Try: Explaining VC in the simplest manner as possible — part 2
This is a continuation article from the part 1 here (https://steemit.com/venturecapital/@vinceliew/try-explaining-vc-in-the-simplest-manner-as-possible-part-1).
Part 1 mainly allows you to understand what is a VC and the different types of VC, funding roadmap of a company and the general things that VC looks for in the company before start investing in the company.
Part 2 on the other hard is the technicalities of the VC’s usual agreement and the financial instrument of VC’s investment. I personally love Y Combinator’s blog, about the startup documents (https://www.ycombinator.com/documents/).
When I first got into my job as a VC, I religiously read all the blog posts available in Y Combinator and I believe you should too as it is absurdly important for the founders to know the details of the VCs investment rights and instruments.
There are a few standard rights that some VC actually insisted to be in their investment agreement however it is also depends on which stage of funding you are at, ie. In seed stage,
Anti-Dilution Rights.
The name itself explains it all.
Think of this as you and bunch of bored friends are making a cup of Milo (No 1 chocolate malt drink in South East Asia) from a can of 500grams Milo, where on the first round of drink you guys agreed to use 100grams of Milo to make drinks for all, you were given the rights of having 30% of Milo to water ratio.
However, on the next round of “drink” session, there is an additional 2 person to join in the Milo session, you guys now agreed to use 180grams of Milo to make drinks for all. Now, you have the absolute rights to remain having 30% of Milo to water ratio just like how you like it before because of your (you guessed it!) Anti-Dilution rights. However, someone will need to have less Milo in their drinks and guess who will that be?
Anti-dilution rights are usually a bit more “harsh” on the founder because there is one shareholder that will not reduce their shareholding percentage without putting more money.
smiling cos my drink ain't diluted
Pre-Emptive Rights
This is the friendlier version of the Anti-Dilution Rights. It is basically the rights to allow the initial shareholder to not have their “drinks” diluted but they have to put in more money to ensure that they are not being diluted.
Continuing from the Milo illustration above, on the next round of “drink” you have the option not to dilute your drink provided that you pay to maintain your 30% Milo to water ratio.
Pre-emptive rights is more of a win-win situation, where the founder will need to inform the VC that they are raising fund and the VC will have the option to subscribe during the new round or waive the rights to subscribe and have their shareholding diluted.
What’s my valuation?
The most popular questions by all founders, how much does my venture works? Is it too expensive? Is it too cheap? Am I being shortchanged?
There is no one correct way to value your company, but having some concrete numbers will allow you to have better idea on your valuation of your company.
This article list out methodologies that you can use to derive the valuation of your company.
https://www.startups.co/articles/startup-valuation-methods
However, it is up to you to figure out the most relevant method of valuation of your company.
Say, if your company is a marketplace for babies product and you are valuing your company based on total number of visitors to the website, then it is definitely not the right method of valuation. However, if your valuation is derived from the commission received from the sales generated, then you are on the right track.
Of course there’s a lot technicalities in the VC investing world, I barely scratch the surface with the 3 most commons issues here. I’d suggest you to do your own research and reach up more on the details. Y Combinator’s blog is a very good place to start (https://www.ycombinator.com/resources/)
Here, I bid you all the awesomeness to your entrepreneurial/Venture investing journey. All the best!