Seed funding can be a tricky proposition for startups.
The broad choices in dealing with the early expenses are: (1) self-fund by making founder loans/advances to the company, whether for demand or convertible notes; (2) get friends and family money, usually in the form of a convertible note; (3) go to institutional investors and either argue for an acceptable valuation as part of a seed equity funding or bypass that issue and hope to get bridge money via convertible notes. Of course, in the right cases, founders can also sell products and far-more-typically services to generate enough funds in the early going to fund development efforts tied to a longer-term strategy.
In working with founders over many years, it has been my rule of thumb that they should not do too early of an equity round unless there was some very special reason for doing so. Equity rounds come with strings and complications. They require that you set a value on the venture. That in turn means you need to negotiate the issue of price precisely when you are at your weakest as a founder trying to build value. It also means you create tax risks and complications: if the equity round is too near the time of formation, the $.0001/sh pricing used by founders for their shares may look funny next to the much higher amount per share paid by investors, raising risks that the founders can be deemed to have received their shares at the higher valuation as potentially taxable service income; once you do an equity round, you will need to do 409A valuations in connection with doing option grants and that necessitates getting outside independent appraisals; equity rounds come with strings, including investor preferences, investor protective provisions limiting what you can do as a founder without investor approval, co-sale and first refusal rights favoring investors and concomitantly limiting founders, board seats and/or observer rights for investors, and the like. Much of the "distraction" that founders face in raising money exists precisely because a typical equity round can be a complex process and, apart from needing to sell the economic proposition behind their venture, founders must also make sure that any funds they do take in are taken on reasonable terms. Sorting through the issues of company valuation, preferences, and similar issues takes time and can be a grueling process. What is more, when you have emerged from the process, you will find yourself having to price your equity incentives to key people you are trying to attract at a much higher price than you otherwise would have if you had not done the equity round.
So, in the early stage, it is usually best to defer all this and focus on building value with funds made available through some sort of bridge instrument such as a convertible note if possible. In such cases, with institutional investors, you may still find yourself arguing about valuation in negotiating caps but the process is nowhere near as involved as it is with a typical equity round and founders with leverage can usually dispense with caps as well. Apart from the cap issue, most of the other complications simply go away. You retain substantially complete founder independence with almost no strings on what you can do going forward (subject to normal legal rules involving fiduciary duty, of course). You retain virtually complete control of the timing and terms of your future funding choices without needing investor approval to make the choices as you like. And you basically eliminate the tax risks altogether. Finally, because you have not had to price your stock, you retain flexibility to continue offering very cheap equity incentives to others, including those who may become potential co-founders, without creating tax problems for them or for your company.
There are cases where founders prefer to do an equity round in spite of the complications. Maybe they can get the equity on good terms with a favorable valuation and even without the complications of doing it as preferred stock (e.g., in some friends and family situations). Maybe they prefer not to have debt on their balance sheet, with the legal obligation to pay it back in case they can't do a qualified funding round. Maybe they just need cash fast and the people they are dealing with it are ready to do it on oppressive terms that are easier swallowed than would be shuttering the venture. Or, on the positive side, maybe it means taking funds on less than ideal terms but from an investor who will add large value to the venture apart from the cash element. Who knows? It is a big world and people have all sorts of reasons for choosing one way or the other. The point is that they need to think through the pros and cons carefully and make a wise choice for their circumstances.
The Kima offering offers fast cash to qualified ventures. This has an obvious advantage of being simple and fast for those who qualify. Whether it is the best choice for a given venture turns on how the founders in that venture see the trade-offs. If you take the Kima offer, you will wind up doing an equity round. It will be for preferred stock. It is for cash only, with no value-add. Thus, you will have the tax complications that attend an equity funding, including needing to price your stock and option grants based on the $1 million company valuation and the need to do 409A valuations. Moreover, the strings that appear in Kima's term sheet are not trivial: the valuation is based on no larger than a 5% equity pool; you give up a board seat; you give Kima a broad veto power on many of your future actions relating to fundraising and other important company matters; you agree to restrictions on how the value is shared in case you are acquired. If the answer to this is that it is worth it for many startups to make such tradeoffs in exchange for fast cash, I would add that these funds are not being offered to just any startup. Kima reserves the right to cull through the submissions and pick from the best only. While that is fine, of course, it does mean that the value of the offering must be weighed against other choices open to the same level of quality startup that it hopes to fund and not against the more limited choices open to just any startup. The biggest question I would have for those startups is this: fast and easy cash, yes, but are the complications worth it for $150K if other reasonable options are open to you? While they may be for some, for a good number the answer would very likely be no.
