How Investors Value Startups | Expert Insights from Neil Shah

A question says, how would founders approach equity negotiations with angel investors to maintain sufficient control over the company?

Great question, great question. So this depends, right? This depends on the value add. Everything is control and economics. Let's just start there. That's the two things that happen between an investor and a founder. So I would look at what the investor can add beyond a check.

Hello everyone. Welcome to today's event. This is Sanae. I'm part of the marketing and sales team at Founder Institute, and I'm very happy to welcome you today. Please let us know in the chat from where you're joining. We're expecting over, uh, the signups are here for this event are over like 500 signups. So we're expecting like 40% of those to be in the event. We have people from Los Angeles, like keep, keep sending from where are you from guys in the chat. It's nice to meet you all. Poland, Colorado, Washington. Yeah, Vienna, Europe, Berlin. Yeah, I have some people from Europe, Canada. Nice to meet you all, everyone. Um, this event, uh, we've been like hosting a lot of AMAs events before, and we keep getting the question, how do I value and know my startup's worth? So we have created this event just for you We have brought an amazing speaker today to answer this question. But before I invite him to the stage, I'd like to walk you through some housekeeping rules for Airmeet. So the agenda for today will be our speaker will give you like a presentation, a very good presentation to help you to walk you through the topic. And then we will move to the Q&A. So when we move to the Q&A, please make sure you put your questions in the Q&A section, not in the chat, so that we can put them on the screen for our speaker to answer. And feel free to also interact with our speaker through the emoji bar at the bottom of the screen. And after the questions, we will have our networking stay. So make sure you stay at the end. We will have networking. Our speaker will be happy to network with you at the end of the session. So without any further ado, I'd like to invite our speaker to the stage. We have with us today Neil, who is an angel investor in fintech. Uh, he actually has two, uh, hats today, but I will let him introduce himself better. Hello, Neil.

