 Hi, I'm I'm Anthony. I'm going to tell you everything you need if you're a startup founder to grow your company, raise investment, incentivize your team and get all the Legals right. Now Legals is super boring and I'm amazed that anyone arrived with a title of Legals. So let me ask, who in the room is a first time founder? All right. We've got some founders. Who's planning on raising investment for their startup? A few people. All right. And now who is from Europe? Everyone from Europe. Excellent. All right. So I'm going to take you through the journey of a startup from incorporating your business through raising and then potentially to exit and the things to look out for. And I think for many first time founders, it's really confusing. You don't know which things to do. And what we've done at seed Legals, which is in the UK. And as you've heard about one in six of all UK start early stage funding rounds is done on seed Legals is we've productized each step of your startup. And with more than 30,000 companies on the platform, we've got a huge amount of information that I love to share because although every startup idea is different, the formula is remarkably the same. And if you can understand the formula, you're going to make yourself much more investable because astute investors, repeat investors look for a pattern when they invest. So we're going to start right at the beginning, which is get your cap table right. So when you start your company, you're going to create some shares, which you're going to allocate to the founders. Now, sometimes people look to Mark Zuckerberg and they'd look to make special super voting shares for founders. Don't do that 100% of the time people do that. It's a disaster and it needs to be undone. So I'm from the UK. I know the UK naming conventions for shares, but generally the founders just get ordinary shares and you'll split it between the founders. So that's really easy. So now the next thing is you're going to allocate shares to your team. So you've heard from index ventures a few moments ago and actually index is an investor in our company, which is fantastic. But the advice you've got from index is probably for much later stage companies. They tend to invest in series A or later. But at the beginning of your company, it goes like this. The founders own 100% of the shares when you create your company. And now you find your first employee, maybe your CTO, and you want to give them some shares or some share options. And the question is how many to give them? And the problem is it's an arbitrary number. They might go 110%. And you go, I'm going to give you 1%. What's the right number? What I like to do is I like to think what's the equivalent value that they might get. So let's say you want to hire your CTO and you want to pay them, well, let's say their market rate is 80,000 euros a year. But you can't pay them 80,000 because you don't have any money yet. So you might give them 40,000 euros a year. So they're being underpaid by 40,000 euros a year and over two years, that's 80,000 euros. And if you think your business value in your first funding round might be a million euros, that's the equivalent of about 8% equity. So when you are negotiating with team members for how much equity they want, I like to always think of it in a money value. And then it makes your discussion really easy. Later on, once you have your first funding round, you're now going to create an option pool and you're going to give share options to people. So certainly in the UK and probably in other countries as well, if you give shares to people and the shares have a value, that creates a tax problem for the employee and often for the company as well. So you usually give shares to your earliest joiners before they've got value. And once they have value, you create an option pool. Now you heard from INVEX that typical option pool sizes might be 15 or 20%. And that may well be the case when you get to your second or third funding round. But when you create an option pool, it dilutes the founders. So if you make too big an option pool early on, you're just going to dilute yourself massively. So my data shows in the UK about 50% of companies create an option pool at the beginning. And of those, 10% is the standard amount. Some people do 15, even 20, some 5, but 90% make a 10% option pool. And you may extend that later. And when you extend it later, you're going to dilute all your existing shareholders, including you, but not only yourself. So you're better off, in my view, making just the size of the option pool you need to cover you to your next round. Otherwise, you're going to massively dilute yourself. And I should say investors will usually want you to make a big option pool early on because it's diluted you, not diluting them later. So you can see it's a bit of a game between what's good for you as the founder and good for the investor. So now we've got something very briefly, which is for UK companies here, and for anyone looking to raise investment from UK angel investors, you can offer them what's called SEIS or EIS tax breaks. And I'm amazed other countries don't have such a system. It fuels the UK startup ecosystem. And investors can deduct from their tax for that year or the previous year 50% of the amount they invest in your company. But it's a little known fact that even if you're not a UK company, you can still offer this to UK investors. So you can drop us a note on Seed Legals and we can show you how you can attract investment from UK investors, I guess with this little known, I shouldn't call it a trick, but this little known method. So you've now built your team, you've given some people