How does Kima compare with YC? PG has assessed the broad economic proposition to which I would add the following: YC does take an immediate equity grant but does so with common stock and on terms that don't affect founder stock pricing. Thus, near-complete founder freedom is preserved and there are no special strings that come with the investment. This stands in pretty sharp distinction to the Kima terms, which involve preferred stock and a number of strings. But by the far the biggest differential that I see comes with the value-add piece: with YC, founders pay a price in terms of equity they give up but they get huge benefits from becoming part of a network that keys them in to relationships and solutions that can prove invaluable to an early-stage startup. In effect, founders pay (somewhat) dearly in early equity to partner with a powerful ally that may dramatically speed up and enhance their path to success. This sort of trade-off is not worth it for all companies but, for those that dream to do significant scaling and that need to have doors opened to future VC investors, the YC stamp of approval and the YC resources offer value that is not easily found elsewhere. Of course, no angel investor, Kima included, can match this in any comparison, though such investors can add value in various lesser ways from their relationships and the like.
Different founders have different needs. What Kima is doing is new and innovative and the people behind Kima are savvy and sophisticated players in the startup investment world. Therefore, it is very nice to see this sort of slant on seed financing. But, again, there are always trade-offs and founders should weigh these carefully in deciding whether the Kima way is the way they want to choose.
To a business laymen like myself, giving up 15% may not seem like much but as you point out, the caveats can be quite extreme. So thanks again for your post.
We do a lot more than help people raise money, of course, but financially that is what the median trajectory looks like.
I thought it pretty funny telling pg about his program. Of course I understand there are many more readers of the comment, but it still seems directed at him.
Anecdotally Henry Ford was told that the drive shafts in Model T's were outlasting the chassis, so should they improve the chassis to match? Hell no, drop the quality of the drive shaft and save some money.
I think pg would have made a bad Henry Ford.
Edit: there is however a clear need for fast, time boxed, fund raising. Kima is part of the YC-inspired move in that direction, and there is far far more talent and money out there than YC can handle, so there is scope for them. They are just pricing in the middle market, away from the luxury brands :-)
While shareholders were worried about maximizing profits and dividends, Ford was thinking of bettering the World with $60M in capital surplus. Ford envisioned a World where every family could afford and benefit from a vehicle - he just intended to see to it they owned a Ford which simultaneously would have allowed him to employ more workers.
but I won't call her a philanthropist when she is picking out her next yacht. I will be pleased she lived however.
Great numbers, we really admire a lot what you're doing at YC but not all companies want to join an accelerator or relocate and not all companies are accepted by YC ;-)
We see Kima15 as a different offer for different founders all over the world who want to raise funding quickly and when they need it.
We are also investing with a lot of local investors and they are sometimes managing the local relationship (or mostly making things worse :-()
Last but not least, many of our companies are targeting a local market (China, India, Pakistan, Switzerland, France, Argentina, UK, Germany...).
They have nothing to do in the Silicon Valley.
The YC model is awesome.
No doubt on that.
but there is room for many other models.
(and thanks God, we invested in Rapportive before they went to YC ;-)).
Check also what my partner is building : 1000Startups, the biggest incubator in the world in the center of Paris
Wow! That's twice as powerful as 500 Startups
Also, if a company already has a v1 of the product, are you planning to do the same deal? (YC often accepts people who are post seed pre series a.)
Kima15 is not dedicated to fund prototype only. Some companies with V1 are also great targets for it. All the projects we received since the launch 3 hours ago are all startups with a real product.
If the startup is at a later stage, we will be happy to check it through Kima Ventures. It can take just a little longer.
I'm sure we will invest in a future AirBnb or Dropbox. We just need a little time ;-)
If you don't mind me asking, given that you claim to fund 2 startups every week, how much access would a startup have to either yourself or Xavier? One reason why Kima appeals to me surely is the fact that you two are heading it. Would you actively sit on a board? If so, do you ever sleep?
