Show Notes

Venture Capital Funding and Investment Terms with Nareg Essaghoolian from Decrypted Legal & Consulting

We explore the world of startup funding and venture capital. Nareg shares insights on the use of safe notes, valuation caps, and discounts in pre-seed rounds.

We discuss the importance of having a product or service with positive revenue when seeking institutional investment and the challenges faced by first-time founders in securing funding.

We also dive into how the investor market has changed over the last few years and give advice to anyone looking to raise money from investors.


About Nareg Essaghoolian
Nareg Essaghoolian is the co-founder of Decrypted Legal & Consulting.  He represents startups from day one at formation through their venture capital financings and exit. 

Prior to Decrypted, he spent several years at Cooley in Palo Alto, CA, one of the most prominent firms in the industry.

He is now back in Los Angeles where he is born and raised working on disrupting the legal industry by being more transparent with pricing and services.

EPISODE LINKS
 

TIMESTAMPS
[00:00:00] - How we met

[00:02:20] - VCs don't do follow-on investments?

[00:03:03] - VC with no follow-on investments.

[00:03:20] - Smart decision, reduced risk, 10x return.

[00:03:46] - "Investors don't follow: Crazy thought."

[00:04:29] - Sequoia loses trust, no follow-on investment.

[00:05:16] - "Ten times return on investment"

[00:05:55] - Y Combinator: Accelerate, Invest, Return.

[00:06:47] - Angel investors not investing in Series B, C.

[00:07:44] - Tech, web three, down rounds.

[00:08:35] - "Protective terms more prevalent than pay-to-play."

[00:09:31] - "Understand cap table terms: Liquidation Preference"

[00:10:06] - Investors get preferential treatment.

[00:11:01] - Double-dipping liquidation preference.

[00:11:34] - Negotiating Leverage for Investors

[00:12:25] - Investor gets 20% upside.

[00:12:58] - Participating Preferred: 18M Shared

[00:13:47] - "Accumulating dividends of 6% annually."

[00:14:30] - Investors leveraging market, waiting.

[00:15:23] - "Maximize returns in venture capital."

[00:15:54] - Betting on ten, hard model.

[00:16:37] - Equity over loan for higher returns.

[00:17:20] - Nine failed investments, safe notes used.

[00:17:57] - Stacking SAFEs: No Consequences?

[00:19:16] - Raising money with complex stock.

[00:20:01] - "Multi-year dilution, complex lead investor."

[00:20:42] - "Valuation caps range widely."

[00:21:14] - Valuation caps vs. discounts.

[00:21:52] - Oh, I'm not investing in ideas anymore.""Ideas not funded: Valuation 7.5-9"

[00:22:18] - "Finding repeatable sales process: hard."

[00:23:01] - West Coast: liberal, East Coast: conservative.

[00:23:38] - "Raise pre-seed, build MVP, get revenue"

[00:24:17] - Making money: repeat founders exception.

[00:24:51] - Micro investors: new venture rules.

[00:25:42] - Small investment, big talk.

[00:26:16] - Raising too much money kills startups.

[00:26:37] - Microinvestors, micro funds, venture studios.

[00:27:30] - Investor expectations counterintuitively high.

[00:28:16] - Startup founders hustle to succeed.

[00:29:12] - Competing for best deal flow.

[00:29:59] - Investing in startups: Betting, Adding Value, Studying.

[00:30:50] - "Buying product market fit: Not possible."

[00:31:28] - Finding product-market fit: Tough Love.

[00:32:15] - Solve pain points, ask questions first.

[00:33:37] - "Can't cheat certifications, hard to get clearance."

[00:34:09] - Money not validation: 90% wrong.

[00:34:33] - Belief in you, not product.

[00:35:18] - Validate idea with money, not market.

[00:35:50] - "Traditional VC vs. Super Angels"

[00:36:24] - Raise VC funds without legal help.

[00:37:23] - Most favored nation only for lead.

[00:38:05] - "Check size defines favor nation."

[00:38:45] - Good relationships, large checks, more rights.

[00:39:37] - Equity holder on liquidation exit.

[00:40:13] - Raised million, sold for hundred.

[00:40:54] - Founder discount on exit: 20%.