Hi there. Hello, everybody. Such a global audience, I love it. I'm gonna go ahead and share my screen, go into slideshow mode, and we'll get started. Thank you, Sonali. Um, so my name is Neil Shaw. Today we'll be talking about foundational equity and fundraising. I currently work at Carta. I do business development and partnerships for VCs and accelerator verticals. I've worked at Drata, HubSpot. I'm a two-time founder and actually launched a Founder Institute chapter in Guadalajara, Mexico in 2020 and 2021. I'm an angel investor in 42 companies now in the US, Latin, EU, MENA, and LP and for funds, and a SoCal native based in San Francisco, but I've lived all over the place. You can get this deck. We're going to share this recording afterwards, or you could always email me at neil.shaw@karta.com as well. Just a brief word from our lawyers. I'm not going to read it, but basically it's just something they need to say. All right, this is our agenda for today. Cap tables for 5 minutes, data rooms, equity compensation, financing instruments, data insights, and Q&A at the end. All right, so what is Karta? Karta is a single source of truth for equity management. We allow you to have cap table equity management, electronic securities, who, uh, to all stakeholders who can accept and exercise on Carta. You can do scenario modeling for sensitivity and breakpoint analysis. You can do one-off transactions for liquidity, tender offers, and stock buybacks. And importantly, you can also do 409(a) valuations, which are audit-ready, fast, cost-effective. And finally, we have the Total Comp, um, which is a benchmarking tool for market data for both cash and equity that is very valuable for We have 40,000 companies on our platform, so we have a lot of data. All right, let's jump into what a cap table is. It's basically a way— it's to show a detailed breakdown of who has an ownership stake in your company. You'll see an example of this on the right-hand side. You manage the ownership stakes of each equity holder and keep track of every security that your company has issued, whether that's shares, stock options, warrants, saves, convertible notes, and who holds them. It's basically your startup's investable story from A to Z. Why you should care as a founder. One, it helps you raise money on better terms and understand your dilution. Dilution being your dilution, being basically your loss in equity over time given to investors, employees, and stockholders. And another thing is that a clean cap table will actually accelerate your VC financings. I'm speaking as an angel investor. When I know there's a clean cap table, when I know somebody's using Carta, I have confidence that they know what they're doing and who owns what. It'll also expand and grow as you grow in size and complexity as your company grows. And so it's important to have the centralized repository, which is everyone's source of truth. What investors zero on in the cap table, the first and foremost is ownership percentage of the founders and key employees and how vested are they. We'll talk about vesting in a little bit. And number 5 here, who are the other investors in this company and what do they hold? Why is that important as another investor? Because I want to see if you have investors that I know, people that I've co-invested with, people that maybe have a bad reputation as well, so I can stay with a big 10-foot pole away from your company. And how much is left in your option pool, right? How much is left to give to employees, founders, advisors, board members, etc.? All right, let's turn to data rooms for just a second here. So the first important thing to have in your data room obviously is your deck, the most updated deck. It can be a DocSend PDF, PowerPoint. The other thing that people generally don't do and they should do more of is show a list of competitors so that you can demonstrate your competitive advantage in your TAM and your market research. The reason people don't do this is because they're scared to think that an investor will look at their presentation and think, oh my God, the competitors are actually better than them. But that's not true. There's a bunch of different ways that you can show you actually have a competitive advantage, and by understanding and showing that you know the market, that's how you demonstrate that. LOIs, uh, letters of intent from any potential customers are super important, especially in the early stages of traction. Obviously, your details about product, tech details, design, and intellectual property. The team in the early stages at pre-seed and seed, there's nothing more important than the backgrounds of your team. Legal formation documents, cap table, and finally, financials. 5-year pro forma balance sheet, P&L, statement of cash flows, unit economics if you have a product that has unit economics, or a techno-economic analysis. Equity compensation. This is gonna be the biggest portion of the presentation. So what should your employees know about their equity grants? They care about one thing essentially. How much equity are they getting in a dollar amount? They multiply the type of the share, type of total number of shares at the strike price per share, and they get the total dollar amount of equity that they receive. Important dates to remember are grant effective date, exercisable date and terms, and the expiration date and terms. And vesting schedule. Vesting schedule is basically giving equity over time that is earned if an employee stays and retains their status at the company as an employee. The most common for startups is 1/48 term with a 1-year cliff. And I'll talk about these terms on the next slide. But basically, if you take 12 months and multiply it by 4, you get 48 months. That's a 4-year vesting schedule. So the vesting period is the length of time or milestone that must be met before employees can exercise or effectively purchase their options. The cliff is when the first portion of an option grant vests. It's typically after 12 months. The early exercise is usually for senior executives, the right to exercise stock options before they vest. And importantly, the PTE period. When I just left my last company, I left after 1 year. Um, I had 90 days to exercise my options post-termination. Um, and I wasn't able to exercise anything because it turned out they have a double liquidity event. So until they had raised another round of funding or go public or get acquired, my shares will just stay in my possession. And then finally, option pool, which is the share of common stock reserved for employees and service providers under an equity All right. The left-hand of this slide talks about stock options. The right side of this slide talks about restricted stock awards. There's a difference. ISOs are most common due to tax advantages in the early stages of a company, and you'll see this on the next slide. Non-qualified stock options are typically for international employees and contractors. The right-hand of the slide is for stock awards. RSAs are typically issued to early employees before the first financing. And RSUs are typically for public and late-stage project companies. The last two companies I was at, HubSpot and Drata, were Series Public and Series C. I got restricted stock units. ISO. So incentive stock options here on this slide is the top, the black bubble. You'll notice that the seed stage around 84% is ISOs and it drops precipitously when you get to Series F or later. The NSOs stay pretty stable because most of our data on Carta is from national US companies. So it's essentially very, you know, kind of stable since there's not a lot of international employees or contractors. And then you'll notice that RSUs start out minimal and jump to 37% by the time you reach Series F. Yes, employees should have vesting schedules, typically 4 years with a 1-year cliff. We talked about the 1 over 48. Employee equity is typically given as ISOs, incentive stock options, although you can give very early employees RSAs as well. If you have any questions about this, just visit that link and it'll teach you about equity and stock options and ISOs. All right. The median equity pool, stock option pool, ESOP, is between 13% to 20% of company equity. If you notice the bar on the very left, we're going to take the $1 million to $10 million range. The 25th percentile is 8.9%, whereas the 75th percentile is 18.5%, and the median is— the, the 50th percentile is 12.9%. But if you go to a billion to a $10 billion company, your option pool jumps to 14.3% at the 25th percentile and all the way up to 25.5% for the 75th percentile. So essentially, your option pool is increasing over time. That's the trend, and you can use these as benchmarks to create your option pool. Consumer startups tend to lag in option pools than other industries. Um, I don't have a great explanation for this, but I can tell you why hardware might have, uh, fully diluted shares dedicated to employees by stage and industry is because hardware generally requires very high and, um, engineers and technical folks and, um, mechanical engineers. So, you know, that high level of retention and talent requires higher levels of option pools to be given out shares. The majority founding teams did not split equity equally at the start. This is a very interesting slide. Two founder teams— only 38.8% of two founder teams split equity equally out of a company's that we analyzed, of 15,000 companies we analyzed. When it gets to 3 founding teams, even less, only 16% out of 9,500 companies split equity equally, um, between the founders. So what did the splits look like in the initial stages? On the left— on the right-hand side, we have the median equity by founder. Obviously, for 1 founder, it's going to be 100%. For 2 founders, the first co-founder, the lead co-founder we call it, it's 55% generally. then the second co-founder gets 45%. If it's a 3-founder team, the lead founder gets 47%, the second founder 33%, the third founder jumps down to 17%. Founder equity, like I said on the last slide, there tends to be a lead founder in large founding teams. So this is just another representation of the last slide, and you'll see as you get to 4 founders and 5 founders, you can use these as benchmarks, uh, for your own equity splits. Um, for your, your growing company. Founders should definitely have a vesting schedule as well, and as well as employees, maybe more important than any other stockholder. Typically at least 4 years because you want them to stay, with generally no cliff, but as long as 6 years. And founder equity is typically given as RSAs, as we talked about, restricted stock units. You'll own the shares as stock units on the date you accept the grant and satisfy any purchase price requirements, but typically the shares will still be subject to vesting conditions, and they're—