I'm not sleeping enough and have 10 children ;-)
All our startups are discussing with me by email all day. Not sure will be able to answer to everyone when we will have 800 startups but for the moment, that's ok because working exclusively by email.
We are not board member but are here to help all the time not only during boards ;-)
That means the YC program needs to be worth $52k more than the Kima15 network/brand for the lower valuation to make sense. I wouldn't be surprised if it is, but we'd really need stats on the subsequent funding rounds of Kima15 companies to compare them in this way.
Very difficult to compare both programs and it's not the goal to compete against anyone.
Kima is awesome for startups, who need a cash infusion RIGHT NOW. This can often save a startup and make the difference between the startup shutting down and it becoming a billion dollar company.
With YC, it's a very long process as it roughly takes 4 months from applying to money in the bank.
So Kima can give startups a fat cash injection, which is good for startups who know exactly what to do and just need cash, nothing else. YC is more for long-term startup building, getting into a community, relocating, becoming a Silicon Valley startup etc.
That's not true. Startups get the initial $18k + $80k on acceptance.
Considering that lots of startup founders apply many times before being accepted, the median is easily in the years range.
It seems misleading to consider multiple applications, since we're talking here about the time between applying and getting money or a no.
You had mentioned the day before the deadline applications are submitted at a rate of one per minute, which is bound to bring the median closer to the deadline, but only YC knows how many of the applications submitted during the last 2 days were funded. The median funded application could be submitted 2 months before that for all we know.
If it's the median funded application, shouldn't you be correspondingly alarmed YC-funded startups apply 2 days before the deadline? Would setting more deadlines (having more funding cycles) generate more YC startups?
But that's fine, because your expertise is a more long-term approach over several months, Kima's expertise are burst-investments. You have completely taken up the "hatching investments" space, Kima will completely take up the burst-investment space.
I think is the next logical step of startup investments after accelerators. Just as we've now seen accelerators popping up everywhere (and now dying down), we could see Kima-clones popping up everywhere soon.
I think they probably fit a nice spot for founders who can't get to YC but are looking for funding. Overall it's win for founders.
Since YC companies' approx valuation is $5m, the 80k note will take about 1.6% equity. So I would say YC is offering 98k for 8.6% (18k + 80k for 7% + 1.6%).
I'm not looking for funding at the moment, but the speed would be a huge bonus for me. There is a huge amount of value in being able to focus on making your business succeed instead of focusing on getting funding so that you can continue trying.
It could be argued that YC brings a lot of added value to the table, but if we are simply looking at the terms, their ~$20K for ~6% is far worse than $150K for 15%.
> This should help you to launch the first version of your product and to test your initial hypothesis about the market before (potentially) raising more funding to grow the business.
They are shooting for helping companies who know what they need to execute do it fast and not worry about the rest, at least for a bit. After personally going through almost 6 months of angel investing diligence hell to get a similar deal, this is completely something I appreciate.
It's definitely good to have these options, so people can make better choices for themselves / their needs - and hopefully be able to get access to what they need. :)
We'd maxed out personal credit cards and we were literally on a ~2 month timebomb of personal runway.
So yeah, awesome to see they've now put this "move fast" promise into a transparent offer. Sure there's limits on the cash and valuation but, I guess better to see it upfront.
In our case, the fees were £1,800 (incl 20% VAT) for our lawyer, and €1,136 (inc 19% VAT) for Kima's lawyer.
A request for "weekly updates" is also quite burdensome on founders, and they also have the optionality of a board seat (also unusual for investments at this stage).
What I learned from getting an investor from Europe is lack of connections in the SV/USA which could be a disadvantage for some startups.
Some of our founders are sending an update every 48 hours...
I'm not saying we walked uphill both ways in the snow to get a round of funding... but it's definitely easier right now. Hope YV and Kima is more representative of a new normal than a passing fad.
You can follow KIMA portfolio day live on Monday, tune in: http://www.dailymotion.com/kimaventures#video=x17ww6i
1) People who know what "the going rate" is will not be overwhelmingly enthusiastic about you asking for a board seat given the package deal here. An option on a board seat is, approximately, as expensive or more expensive than a board seat. For example, it's going to cause auto-failures of negotiations with later stage firms who would otherwise be prepared to pay market price for board seats (my SWAG from outside the Valley is "in the neighborhood of multiple millions currently"), because board seats have to be static and scarce to retain value.
