How much should I raise in my angel round? How should I spend it?

http://calacanis.com/2015/01/21/how-much-should-i-raise-in-my-angel-round-how-should-i-spend-it/

by ggonweb • 12 years ago

181 42 12 years ago

This is pretty damn spot on. My company raised $700k, and just hired the fourth person for our four-person team. I've had a lot of people ask me about how our expenses work out, so I figure I'll be a little bit transparent in hopes of helping newer folks out.

Person 1: Business/operations/marketing/CEO stuff (but still likes to get hands dirty in code when possible). 60k/yr, lots of stock.

Person 2: Brilliant programmer, mostly back-end. 115k/yr, lots of stock (family + student loans).

Person 3: Good programmer, mostly front-end. 120k/yr, a little stock.

Person 4: Great designer/product/UX. Can write HTML/CSS/JS, but it's usually faster for him to pass it off to #3. $100k/yr, a little stock.

The salaries are, of course, dependent on our needs and personal circumstances. The person who makes 60k has practically no expenses, at least relative to some of the other members of the team. We're also distributed geographically, so the salaries will change slightly in SF vs. middle-of-nowhere, but that's the gist of what I consider the classic team.

After taxes, office space, etc. Our burn will last us just more than 18 months (we're frugal on this stuff - didn't need new computers or many monitors or other stuff). We also spend about $500/month on various types of software. If something slows us down even a couple days, it's cheaper for us to buy a software solution than to pay salaries while everyone works through it manually.

Everyone has to be a generalist to a certain extent, but we all naturally gravitate to what we're good at. It took us a long time to hire person #3 - we thought we would be able to get away without him/her, but adding him/her feels like it's doubled the rate at which we can ship product. We formerly compensated for it by having #1 and #4 do his job, and that really slowed things down.

Now we have every opportunity to do what we need to do. It's all up to us.

Hope that is helpful to someone.

loceng• 12 years ago

Mind sharing where you were at (product wise) prior to the $700k raise?

austenallred3• 12 years ago

Launched for one month, 50k "users" and 250k page views in the first month. Users is in quotes because we only required a username to sign up, so it was pretty close to measuring active unique visitors.

But most importantly we had a really compelling story and go to market strategy in a really big market. Over 50% off the investors we talked to invested, which is absurd, so don't feel like that's the minimum either.

jasonmcalacanis3• 12 years ago

Stoked to see we are in sync... the data I put together is based on a couple of dozen investments in this stage. Some folks do it cheaper, some folks spend more money.

saurabhnanda• 12 years ago

Is the person getting a lower salary for personal reasons being compensated with higher stock? Or is everyone being altruistic about it -- "I won't drain cash if I don't need it"?

austenallred3• 12 years ago

The purpose of our salaries is to keep us alive while we build a great company; what arbitrary number of dollars is required to do that isn't important to me. We have an equal number of shares, because he's an equal partner.

If I take an extra 20k of salary, that's 20k less we can use to hire someone better/smarter. I'd much rather work with smarter people than drive a nicer car. I don't really care for "stuff" anyway.

If you offered to let me stay at this level for the rest of my life and promised I'd always be able to work on something I believed in, I'd take that deal in a heartbeat, even if it's far below market.

http://austenallred.com/everything-you-need/

pbreit2• 12 years ago

First, cool of you to talk about your situation. My 2 cents: salaries seem high even if all in SF. I think it's reasonable to go with reduced salaries at seed stage. If there's concern, include full salaries in offer pending fundraising/revenue. Cash is extremely valuable. The first few people need to bear down. As you say, they're working for the challenge and the promise, not the money.

skrebbel2• 12 years ago

To me, someone who lives in what the author calls "the real world", $750k sounds like a humongous pile of cash. I have a hard time matching this with the word "seed".