yeah, so sorry to cut you off, but can you make sure you're on full screen? Because some people in the audience are saying that the screen is too small. We see it as well, the, the slides, I mean. Yes, perfect. Thank you.

This is full screen.

Yeah, it works now. Thank you.

Oh cool, okay, nice. Um, so yeah, RSAs are considered restricted stock because the shares cannot be freely transferred or traded, which allows the company to stay in compliance with security laws. And RSAs are generally issued by very early stage when the FMV, fair market value, of common stock is very low. This way employees don't need to pay a lot of own money to have ownership in the company, and they won't get hit with a significant tax burden if they receive the shares as compensation instead of purchasing them outright. QSBS. What is that? Qualified Small Business Stock Exclusion allows holders of QSBS like myself as an angel investor to potentially pay zero federal capital gains tax on up to $10 million or 10x my investment when selling my shares. So we actually have a QSBS product at Carta. We wanted to make sure determining a company's QSBS status and obtaining the necessary legal documentation to provide shareholders was simple for founders. So if you have any questions, go to the link on the bottom left and it'll learn— teach you everything you need to know about QSBS. All right, advisors. Only 10% of pre-seed advisors receive 1% or more of equity. If you notice in the pre-seed section here, the median is 0.5% for a pre-seed startup to give to an advisor. And the 90th percentile is 1%. Why is this important? Because when you're hiring your employees, your first employee should be getting about 1% equity. Your advisor needs to provide tons of value to earn their 0.5%. You shouldn't just be adding advisors just to get name recognition, um, or validation in the market without getting something out of it, um, as well. So 0.25% is the 25th percentile, but 0.5% is the median. And then for seed, it drops down precipitously. It goes down to 0.25% at the median, and then even Series A is 0.16%. The median pre-seed advisor grant rose slightly in 2023. Um, this shows the median percent of fully diluted shares granted to an advisor by stage from 2021 to 2023. Um, yeah, it's just another representation of the slide we looked at before, but you'll notice from pre-seed it drops significantly to seed. And drops even more to Series A. What should the vesting schedule distribution be across your advisors and board members? Well, for advisors, it's generally 2 years. About 46% of companies in the pre-seed do it in 2 years. 44% of companies do it seed in the 2 years as well. And 35% do it in the pre-seed after 2 years as well. So, um, or in the Series A. And then board members is actually 4 years because you want your board members to be there for long, um, and be— have a long tenure. So they're at the seed level, is 46% of companies are doing a vesting schedule of 4 years. At the Series A, it actually goes up to 50%. Yes, advisors should have vesting schedules. They're typically 2 years with a short cliff. And advisor equity is typically given as NSOs. Remember we talked about independent contractors or International employees. Well, if you have any questions on NSOs, go to that link below. We'll give you all the information on our blog. All right, this is a great slide. So equity grants for the first 10 employees fall off quickly. You'll notice from hire 1 to hire 10 is on the y-axis, and then the percentage of equity is on the x-axis. The one I want you to pay attention to here is the blue, uh, the black bubble, the median. So you'll notice the first hire median gets 1. 1% equity. But at the very highest percent is that 90th percentile, get 3.5% equity. That seems a little crazy to me to give 3.5% equity to your first hire. I would do 1 to 2%. 1% is the median. So just follow the directions on this. This is 50,000 companies that we have data on. And then you'll notice the curve from the black bubble on the way down, 0.75%, 0.5%, 0.42%, 0.31%, all the way down to the 10th hire, The median only receives 0.17%. So keep this in mind when you're creating your vesting schedules and your employee distribution for equity. All right, financing instruments. What type of equity should I issue? All right, convertible instruments. That's the first kind. They allow for founders to raise money while postponing full negotiations on the company valuation until a later date. There are two types. The SAFE, which is a simple agreement for future equity, and there's a convertible note. The other option is a priced round or equity round where you actually conduct formal negotiation to agree on evaluation with investors. Every single thing that I've signed this year and last year is a post-money SAFE, except for one investment out of 40 companies that I've invested in. And the post-money SAFE was invented in 2018 by Y Combinator. and I'm going to talk a little bit about it here. So the Simple Agreement for Future Equity, the SAFE, allows investors to convert their investment into equity at a future priced funding round or liquidation event. And about 82% of convertibles now occur on SAFEs that are either pre-money or post-money. About 70% of that 82% are post-money SAFEs. The other option is convertible notes. It's a form of debt financing that allows investors to convert their loan into equity upon a future priced financing round or liquidation event. Terms to know: valuation cap and discount rate are the two terms to know. The maximum price at which a SAFE