options and you now want to raise investment. And now you have to go to figure out how much do I want to raise and what's my company valuation. So here, let me talk about picking your company valuation because you've got two problems to solve. Number one, you have to figure out what valuation should I talk to my investors about. And number two, you have to be able to justify it to them. So how are you going to pick a valuation? So imagine that a couple of founders have gotten together, you've worked for a few months, you've built a prototype, you've got some code working and now you want to raise investment. Is your valuation 100,000 euros a million, 10 million? Where'd you come up with the number? So one thing you can do is you can go and read TechCrunch and then you should take at least one zero off the end because those are insane US invaluations that don't work in Europe at all. The other thing is you can read sifted.eu or one of the tech publications that run stories all the time about how much startups raise. But that's no good because they just tell you how much they raise but not what the valuation is. The next thing is you can go to your accountants and say, help me value my company. But that's no good because your accountant will say, do you make a profit? And you go, oh no. And they'll go, do you have any revenue? And you go, oh no. And they'll say, are you losing money? You go, yes. So they'll say, why is the value greater than zero? And that's because accountants value your company based on its existing performance whereas investors are going to value it based on the future. So what are you going to do? And what I found, oh and there's one more thing you can do, which is you can use a spreadsheet to try and model your next five or three years revenue and calculate evaluation from that. But I think astute investors know that those are bullshit numbers because you just made them up and I've seen companies in their pitch decks with five year projections or even three years of 100 million euros or more for their blockchain company, which is fantastic but realistically that's faster growth than Twitter and if it were true it would be brilliant but statistically it's unlikely and if people aren't going to buy into your projections then they're not going to buy into any of your other numbers as well. So what are you going to do? So here I turn to data. So on Seed Legals we've got fantastic data and over thousands of funding rounds what we've seen is companies sell a median of 15% equity in a round. So that's the top of the curve over there. So were you to be raising let's say 200,000 euros, you would be raising it at a 1 million euro pre-money valuation which means at the end of the round the investors will own 200 out of 1.2 million which is 1 in 6 which is about 16 or 15%. So actually from this formula you've got a few really important things and I think this is a real value add from this piece because number one if an investor comes to you and says we'd like 25% or 30% of your business you can go on the Seed Legals resources deal data show them this chart and go dude you're way off the scale here this is really atypical so why is giving away too much equity early on a problem? Well here's what I think the life of a startup is basically like this you're going to do three funding rounds over the life of your company that might be your goal and each time in each round you're going to raise three to five times the amount of the last round at three to five times the valuation each time diluting by 15% and making a 10% option pool and that means after the three rounds hopefully you don't need to fund raise again because your business is either profitable or you're ready to be acquired and everyone makes a nice exit but if you run the numbers three rounds 15% dilution 10% option pool the founders will still own more than 50% of the equity at the end of it and that's really important if you start doing three rounds and diluting 25% each time after three rounds the founders are in the minority and your investors to some extent are running the show and that's a problem particularly if business isn't good you can be out of the business so your goal really early on if you give away too much equity in your first rounds your investors will see you as uninvestable later and it's a real problem and ironically often it's not astute investors who you give too much equity to it's often well-meaning friends and family because you manage to get some friends and family investors together in your first round and they go she's so nice she's been spending a few weekends working on this how could it possibly be worth 300,000 euros I'm going to invest 50,000 euros for a third of the business this is a bad thing to do so in your first round aim for no more than really 15% dilution ideally so everything I've been talking about here is about doing a funding round and when we started Seed Legals our mission was to help founders do their funding rounds much faster and more efficient and as you can see in my mind there's a 3D world view of the life of a startup and if you understand that journey it's much easier to set your own course there but now I've realized my goal is to help companies not do a funding round so what does that mean? well once upon a time you had to get all these investors together and then there'd be a lead investor and you had to agree evaluation and because you had to pick a large amount to raise because it was complicated and slow to do and so you might do a funding round every 12 to 18 months and your goal was to raise enough money to last you 18 months and that meant you're raising equity you're giving away equity