Ben Doherty, cofounder of Favor and Sunroom, explains how to avoid bad investor partners. Raise earlier to extend your runway, understand the differences between priced rounds, convertible notes, and SAFEs. He recommends reading Venture Deals by Brad Feld.
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All right. Go ahead. Looking back with hindsight, how would you avoid those bad parties? Yeah, so he asked looking with hindsight, how would we avoid those bad parties? Well, I'm doing it exactly. I'm doing it right now at Sunroom. So what we're doing is we're just making sure that when we start raising money, that we're not even close to running out of money. Which I know that is more of a luxury that I have gained as a second-time entrepreneur now, and sometimes that's not as realistic as a first-time entrepreneur. But I will say, as a first-time entrepreneur, the moment I went full-time on fundraising, I raised the money every single time within 2 to 3 months. And so, I mean, it's different for everybody, but I'd say if you have about 6 months of runway or even 7, 8, 9 months, you probably should be going full-time on fundraising right then. And so the number one way that I have made it so I can avoid working with bad partners is simply by just raising earlier. That's the number one way. Because what ends up happening is that, and by asking the right questions, right? Because I like to think the people that we ended up working with for Favor, we honestly weren't that excited about working with them. We kind of already knew that they probably weren't the best people to work with, but we didn't have any other options and we were gonna run out of money in a month and a half when we actually made that decision. But on the backside of that is, How do I avoid working with the wrong partners now? Well, you have to ask the right questions. So I mean, I can tell you guys about what some of those questions are right now, 'cause I know we have about 10 minutes left. And I think that could be helpful for you guys. And I could also tell you about a couple books that were really helpful for me. I'll just run through them real quick. I got some notes. So, One of the books that's really good is by Brad Feld and it's called Be Smarter Than Your Lawyer and Venture Capitalist. You guys could check that out, but it's basically, it gives you the whole lowdown on all of the different ways that you can raise money. Also some pitfalls that you can fall into. So that's a really good book. Thanks. Venture Deals. Venture Deals, yeah. Thank you. I remembered the tagline. It's called Venture Deals by Brad Feld. That's a really good book. But let me go into some of the questions. Oh yeah, one other thing too, so that book won't cover, is now there is this awesome investment vehicle that Y Combinator actually invented, and it's called a SAFE. Who's actually heard of a SAFE? Okay, some people have. Cool. SAFEs are, in my opinion, SAFEs are great. And the reason for it is, is it's designed exactly like a convertible note, except it doesn't have any of the downsides of it. Who knows what a convertible note is? I guess who knows what a convertible note is? Alright, so let me just give you the 30-second version of what I would call the 3 different ways that you can raise money. So one, you can literally just give away a percentage of your company for a certain amount of money. That's called a priced round. So you say, hey, I'm giving away 20 or 10% of my company at a $5 million valuation. And then people will decide how much money they want to give you at that valuation. That's a price round. That's generally expensive to do. You have to have lawyers involved in it. You're going to be arguing about different terms on the actual way that you raise money. The second way you can do it, which is predominantly how most of the seed funding has happened in, call it the past 20 years, is called a convertible note. A convertible note is essentially debt. So you can say, you— and it's weird because you kind of can price it. So convertible debt, normally what it means is you'll say, hey, I'll take your $100 grand, and technically I owe it back to you, but nobody ever expects to get it back. Which is what's weird about it. And it's just a way of saying, hey, when I actually do do a priced round, when I do do a priced round, I'm gonna have that money you gave me convert into equity later. So it's a way of sort of kicking the can. And you can read way in much better detail about this on Venture Deals. But that is sort of a way of raising money without having Too many lawyers are involved, they're doing it for a lot less expensive. Now a SAFE, this is what I was talking about, this is what Y Combinator created. That just stands for Simple Agreement for Future Equity. And it essentially does all of the good things about a convertible note, where it's really lightweight, you don't need to get lawyers involved, it's really cheap to do. The difference is you don't actually owe the money back. So no one thinks it's debt. So the way that debt can go wrong is, say you raise from the wrong angel investor, I don't know, something happens to the economy, they go belly up and they say, hey, hey dude, this is debt. I want the money back whenever that time— there's usually an expiration period. They technically can ask for that money back when the expiration period comes along and And if you don't have the money, they can bankrupt your company. That's the downside of convertible debt. A SAFE doesn't have any of that. They can never call, ask for the money back. And that's why I recommend it and use it for all the money I've been raising for Sunroom. I haven't priced the round at all yet. Any questions?