converts into equity is your valuation cap. So let's just say for round numbers, I have a $10 million valuation cap. A lower cap is better for investors because they'll be able to convert notes into more shares of the company. So I would prefer to have an $8 million valuation cap versus a $10 million valuation cap for obvious reasons. Now, the discount rate is the discount to the priced round valuation, the priced round that SAFE holders will get when they convert. So the follow-on round after the initial SAFE. A higher discount is obviously better for investors as the discount reduces the valuation used to calculate investor shares. Allowing them to convert into more equity. So it's pretty, pretty obvious and self-explanatory. The vast majority of SAFEs have a valuation cap. So we took data the last 3 years, January 2021 to March 2023, and this is the percent of pre-seed SAFEs by conversion terms. Follow the black line— valuation cap, no discount. Valuation cap and discount is in the orange, And discount, no valuation cap is very uncommon, and that's at the green line at the bottom. So either you want to have a valuation cap or no discount, or a valuation cap and a discount, depending on your circumstances. The difference between a pre-money SAFE and a post-money SAFE: a pre-money SAFE does not set a fixed ownership percentage for the investor. Why will this not be good for the investor? Because the investor will be diluted by other convertibles, other SAFEs that you sign. So this is considered more pre-founder friendly, and it was very common before 2018 until the invention of the post-money SAFE, which sets a fixed ownership percentage for the investor. Why is this good for the investor? Because they will not be diluted by other convertibles, and it's considered more investor-friendly. Everything you can do this um, easily on Carta. If you look at the right-hand side of the screen, you just click a couple of boxes and you're good to go. Valuation caps are holding flat in most cases. Also, our data from 2022 to 2023 shows the median, 25th, 50th, and 75th percentiles for pre-seed SAFE valuation caps over time. You'll notice that they're basically staying flat. Uh, what does this mean? Well, 2022 and 2023 were tough years for venture capital and for investing. There was basically a lot of dried-up capital just sitting on the sidelines. Um, inflation was very high, economic uncertainty is very high, and so that's why they stayed flat. Median dilution for primary rounds stays steady in early stages. So this is by dilution and by stage and quarter, Q1 2020 to Q4 2023. Uh, you'll notice that, um, these slides go by stage here, so seed, Series A, Series B, and so on. And the median dilution primary round stayed pretty steady, um, which is a good thing, right? It's, it shows that there's a little bit of calm in the market, but at the same time, that doesn't show a lot of growth. I love this slide. So the future, uh, founder ownership over time. You'll notice how steep the curve is on the left, and look at the valuation at $5 million. You have an ownership percentage of 38%. That drops down to 17% when you reach a $100 million valuation. Now obviously, 17% of $100 million is more than 38% of $5 million, Um, so you actually have gained a lot. And all the way to a billion-dollar valuation on the very bottom right, $981 million, your ownership is only 12%. But what's 12% of a billion dollars? $120 million, roughly. $100 million. So this is just a really good slide for you to understand what's going to happen to you as you dilute across funding rounds. All right, this is our last section on data insights, and we'll jump into Q&A. So this is a brand new slide from 2025, and we're seeing that AI companies are typically seeing less dilution per round, percent sold to investors in a primary venture round in 2024. The 25th percentile is in the orange, the, um, 50th percentile— I'm sorry, not in the orange— 25th percentile, 50th percentile, and 75th percentile for AI companies is in the orange. And the black is for non-AI companies. So you'll notice that by the time you get to Series C, D, the median dilution is only 7.8% for an AI company, whereas it's 14% for a non-AI company. So keep this in mind. Do you incorporate AI into your startup? Is it quote unquote real AI? Are you building machine learning algorithms? Are you using AI wrappers like ChatGPT wrappers? Like, what are you doing? But just know that AI companies typically see less dilution per round. And again, this is data from 50,000 companies on our platform. Solo-founded startups became more common. Why is that? Well, the distribution of founding team size across 43,000 companies on Carta includes startups with and without VC funding. You'll notice in the top left In 2015, there was only 17% of one-founder teams. That jumps to 35%. That doubled in 9 years. So what does that tell you? That tells you that people are becoming more efficient, that people are using AI tools, they're not hiring as much, they're doing less with more, they're doing more with less. And you'll notice the same trend with two-founder teams. It's a little less drastic, but the 32% of two founder teams in 2015, um, and then it, it goes up to 37%, uh, in 2024. Startups with VC funding are more likely to have co-founders. So this shows the distribution of founding team size across 18,000 start— US startups on Carta, and includes only startups with VC funding. So what's important here? The top, uh, the very left One founder teams in 2015 had 15%, um, or 15% likely to have, uh, VC funding. That kind of went up a little bit to 17%, 20%, and then came back down to 17%. Um, but notice that two founder teams, 32% of them, uh, were likely to— were startups with VC funding. It jumps 30, a little bit to 34%. With 3-founder teams, it actually decreased over the 9-year period from 26% to 25%. Um, so that's the important thing to understand, is that it's good to have co-founders if you need the co-founders. That's the crucial issue. I generally, as an investor, like to see at least 2 co-founders with complementary domain skill sets. Um, but I have invested in solo founders as well. There were no major surge in rounds or capital in Q4 of 2023. 