today at evaluation today but you don't need the money until later and it also means that every 12 or 18 months you've got this big cycle where you raise lots of money you're super excited you've got millions or hundreds of thousands in the bank and then slowly each month the amount goes down and you start hiring more people and life gets really really stressful and I think it used to be that way because VC's dominated the way you ran funding rounds it took three months to find investors and then three months to do the legals and then you had to repeat it all over again this time at three to five times evaluation and that takes time to grow so you've got these big 12 to 18 months go big or go home cycles but does it have to be that way and actually the world is changing really really rapidly and we call it agile fundraising and things are changing in two ways number one ahead of a funding round you can use something called an advanced subscription agreement in the US it's called a safe and in the UK our brand name is a seed fast so this means before a funding round instead of having to spend time agreeing evaluation with investors and getting all the investors together and doing a shells agreement and an article and the company articles a constitution you can have a much simpler document that says the investor says I will give you money now and you will give me shares when you do your next funding round and to incentivize me to come in earlier I'll get a 10 or 20% discount compared to what the investors are paying later and by the way if you don't do a funding round in 12 months or 24 months it's going to convert into shares anyway at a valuation that we agree now which we call the longstop valuation and this method of raising before a funding round is now proving insanely popular and my conversation with start-ups on seed legals who normally goes hey Anthony I'm looking to do a funding round I want to raise a million pounds but actually I've got three investors wanting to invest 20k each so far what should I do and in the past I've had to say well wait come back in February when you've got the rest of your round now I can say just send them an advanced subscription agreement or seed fast get the money in now use the money to hire people and build your team and then as you find more investors you can do your round later so this is the beginning of agile fundraising but the other piece after the round is also once upon a time when you did a funding round you'd say I wanted to raise a million euros and then you'd close the round and you couldn't add more investors easily later because when you add investors you have to get all sorts of approvals and do new deal documents but why does it have to be so difficult I kept having people come to me and see Legals going I'm looking to raise a million euros I've got 700,000 euros committed should I close the round what should I do so we made it a one click option that you can have a rolling close round and this means you can do a funding round raise the least amount that you need and then seamlessly top up afterwards and as you add investors afterwards they sign a document that brings them into the funding round and the investors in the round give you permission to top up afterwards so everything in your life as a founder you might want to pivot from I have to do these big funding rounds to know I'm going to do some event I'm going to find some investor slash or wherever and when somebody says yes I'd like to invest you go let me send you an advanced subscription agreement now of course it doesn't mean you're not going to do a funding round you're still going to plan a round funding rounds that you've got now other tools available for you as well alright now I'm going to hop on to a few quick dos and don'ts and then I'm going to dive into a few of the most important things in your term sheet and funding round so when you talk to investors you're going to tell them evaluation now your goal as a founders when you talk to investors you want to sound really knowledgeable if you don't know what you're talking about then they're going to take advantage of you and they're going to set the terms so you want to get up to speed on it beforehand so the first thing is to pick a valuation you can use the methodology that I've shown and if you're a UK company or you think your valuation might match what's in the UK you'll find a lot of data on that on the seed legal site but now when it comes to talking about evaluation you can talk about a pre-money or a post-money so pre-money valuation is the valuation before the new investment is added and post-money is the valuation afterwards I've noticed many founders don't know about that and they just talk about the valuation and if the investor thinks the valuation is the valuation after the round the post-money it'll turn out when you send them their term sheet that they're getting less equity than they're thinking they were getting and you can run those numbers yourself to understand why so when you talk to an investor always talk about the pre-money valuation this is a valuation before I've added your investment and then they'll know two things one, you know what you're talking about you're open and transparent and you'll see you educating them because when you talk to angel investors many of them don't really know any more than you maybe a lot less and you can help them feel that oh they're now understanding you're not taking advantage of them they're more likely to invest so the other thing is just work out the dilution so often what will happen is someone will say I'm raising 100,000 euros at a 1 million euro pre-money valuation this means