect to close the round (when all paperwork is signed and funds wired to the startup). Note there are different approaches to closing a round such as a traditional target date or rolling close.
- Terms – Specific contractual elements governing deal. These include discounts, caps, rights, protections, liquidation preferences and other matters that determine what eventually happens with the investors’ ownership stake.
- Use of Proceeds – Explanation of how the capital is going to be used. This is a rough sketch of what the money will be used for, what your estimated monthly burn rate is going to be (in a min-max range) and how long the cash will last.
- Progress –This describes the milestones you have achieved in funding process. As you progress, you can include lead and/or committed investors, amount raised to date, incubator/accelerator programs , and previous funding raised.
The best way to organize this information is to think of three buckets; what you are asking for, what your funding process is, and why you are asking. In this way, you can structure the conversation and presentation accordingly.
- The Ask – You are essentially explaining what you are asking them and what they get in return. This would include the Raise, Type, Price and Terms information. You can also include key terms that would matter most. For example, in a convertible note, you would probably want to include whether the round includes a discount and a cap. On an equity deal however, you may want to include types of shares issued, dilution rights or whatever might be unique to your deal. Whatever the situation, include as much relevant information on this slide.
- The Process – This is where you discuss how you are closing the deal. This would includes Closing and Progress information. If there is little progress to date (as you just started the process), then this is unnecessary. In that case, you can place the Closing information on the Ask slide.
- The Usage – This is the Use of Proceeds information. An important point is that this should not be a spreadsheet with infinitesimal amount of detail on every conceivable dollar spent. This is simply a top level categorization of how money will be spent, the burn rate and the runway you are giving your startup. Do not just put random numbers here however, go through the effort of determining what salaries, office space, marketing events, customer acquisition and other costs will be so that you do not over or underestimate the amount of funding you need. Investors many drill you on your assumptions, so it is best to be prepared.
Most recommendations seem to state that you should not include much information, particularly when it comes to terms and use of proceeds, but there is little downside of including this. By not including some details and specifics, you lose the investors that yearn for details, while the investors that do not care will just bypass the adding data. If you are concerned about offending one camp over the other, you can build your pitch deck in such a way to include highlight of the three buckets in one slide, then make reference to a detailed set of slides in the appendix.
The last bit of advice would be to keep it simple and stick as closely to standard terms and deal structures. Experienced investors are familiar with the standard terms and will be better able to evaluate your deal focusing on more important things like your team, the product, traction, and the market opportunity. Also by keeping it simple and standard, you are leaving the conversation open to suggestions and modifications that might be important to certain investors such as pari passu rights, participating preferred shares or board seat representation.