3. This is our, our, the latest data that we have. We will have an updated slide shortly from our head of insights at Carta. But basically, look at 2021, right? There was a rocket ship in 2021 in terms of total cash raised by quarter. It was just an anomaly, to be frank, and jumped to $66.8 billion in the Q4 of 2021. And then it went down to $12.8 billion in 2023. So across 2023, there were no major surges. 2024 was a better year. 2025 is already shaping up to be a year where the VC winter is going to be demonstrably over, in my opinion. I've deployed a ton of capital. I've invested in 16 or 17 companies in the last 2 months. I know a lot of investors that are opening up their checkbooks. I think there's a lot of optimism in the market and, you know, politically, economically, socially, we're in a turbulent time, but it seems like 2025 is going to be a good year for startups. So gear up to invest and raise. All right, early stage round sizes stayed flat in Q4. That's kind of what we talked about on the last slide. Median cash raised by stage and quarter here. From 2020 to 2023. Priced seed was, uh, in 2020 it was about $2 million, $2.1 million, and that went up to $3 million in Q4 2023. Um, for Series A, it was about $8 million in Q1 2020, and that went to $9 million, up to $12 million in 2021, and then back down to earth and $9 million in, uh, 2023, at the end of 2023. Primary seed stage valuations rose in 2023. So seed round volume and median pre-money valuations for primary and bridge rounds—bridge rounds being in the orange, primary being in the white—there were a lot of bridge rounds in 2023, and the valuations rose. But, you know, bridge rounds are basically extension rounds in between your formal value—formal raises. And a lot of companies just needed extra capital to survive the VC winter and get to capital efficiency and profitability, and then they were good to go. So for an angel investor like myself that came in for the first time on a lot of investments during a bridge round, that worked out pretty well for me. Primary Series A valuations near former peak on low volume. Series A round volume and pre— medium pre-money valuations for primary and bridge rounds Again, kind of a similar trend here. You'll notice that in 2022, the bridge rounds jumped to $55 million, the highest data point on the chart, uh, with 618 rounds. And then, uh, in Q4 2023, they were actually about the same, $45 million and $44 million, with about 395 rounds. All right, this is important. Median time between Series A and Series B is the highest yet recorded. So the days of raising between 12 and 24 months between rounds is kind of over. Uh, it actually has jumped up to 3 years at this point. So you'll notice that, um, from pre-seed to Series A, the average days was 831, which is about 2.5 years. From Series A to Series B is about 3 years. And from Series B to Series C is like 2 to 3, 2 to 3 years, 2 and a half years. So you're gonna have to do more with less and you have to be capital efficient and profitability is the name of the game. That's just the way the climate we're in right now. And that's how you attract investment. SAFE and note calculator. So these convertible instruments have come to dominate pre-seed funding and partly due to their simplicity. You'll notice an example on the right in Carta, what it looks like. It can still be tricky to know exactly how much of your company you're giving away with each SAFE. So that's why Carta has a free SAFE and convertible note calculator that takes out the guesswork. You can add in your total shares, all the SAFE information, and projected price round data, and watch how your ownership stake changes. Go to safes.carta.com for that. Deal Pro Forma. So this— when it comes time to model your first priced equity round, you will save thousands of dollars on legal fees with Deal Pro Forma, which is free right now on Carta. You'll fundraise faster, and it has automated built-in advanced calculations for precision and accuracy with real-time information from Carta CapTable. You get a beautifully formatted and priced pro forma that can be used by investors and law firms. So take advantage of that. If you want to learn more, go to Carta Classroom at CapTable 101. Just click on the link. It just launched. If you have any questions, these are all links that you can use. Um, we have a great blog. Check out our blog, it's very valuable. And if you're interested in Carta, you can get started with Carta Launch today. It's free up to $1 million raised or 25 stakeholders, completely free. Um, and the FI perk globally is 20% off any paid plan for the first year and waived implementation fees, which is a $2,500 value on top of that. If you have any questions, if you're feel free to email me at neil.shaw@carda.com or just click the link to connect with me on LinkedIn. I'm, I'm very good at responding on LinkedIn. I try and respond to everybody. And that's it.