How far do SV angels expect you to be before they'll put that kind of money on the table? Idea? Prototype? Users? Ramen profitable? Ramen profitable and 4x monthly growth? Weekly?

biot2• 12 years ago

It boils down to risk tolerance. If Elon Musk were to say "I'm thinking of doing something new, just not sure what yet", someone will throw $7.5M at him. On the other hand, if you're not a big name with an established track record then showing up with just an idea isn't going to get you very far. The more you can demonstrate to reduce risk, the more likely you'll be in successfully raising funds.

petercooper• 12 years ago

Since you brought up Elon Musk, the "seed" funding for SpaceX was $100M of his own money. A different industry for sure, but I think it proves that "seed" funding can't really be defined by the amount but the intent.

iolothebard3• 12 years ago

750k seems like a lot to me as well, however I have done startups that are very lean and all the investors are people that are working on the product.

35-70k of my own money was more than sufficient. The problem is once you're live, trying to get enough income while growing the company and having other jobs so you can fund your own needs makes it very difficult (have failed 7 out of 7, just to varying degrees, 3 made multiples of money back but died off, 4 went down in a flaming pile of dung).

I've done all but one of my startups in the midwest though (one in SF, SF failed out of the gate).

I don't like the money game, so I'll probably never have a startup take off, but trading away too much seems like it's not worth it. I don't do startups to get rich, I do them so I have clients/customers to answer to instead of asshole bosses.

My most successful startup was the one I regret (first I ever did alone 100% on my own dime). I should have gone after money 9-12 months in once I had a stable (although needing lots of work) product and 13 clients.

mattm• 12 years ago

My most successful startup was the one I regret (first I ever did alone 100% on my own dime). I should have gone after money 9-12 months in once I had a stable (although needing lots of work) product and 13 clients.

Why do you regret not doing this? I'm currently funding 100% my idea which has a few customers and I'm wondering if it will be better to raise funding once I can get more customers or to just keep going as is.

rhgraysonii• 12 years ago

I imagine this varies on a case by case basis. Since this is often not publicly disclosed, its difficult to know exactly. In my personal experience at a few firms, the seed money came with an MVP that had proven an ability to get users and provide value.

Your next question is how many users, I imagine. This varies by the product/service. Working B2B? You don't need thousands. Doing something consumer facing or social? You need a lot, and a hook. Or something no one else has done that catches someone's attention that has a lot of money.

jasonmcalacanis3• 12 years ago

750k is a lot in the real world... then you move to the Bay Area and run into the cost of living issues: rent, transportation.

It's very hard to find housing under $2k a month per person -- so if you make $7k a month and have X left after it you're going to be surviving on 75-100k a month... but it's like getting paid $50k in Atlanta: small apartment, decent food but no savings or big Hawaii trips.

marincounty• 12 years ago

The rent in the Bay Area is a huge problem. If was starting out my 5th person would be a homeowner who would let me use their garage, and a few bedrooms in exchange for stock in the company, and maybe a little help around the house? We seem to be, as Americans, too concerned with the right living situation? I've lived in a garage and couldn't care less. My dates did though? But the ones who looked beyond the rust stuck around for the finished product.

patio11• 12 years ago

It depends, and there are factors which can make the usual rules not apply. The right team / the right story / the right moment / the right competitive dynamic among investors / etc means you can raise on, essentially, nothing else. If you have to ask whether this will apply in your case, it will not.

Anecdotally, the bar for a seed round in software is a) the product exists, b) real people are using it happily every day, and c) you're collecting proof points that it is a nascent business. (As distinct from a hobby project.)

If forced to put a number on it, for B2B SaaS, you've got either an LOI or contract for an anchor enterprise customer paying $50k+ or you've got thousands a month in low-touch revenue and it is increasing rapidly. Note that thousands is not tens of thousands. It may have been a while ago.

There are also huge X factors here. Location is one. Ask Matt Wensing about the frustrations of having the White House Situation Room as a paying client and being told that that was insufficient grounds to fund them because the TAM of WHSRs was 1 and, as they already had it, the investor didn't see the growth story.

skrebbel2• 12 years ago

Thanks, just wanted to be sure. No seed investment before team+product+users/customers+real turnover. Turns out the valley isn't that different from the real world after all!