after the round my investors will own 100,000 out of 1.1 million so 9.09% so they then go great I've added one investor and this is what your dilution will be and the investors excited but then they add more investors and that dilution decreases so always try to pick the total amount you're raising work out what percent the investor would get once you've filled the round and that's the number to go to them with otherwise they'll be disappointed later so the next thing I want to spend a few moments on the most important deal terms so when you do a funding round you've got like a hundred pages of dense legal documentation but actually 98% of it is just boilerplate stuff that's very important but not the key deal terms and everything in a funding round is going to resolve on the equity that the investors get and really the control of your company and here's once you understand that then a lot more things make sense so for an investor their main worry is that firstly of course that your invention won't work out your drone won't fly and they'll lose their money but they're also worried that the founders who've got most of the shares in the company in your first round the founders will still have 80% of the shares or more so they worry that the founders have got all the votes and can do anything they want so they want certain investor protections they want to protect themselves that you don't issue more shares to yourself and dilute them maybe they want to avoid you just selling the company for less than the value that they got in their round and therefore you making money but they're losing money or they might want to have a protection so you don't pivot the company you decide you're bored with this drone thing you're going to be the new only fan site and they didn't want to be an investor in an only fans kind of business so your shareholder agreement will normally contain investor consent rights and the investors might want to seat on your board as well now as you as a founder realizing this you need to understand that the investor isn't going to invest at least a professional astute VC investor unless they get some level of protections themselves but you also want the freedom to run your business yourself on a daily basis so I think company governance works like this if you think of your company structure as a pyramid at the top of the pyramid is the CEO and as the CEO at Seed Legals if I want to buy a new coffee machine I don't need to ask anybody I just buy it but if I want to hire someone for a 200,000 euro salary actually I need to go to the board run out of money if we kept hiring people crazily so the next level down is to go to your board and that's a great way as a founder or CEO to spread the risk the board together votes should we launch in the US should we do some crazy new thing so that nobody gets fired afterwards and the board which could include the investors has a say in things one level down from that are things that need the consent of your investors usually 50% majority of the investors and one level down from that are things that just have a shareholder vote and this is where I think founders are wrong about Zuckerberg and needing special voting shares because at least in the early stage of the business the founders have all of the shares you've got all the votes so everything else in a funding round is about investors trying to claw back some protections for themselves and if they see you doing anything non-standard they just go to invest in someone else who's making it less difficult than you are so the last thing is due diligence now this is one of the things I learned at Seed Legals or in fact a few startups ago so when you start your business you meet up in the parbois restaurants you informally get some people starting graphics design and writing copy and doing some coding you haven't got any agreements with anybody because it's just a hobby and now slowly it turns into a real thing and then later on you start doing your series A round and you have an investor like index ventures and they're going to say great we would now like to do due diligence on your company we want to check it doesn't have any outstanding debts that no one's suing it but also that you own all your intellectual property and that means it's really really important that you have contracts in place with anybody who's done any work on your project and what I find and then just to wrap up is interestingly founders think that investors are going to screw them and they put all this effort into trying to protect themselves against investors but actually what I find is the people founders have to protect themselves against are their co-founders because my anecdotal data shows that about 10% of the time founders split up and so having founder agreements at the early stage is really important with founder vesting so if you split up the departing founder gives back their shares transfers it back to the company and you can find somebody else so on this slightly boring topic of due diligence I think that's largely it for me do we have any questions in the audience and I know I'm not meant to ask questions but I thought is there any question to be had question back I'll tell you what go for it seed stage founder yes right we have a fantastic very UK questions I'll catch up with you directly after it's on that alright okay everyone thank you so much I'm Anthony at seedlegals.com you can head over to the seedlegals website where there's a huge amount of data and resource we're in the UK we're in France we're in Ireland we're about to launch in Singapore and Hong Kong and hopefully Finland on their own one of these days thank you everyone