Thank you, Neil. That was a pretty good presentation. A lot of people were asking in the chat if they're going to get the link. Yes, we will send you a follow-up email if you register at our URL. We will send it now in the chat. You will receive an email with the recording and also with the presentation so that you can access all the links. So don't worry if you missed, because a lot of people were saying that there are a lot of interesting details. I'm not really— I know it's not very— it's not enough in 30 minutes to go all the presentation. So I know you were trying your best to finish this, but I'm sure if you go through the recording again, you can— you can grasp most of these information. So thank you so much, Neil. We have some good questions on the chat here, so, uh, let me start one by one. Uh, first question here says, I would love to know about pre-revenue evaluation for startup. Is historical or competitor data the only way to arrive at this? It's very tricky to not have too much or too less valuation.

Yeah, I think you answered your own question within the question. So historical or competitor data is kind of the way to go. You can also kind of like back into it using a grassroots approach, you know, with your SOM, SAM, and TAM. And then like, say like, you know, we have a little bit of traction maybe in the form of LOIs, but no revenue. And that's how we're basing our valuation. I don't personally invest in pre-revenue startups, at least I haven't until today. Um, but yeah, I think that informational and historical competitor data is your best bet.

Cool. So let's take another question from, uh, she says, what usually dictates founder equity in case of two or more founders, and how should this work between spouses as co-founders? Oh, that's an interesting one.

Spouses as co-founders. Um, Well, you would like to think that it'd be 50/50, but the data shows that even— I mean, I don't know, we, we don't have the granularity of data to show spouses in our data, but the first founder, lead founder, usually gets 55% median, and the second co-founder gets 45%. And that's what the data shows, and that's kind of how the industry works. So I would use that as a benchmark to determine, um, for two co-founders. And then for three co-founders, it's 46 7% for the first co-founder, 33% for the second co-founder, and 17% for the third co-founder. So just refer back to those slides for the benchmarks.

Thank you. So let's take a question from Ella, uh, what's the best, uh, way to demonstrate founder-market fit for startup tackling healthcare innovation?

Yeah, so domain expertise is going to be huge here. So your background should have healthcare in it, whether that's in informatics or, you know, insurance or whatever, you know, sub-vertical you're in within healthcare. That's the first thing that I look at. I look at 4 things as an angel investor, okay? There are 4 Ps: people, problem, progress, and price. At the early stages for me, People are the most important. P, price, is the least important. So complementary skill sets of founders, domain expertise of the founders, and relevant work experience or entrepreneurial experience in healthcare. That's what I would recommend.

Great answer. Thanks, Nate. Uh, let's take a question from Daya. If investors are more interested in teams with two or more founders, how to overcome that potential obstacle as solo founder or how to determine appropriate co-founders?

It's a good question. Um, how to overcome that as a solo founder? Find a co-founder. That's one thing. That's one way to do it. Um, the other thing is just to show you have the complementary skill sets that they're looking for in two co-founders. So let's just say you need the business background and the technical background, and you happen to have an engineering background and like a go-to-market strategy background. That is a powerful combination, um, and generally the two most important things when you're starting. So you can be the CEO and CTO, uh, of your own startup. And I think that the more confidence you have in your abilities, um, the more you're able to demonstrate and communicate that by getting in front of investors, um, And so it's a little bit tough. It's like chicken and the egg problem, you know, but if you are adamant about being a solo co-founder, effing go for it. You know what I mean? If that's what you want to do, don't let anybody stop you, but stay open to the possibility of getting a co-founder. And the way you found a co-founder is by going to networking events. I'm not sure exactly where you're based. but you find on Luma where events are in your local area or the Founder Institute network, and you go to those events and you ask your people like advisors or folks to connect you to potential co-founders and do some co-founder matching and interview people from there.

Yeah, and we actually have a lot of those co-founder networking events. We have like some events coming up, uh, in the next weeks. Maybe our team will share them in the chat. So if you, if you're interested, make sure you sign up to those events. A lot of people get to meet their co-founders there, so it's a net— it's fully networking event for finding a good co-founder. Okay, um, let's take another question from Ella. It's a pretty generic but it's a very good question. What are the biggest red flags that investors see in pre-seed valuations and how can we mitigate them?