[00:41:34] - Maximizing take-home pay: Y Combinator

[00:42:13] - Ten-year-old, profitable, growing company.

[00:42:39] - No need to raise money.

[00:43:17] - Negotiate return, cancel safe investment."

[00:44:17] - Unpopular redemption rights and buybacks.

[00:44:47] - Tax exemption for stockholders.

[00:45:47] - Tax avoidance through QSBS.

[00:46:36] - Congress might exit: Plan ahead.

[00:47:32] - Friend sold company, moved to Nevada.

[00:48:22] - Funded to $150M, lived in PR legally.

[00:49:17] - "One day it's not: SEC knocks"

[00:50:09] - "Filed major law, moved to CA, terrible taxes."

[00:50:57] - Fresh air, sun, and ocean.

[00:51:35] - Taxes ruin RV dreams.

[00:52:19] - Focus on exit later, not now.

[00:52:55] - Investor disagreed on business terms.

[00:53:27] - "Investor exits, founders rewarded."

[00:54:06] - Founders relieved of investors.

[00:55:05] - "Protective provisions with director approval."

[00:55:39] - 83B filing for founders.

[00:56:33] - Miss 83(b) Election: Unforgivable Mistake.

[00:57:03] - Defer taxes with IRS: 83(b) Elections.

[00:57:46] - Fairly priced C Corp setup.

[00:58:26] - Restricted stock with 83b election.

[00:58:58] - Filing 83b election to defer income.

[00:59:29] - Tax liability on vested stock.

[01:00:08] - Missed 83b election: Huge financial burden.

[01:00:52] - "Formal restricted stock agreement, check."

[01:01:35] - Investing in company stock vesting.

[01:02:28] - Restricted stock, vest, reinvest, eighty-three b.

[01:03:30] - Tax risk mitigation options.

[01:04:18] - Catch twenty two: vest or buy?

[01:04:53] - Negotiate vesting schedule upfront.

[01:05:47] - Founders decide, eighty three B important.

[01:06:32] - File notices in each state.

[01:07:29] - Raising $5M on $25M post.

[01:08:02] - Early stage market protections, 5-10x blocker.

[01:08:43] - Tighter investor control, quicker financials.

[01:09:49] - Debt financing guidance for founders.

[01:10:38] - Investor Director approval required.

[01:11:13] - Tight grip on equity pool, no buffer.

[01:12:13] - Tighten grip, control money, fair.

[01:12:54] - Bootstrapping to success with millions.

[01:13:38] - Raise VC only if needed.

[01:14:11] - Time-sensitive VC-LP IRR.

[01:14:34] - Never enough time, stress, investors.

[01:15:03] - Funded with stock trading, worked.

[01:15:44] - Raising money: Necessary Evil.

[01:16:38] - "Organize corporate documents for fundraising."

[01:17:07] - "Have diligence book, corporate charter."

[01:17:59] - Organize documents, get legal help.

[01:18:58] - 15% grant, founders take dilution.

[01:19:42] - Plan equity, negotiate dilution, impress VCs.

[01:20:46] - Owed half-million, equity unclear.

[01:21:15] - Advisors: Worth the Investment?

[01:21:51] - Advisory staff, board value?

[01:22:19] - Advisory boards vary by industry.

[01:23:12] - Protecting equity, negotiating points.

[01:24:26] - Starting companies in downturns: success.

[01:25:44] - Trust people, not strangers.

[01:26:27] - "Entrepreneur: Professional Investor's Product"

[01:27:07] - Affordable in-house counsel services.

[01:28:09] - Found product market fit for startups.

[01:29:21] - "Founders and legal: Get it right first time."

[01:30:20] - DIY incorporation: too vanilla.

[01:31:05] - Flat fee legal advice for startups.

[01:32:10] - Accurately predict pricing, no overhead.

[01:33:11] - Raise money remotely: Tips for founders

[01:34:17] - Network with founders, get lawyer, value counsel.

[01:35:28] - Networking with other founders: invaluable.

[01:36:14] - Invest in yourself: Marathon, not sprint.

[01:37:15] - Invest in yourself: gym, trainer, childcare.

[01:38:06] - Educational, entertaining, legal-adjacent.


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