You also probably uniquely cause signaling risk because at least some actors are going to model your decision to take or not take board seats like they would themselves choose to take or not take board seats, and come to the conclusion "A prior investor has a free option on a board seat and has declined to exercise it, despite having had full knowledge of the business' deepest secrets for the last year? Wow, that makes my investing decision a lot easier: PASS!"
2) It seems to me that your strategic reason for asking for the option to a board seat is that you desire to take a personal hand in managing downside risk when some startups you fund implode. This implies that you both believe your contribution will help to manage downside risk when startups implode, and that rescuing imploding startups is a great use of your time. Many people in the community would advise that a startup which is imploding is almost immune to correctional action and accordingly valued at approximately zero, and that startups imploding is sort of the model and that your main source of risk reduction is having 7.5% invested in Google 2020 rather than tweaking twenty imploded companies to slightly-north-of-imploded.
Or, to rephrase, if the successful outcome is "We do not get a board seat" then do not ask for a board seat.
We invested in 220 startups. Had this right to join board everywhere and never used it until now but I still prefer to keep this right.
2/ Discordance between cofounders (in case they are not sharing the same strategy) is not always a startup implosion. Sometimes we just need to come and become the 3rd vote who can decide which founder strategy we will choose.
"The Investor will invest up to US$150,000 and would hold no less than 15% of the Company on a fully
I'm not a lawyer, but doesn't this say that their 15% never dilutes? If so, that would be a horrible scenario in case of future fund raising.
I recommend a much more muted background, especially for the textual portion of the site. Run red banners down the side if you must, but change the text section to a more readable contrast.
http://www.smashingmagazine.com/2010/01/28/color-theory-for-... is the knockoff answer, but you should get the input of an actual designer - I've used yellow-on-red AND the <blink> tag before, both at the same time.
Now, it only it was a convertible note, possibly discounted but a convertible note...
Reduction of adverse selection on your side, also.
Based on your historic numbers, would it be a significant cap on your upside?
The rest should be 'fill in the blanks', and since valuations/dollar amounts are not negotiated here, the only blank each investment should have to fill in is the company information (name, incorporation location, address, etc.)
Maybe I'm missing some steps in my mental model?
We HATE paying lawyers... :-( We are not investing in a company for that. So we will try to work with all good lawyers with great prices.
As you said, it's not so difficult.
1. Checking if the company exists - meaning looking over incorporation documents, validating the bank details and other information to make sure you're funding who you think you're funding - could be done with someone with some common sense and not a lawyer - probably hiring a person who does administration and work full time for you (the high volume of seed deals you're making make me think you already have that person).
2. Checking that the IP is owned by the company is usually done by doing a TAA (Technology assignment agreement) and in that case this could be a standard doc that you let the founders sign on. I would believe that someone on your behalf could also check that the validity of the signatures.
3. Use a service like RightSignature to collect signature, IPs, timestamps and even Identification cards picture or something of the sort in order to check the legitimacy of the person signing on the docs - this will allow you to remove the lawyer from the equation as well.
4. Last but not least - try documenting the things you need from the company beforehand and post it somewhere on the site - knowing in advance what are the things you are requesting usually eliminate the unneeded ping-ping with lawyer.
On a personal note - I streamlined the fundraising process by creating a few templates (with wire details) and having forms on Rightsignature. I had all of my investors go through that process and closed very fast - including countersigning and dating the documents once the wire reach our account. I think every process could and should be streamlined especially if you deal with 200 companies. Lawyer like to interject in between deals because they can bill and in our case we were able to save around ~$10k in legal fees because we didn't let our lawyers talk with our investors and negotiate for us - and we used a standard note provided by our lawyers.
I'm not saying you could do that but if there's room to reduce the $4k to something like $500 or even nothing - that mean an extra $400k that can be re-invested into ~3 companies - imagine that!
EDIT: I know you have way more experience closing deals than me - I just wanted to offer a founder experience and perspective on that process.