Okay, great question. I will repeat the 4 Ps just because I saw that in the chat. People, problem, progress, and price. And this is what actually leads into the red flags. So red flags are co-founder dynamics, right? So I generally try and look at the co-founders, interview one, the lead co-founder, then I try and do a follow-up call with both, um, to find out what— how well do they know each other? Are there any, you know, interpersonal issues, things like that? Is the equity split so vast indifference that it creates, like, why does one founder have 95% and the other just 5%? That's a recipe for disaster, right, if they're co-founders. So that, that's one red flag in people. The red flag in the problem is when they just talk about the TAM, the total addressable market, and they don't go into the SAM, the service addressable market, or their service obtainable market. It goes TAM, SAM, SOM, right? And we wanna talk about the SOM and how you work your way up to the TAM because everybody can say I have a TAM of $68 billion. That doesn't help the situation for me. What helps me figure out is how many of that people are gonna be your customers and what's your plan, what's your go-to-market strategy to get those customers? So detailed problem is super important. Another thing on progress, Showing traction. So I like to see 20 to 30% month over month growth for early stage startups and revenue. For ARR, it's a little less, it's a little more nebulous. I kind of take it as it comes, but usually most of the startups I deal with are not operating for more than 1 year. So month over month growth. Lifetime value to customer acquisition cost, a red flag would be below a ratio of 3 to 1. So you want to have a ratio of 3 to 1 at least for LTV to CAC. And then I wanna see some kind of traction, whether those are LOIs, show me that people wanna use your product, even if it's just non-paying users at this point. And I should correct myself, I did invest in one forklift automation robotic startup recently that hit me up on LinkedIn cold. And they were pre-revenue, they only had letters of interest. So, and they're now part of ParaX Accelerator. So, um, and, uh, lastly, price. Let's be realistic on price, right? Like, look at Carta's data, understand the benchmarks. If you don't follow Peter Walker, our head of insights on Carta, on LinkedIn, you definitely should, because he's— all this data that I presented today is just part of the data that comes from directly from his team. So it will tell you what the benchmarks are for pricing your round, uh, for valuation, uh, what the other 50,000 startups we have on Carta are doing. Um, so those are some of the red flags.

Thanks a lot, Neil. That was, uh, that was— that was good insights. Um, you have a question from Farah here. She says, can you explain more about pre-money and post-money valuation, please? When is the right time to seek funding?

Yeah, the essential difference between pre-money and post-money is when the dilution happens. So, you know, the pre-money safe, um, you're, as an investor, you're gonna get diluted by other safe holders at that time, point in time, during the, during the actual raising of the round. And you're not going to know what your actual equity percentage is at all. It's not fixed. Post-money safe has a fixed percentage of ownership. That's the main difference. So I know going into the next round exactly how much of the company I own, and that's very comforting. It gives you a lot of certainty. Um, when's the best time to seek funding? The best time to seek funding depends greatly on your ability to fundraise. So if you're just say, if you're new to fundraising, you're gonna wanna get started early to get the practice and basically get as many base hits and strikeouts as possible and get it outta your system so you can hit a home run on investors. I would say when you've got some traction, some revenue, you've got a product, You know, some investors do pre-product and pre-revenue, and I know some of those investors, and that's the niche that they serve. Most investors do not. And when you've clearly identified the problem and your solution is showing that it's solving that problem, and it's an urgency that needs to be solved now. One question I ask when I ask about problem is, all right, Why this problem? But why is the solution now? So yeah, interesting.

Let's take a question from Nicholas here. Um, he's asking, how do you find, uh, the percentage of the market you can actually grasp, especially as an early-stage startup?

Yeah, I mean, some of this is a guessing game, right? The percentage of the market, um, the TAM is going to be its TAM. Let's just take round numbers. Let's just say the TAM is $100 billion. Your SAM is generally going to be 5 to 10%, the service addressable market. So let's take an example. Let's take veterans that are homeless, okay? Your TAM is going to be ex-military. Your SAM is going to be ex-military veterans that are homeless. And then the ones that are your service obtainable market, if your product is to get them housing, is your service obtainable market, is the actual housing. So it's military veterans that are homeless that want housing, right, or that need housing. So $100 billion becomes $10 billion, $5 to $10 billion, and 5 to 10% of that is your SOM. So it's 5 to 10% of SAM is, is $10 billion, $5 to $10 billion, 5 to 10% of that is $500 million to a billion out of a TAM of $100 billion. So that's how it generally works, the calculations work.

Yeah, it's not— you just simplified it. It's a nice way of simplifying things. Thank you. Let's take another question from Nur here, um, saying thanks for all the info. Some do critic, uh, critic SAFE saying that it might never converting investors left outright. As an angel investor yourself signing post-money SAFE, how do you protect yourself case that?

