Matt Paulson breaks down convertible debt mechanics, pitching strategies, and deal closing. A nine-word fundraiser email drove $2–3K of a $20K total, showing how brevity works in asks.
Episode 25
May 22, 2017
About $20,000
Approximately $2,000–$3,000
Hey everybody, Matthew Paulsen here. Today we are going to finish our two part series on venture capital. We are going to talk about deal structure, PPM documents, preparing to pitch and due diligence. Let's do this. This is officially episode 25 of Startup Q and A, the online video show that helps small business owners, startup founders and entrepreneurs grow their businesses faster and and achieve their dreams of financial freedom. So whether you're just getting started or if you have 100 employees, this is the show that will give you actionable ideas and advice that you can implement in your business. Now today we are going to finish a two part show on raising money for your business. Last week we provided a general overview of what raising money looks like in the venture capital world. Today we are going to discuss deal structure, PPM documents, preparing to pitch and then due diligence as well. Well, so these two episodes were inspired by some questions from my friend Lisa Gruen. So Lisa, I'm going to do my best to answer your questions again today and hopefully this will be a resource that is helpful to you as you go on a quest to raise money for your business. Maybe. So this episode will focus on to the pitch, you know, preparing the pitch, making a pitch after the pitch, what the whole process looks like, and then finalizing the deal and getting the money in your bank account. That's what we're talking about today. So before we dive into the questions and go any further, let's move on to the tip of the week where I provided you a tip, trick or idea that will help your business, grow your business faster or achieve your dream of financial freedom. So this week's tip, not directly related to venture capital, but still a very good tip, is to write shorter emails to your audience. So if you want your subscribers to actually read your email and do something, so send them a one sentence email in the form of a question and then give them a single call to action. So when I do this, I did this for a fundraiser I was doing for the March of Dimes. They have an annual March for babies event. I'm on their board so I thought I would raise some money. Sent an email to the markbead audience and I just said, hey, are you still interested in helping raise money for the March of Dimes through this fundraiser question mark? And the next line said if you are, click here to make your contribution then Matthew Paulson and then you know, my email signature, that really short email raised probably, I think between two and three thousand dollars for my campaign from one email. It was probably Twice as effective as the email before that. I guess I had about 10 emails in total. We raised about 20 grand. And I think that single email was the one that had the best traction. So when we send out these kind of one these really short emails, the digital marketer crowd calls these like nine word emails. And they don't have to be nine words, but that's what they call them. I see open rates that are typically about twice as high, click through rates that are twice as high as my normal email. And the reason these emails work so well is that because since they're so short, people actually take the time to read them. When you see a long email, your eyes just kind of glaze over and you skip on it and you don't want to do it because it's work. But with an email so short you can't really help but read it and they just work really well so they take less time to write. They tend to get higher open rates, tend to get higher click through rates. Obviously not every email can be a nine word email, but, but you can certainly use them as part of your campaigns. Have a nice short email, maybe ask for a response. You tend to get really good open rates. So that is the tip of the week. Let's dive into the questions. Every week we take four or five questions that are submitted through Facebook or through our website and we try to answer them. So if you would like to have your question answered on a future episode of Startup Q and A, go to the domain Startup Q and A Co fill out the form to submit your question. These questions are all again asked by my friend Lisa. So we are going to try to answer Lisa's questions today. The first question is what are some different ways that you can structure your deal? So not every deal is like shark tank where you get, they say, I'll give you 10% of my business for $100,000. That's considered a straight equity deal. Certainly some deals are set done that way, but not all the deals are done that way. Many early stage deals are also done in the form of convertible debt, which is basically a loan with an interest rate that converts to equity if something happens at some point in the future like they raise a bigger round of money. A bigger round of money. So you might hear something like we're raising a million dollars in convertible debt at an 8% interest rate at a 5 million dollar cap and a 20% discount. So what all this jargon means is that they want to borrow a million dollars, they want to raise a million dollars in capital and they're willing to pay an 8% interest rate on that money. And if they happen to raise a larger equity round in the future, your debt balance, typically they won't make payments on it, it'll just your balance will grow. You will convert at whatever the round valuation is. So say we raised money at $8 million instead of $5 million. Since that 5 million dollar cap was in place, your money converts at $5 million with a 20% discount which would actually be like so okay, so it would be $8 million is your round, a 20% discount is 6.4 million. But since you had a 5 million dollar cap, it would convert at a 5 million dollar cap in interest, it would convert at a $5 million valuation. And then whatever money you had accrued in interest, that would also convert to equity at that 5 million dollar valuation. So the reason companies do convertible debt, the math is kind of complicated. I fully admit that it's is because they don't really know what valuation their business is. It's too new, too small.