Depending on the home country of the company will mean each deal will need customised docs too I guess
Having read the term sheet, I'll say that the desire to get for Kima the post-acquisition excess benefit of any acq-huire exit seems a reasonable request in concept ("Equalization of financial terms") but it does make the 15% more expensive if there are others who would invest similarly without it and figure that N % will acq-huire instead of failing, stalling, or growing. And it potentially goes a bit too far if one of the founders grows to be a business unit head at a large company. Would need to see the actual document language that addresses that though. Also, sorry to be OCD - to be consistent, "financial terms" should be capitalized in the section title.
The biggest issue I'd have is the "Important Decisions" clause. Incubators and many (but not all) angels don't typically look for this level of ability to control that can block the company from growing.
There is some evidence that Kima doesn't use their rights maliciously but that's the clause to think carefully about - if there is any disagreement, the IP is in the company and you can't raise money, give distributions, or sell the company (among other things) without consent.
However, they invite you to talk to other Kima family companies, so I'd definitely do that and talk about business operations and decision making in the context of those Kima rights with them.
Sounds like a Japanese girl band...
> [We] will continue to make investments via Kima Ventures at earlier/later stages or lower/higher valuations. Projects looking for funding outside Kima15 can be submitted via the Kima Ventures website.
From the frontpage:
> We will not invest in future funding rounds of your company to avoid signalling issues.
That's not good communication. Otherwise, looks very good.
We are never reinvesting in one of this deals.
I'm saying the phrasing is unclear. Bad communication. If you don't reinvest in any deals then that should be mentioned clearly in the FAQ. Right now it isn't.
> Will you consider my business if we are later stage (higher valuation)?
> Kima15’s standard offer allows us to make decisions and close investments very quickly but we realise [sic] that not all companies will be at this specific stage so we also continue to accept submissions via Kima Ventures
This implies that yes, you do invest at a later stage. But the next sentence goes:
> We do still only invest at the earliest stages...
Which implies the opposite: that only early stage investments are an option.
So although I like the idea of Kima15, some extra proofreading wouldn't hurt.
As a policy, they won't invest in future rounds. So everyone else knows they won't, and no one asks "why isn't Kima investing in this round?". It can be bad when an investor who's already in a company doesn't participate in future rounds, as it signals that someone which more data isn't interested in putting more money in. They're avoiding this entirely, which is good for the startup.
It's a really bad signal when you get seed funding from someone who does do follow-ons, but they don't want to follow-on with you. It can make it very hard to fundraise.
As for what else they add -- I'll find out next week in Paris at their summit next to Le Web. I suspect the 100s of CEOs they have backed and big european network will be things I value. They are relevant for the company I'm building.
I think the Kima pitch has a lot in common with the PG worldview -- founders want fast decisions, money, network. Maybe they want a school or maybe they can run a school; founders vary.
So exactly the same postmoney valuation.
I added Kima15 to this investor database:
How many brazilian startups have you funded? I understand that you are investing everywhere, but the country counts? I mean, bigger markets = better chances?
Also, just to reassure me, can you completely guarantee that if I don't have an answer in 5 five workdays is because I didn't pass? Just to control my expectations and illusions here if that happens.
About the 5 days, we will do our best to give an answer in 5 days. If not, it means that we are not doing our job well ;-)
Also impressed that Jeremie himself replied to this thread and not some intern.
Also, Is your preferred US Entity a Delaware C Corp?
1) It's the amount you can borrow from your family most of the time. Or just make it working in IT and saving like mad.
2) It's barely useful. $150K is not enough to hire even one great developer for a year.
-We are investing in team when at least one founder is a developer if not all... So $150K is not to hire people.
-All developers are not in the Silicon Valley. You can find developers at much lower price in many countries and we are investing everywhere.
Time = Money
Twitter & FB are easily reproducible, and they provided awesome returns for their investors.
Some people have financial obligation or living situation where they could save like mad and it would still take them years to accumulate 150k.
Barely useful? This is that SV bullshit mentality. There are thousands of great entrepreneurs all over the world who could turn 150k into a profitable little company. Might not make millions in the first few years (or ever) but if they love it and people love their product/service, that is very useful. Surviving off very little is an admirable characteristic, you don't need millions to build something meaningful and if that's the way you think, I would never work with or invest in you.
Alas, VCs are not after profitable little companies. They just plainly would not allow you to become a little company, profitable or not.
It's also easier to raise a big round after that, invest a lot and grow.