Well, I chose the highest risk, highest reward investment in the world, right, when I signed up to be an angel investor. So I have gotten burned, um, once or twice, but that's— I went and got educated, you know. I, um, I went to Columbia Business School for certification for a year this last year in venture capital and private equity, and I started making investments alongside that, my learning. And I learned that there is no more higher risk investment and I do, will get left to dry, but I've made enough investments to where I only need to hit 1 to 2 home runs out of 40 investments to really make my money back. So you're really, it's a betting game, it's gambling, but it's like gambling with some level of information and like kind of understanding of the market, you know, so, I don't want to say don't worry about the investor, but the investor should know what they're doing. And otherwise, you don't want to be that investor on B on your cap table. If they know— if they don't know what they're doing, you shouldn't accept their money.

Okay, let's take another question from Jeff here, and he's asking, how does any money invested by the founders impact valuation? For example, if the founders have invested $1 million in an AI product, does that have an impact on valuation? And does the impact change of your pre-revenue or post-revenue? It's a good question.

Um, you definitely, if it's, you know, you have invested money as a founder. Let's just say you're a 2 co-founder team and one founder has invested a million dollars and the other invested zero. That first co-founder, their, their percentage equity is probably going to be higher than 55%, right? Because they've invested a million dollars of their own money and the other person hasn't put in anything. So that 55-45 split is going to be more wide, probably in the range of 65 to 35, maybe 70 to 30, maybe even higher. It's a million bucks, it's a lot of money. Um, does it matter if it's pre-revenue or post-revenue? Um, yes, but it really depends when. It's like, if it's really early revenue stages, it may, it may not matter as much to when it was pre-revenue because you took huge chance when it was pre-revenue. Uh, I noticed also you're based in Austin. I will be at South by Southwest, and I'm hosting event on Saturday, March 8th, uh, with Stanford Angel and Entrepreneurs. Um, and, uh, you should definitely look that up on Partyful, the website, and come to the event, and we can meet in person.

Great. Let's take another question here. We have a lot of good questions coming up on the Q&A, but I'm not sure if you're gonna finish them all, so I don't know of nail will be able to stay to dedicate extra minutes in the networking. Otherwise, feel free to join any other like, uh, AMA events we do. We will, we will make sure to answer your questions. So the question says, how would founders approach equity negotiations with angel investors to maintain sufficient control over the company?

Great question, great question. So this depends, right? This depends on the value add. Everything is control and economics. Let's just start there. That's the two things that happen between an investor and a founder. So I would look at what the investor can add beyond a check. Okay, it's easy to get $25 grand checks, but what can that investor do for you in terms of connecting you to other VCs, other angels, helping you with like go-to-market strategy in my case, or business development and partnerships in my case? Um, you know, and to remain sufficiently in control, use the SAFE calculator on Carta and figure out what your dilution would be. Um, how much you're willing to give up, use the data on Carta to figure out what is the benchmark for the median dilution per round. Um, and then Some of it's an art rather than a science, right? Some of the people that are raising a pre-seed or a seed are really gonna need high-value, hands-on angel investors. So just don't just look, chase the money, chase the connections and the network and the value add.

Thank you, Neil. There's another question from Ella here. She's asking, how important is having a technical roadmap versus a go-to-market strategy at the pre-seed stage?

Yeah, I would say it depends again on who you're talking to. So if you're talking to like a very product-heavy investor, they're going to want to see a very technical roadmap, right? Like an AI, machine learning, what's under the hood on all the algorithms and the models and things like that. I'm not a product guy, so I generally farm that out, outsource that to a friend or like somebody in my network to review. I like to see a go-to-market strategy roadmap because that's how you're gonna generate revenue and customers, right? That's my expertise. So I wanna see where you are on that. And I think they're equally important in general. I think having a balance between a good technical roadmap and a product roadmap Makes a lot of sense if you can do both. Personally, I prefer to see a go-to-market strategy roadmap so I can tear it apart or help build it up from the ground up again, or just build on the foundation that was already built and add value.

Cool. Interesting. I think we've had enough questions for today, but we still— I don't know if Neil can dedicate a few extra minutes in the networking lounge. So thank you all. You will receive the recording for this session and the presentation for you to access all the links. I know you still have a lot of questions there, so please make sure you connect with Nail either from LinkedIn. We shared his LinkedIn on the chat or in the networking lounge. Thank you so much, Nail, for the insights today. Pretty good data. I'm sure everybody will access the recording later on to grab to grasp all these data. Thank you for sharing those. Uh, and we have these kind of investor AMAs event very often, so make sure— maybe we'll share the next links in the chat for our next AMA with an investor. Make sure you attend and you keep an eye on our landing page. We do post a lot of interesting events for you. Uh, so thanks everyone for today's session. Thank you, Niall. Uh, please, if you can stay a little bit for it in the networking lounge, if not, it's okay. And I'll be also in one of the rooms if you have any questions about DeFi. Thank you all, everyone. Thank you, Neil, and have a good day. Thank you. Thanks, everyone.