_random_• 12 years ago

London: $50-100k USD for 40% (Gaming). Don't come here.

seivan• 12 years ago

Did you have a finished game before, and if you did, did you have paying customers?

iamwithnail• 12 years ago

Really? I mean, that represents astonishingly bad value for a bunch of reasons. The first is that that's not SEIS covered, because it vastly reduces (by 70%) the risk exposure of the capital, and consequently the %. Especially if you'll include video games tax credits on thus back end that let you stretch that runway. Beyond that, you've also not used the full SEIS value -£150k, so again, shot yourself in there foot. This wouldn't be typical of valuations that I see working with startups, it's far more in the order of 10-17.5% for £150k (with SEIS coverage). Gaming is obviously it's own beast, but the same rules on making the investment tax efficient for the investor apply, and I'm surprised anyone gets any investment with ought SEIS any more.

With that in mind - advice is always to raise as high as you can on angel, because it's covered for the investor, and you can only do it once.

walkamages• 12 years ago

London based too - what exactly was that 40 percent of? Would be interested to find out, as a colleague of mine can reveal the following details for comparison: 20 percent of equity in a B2B company (not even live yet; but customers already signed up), five developers plus owner, central London based, amount invested £1.4MM. I am not sure how much haggling was involved but he was happy as the investor has a proven record with B2B in the UK, and can probably help it in the mid to long term.

dude_abides• 12 years ago

A useful reminder: Brin and Page raised $100K in their angel round (from Andy Bechtolsheim). Their company HQ was a friend's garage.

iolothebard3• 12 years ago

1990s were a long time ago as well.

api• 12 years ago

Everything else has gotten cheaper, so if it weren't for cost of living you could probably do it on half that now.

The problem is that while hardware, cloud, bandwidth, etc. has collapsed in prices since the late 90s, real estate has arguably undergone hyperinflation. As a result, people can't cope with low salaries as easily unless they're just-out-of-college types with no footprint.

syllogism• 12 years ago

and have $120k in legal, accounting, and capex spending (your laptops).

So about 100k for legal and accounting? Is that normal?

jamiesonbecker• 12 years ago

Seemed like a lot to me, too, but a few patents can eat that up fast.

mikeyouse• 12 years ago

If you're planning on making it last 18 months, $100k is probably in the right order of magnitude. Incorporation fees, corporate taxes, liability insurance, workers comp., 409a valuations, audit fees, patent / IP expense, trademarks...

You'd be surprised at the number of $5k bills you get from various parts of running a business.

jasonmcalacanis3• 12 years ago

You can have some fees deferred. but $3k per person for computers is $12k... company formation is $5-10k, convertible note is $5-10k, terms of service, IP assignment, etc. Patents are $10-50k depending on how far you take them.

$120k is high, but not outrageous.

vasilipupkin3• 12 years ago

at that stage, patents are probably a waste of time for a startup, wouldn't you say ?

mbesto• 12 years ago

I've got a reputable SF lawyer (does YC companies to boot) to do formation+note+etc for ~$3k. Cooley/WSGR/etc will all look for $25k (and sometimes help by deferring), which IMO is outrageous. It's outrageous not because it's incorrect given the market, but they're value isn't high enough to justify the cost. If you're negotiating a Series C, I can see their value but not when you're just starting. Early stage law is fairly boiler plate, that is, unless of course patents come into play.

joshu2• 12 years ago

if you have a mostly working product and starting to scale up, $750 is okay-ish. eg you have a saas that's already starting to grow or whatever.

if you are still figuring out what you are building, it's too little. it will be very hard to raise again.

all except for one startup i invested in at a lower total raise ($500k) has died; they had even less runway to figure things out.

vasilipupkin3• 12 years ago

I've invested in a bunch that have raised 1mln+ but that extra money just prolongs the same misery, while creating the illusion that they still have the funds to figure things out. I recommend maybe 1 mln rather than 750.

joshu2• 12 years ago

Yes. Not saying anything guarantees success, but too short a runway can ensure failure.

peterjancelis• 12 years ago

$35K per month for a team of 4 seems ridiculous to me. And $500 for a desk, really?

I live in Vietnam, serviced room in the middle of Ho Chi Minh City, eat out in restaurants daily and spend about $1000 per month.

vasilipupkin3• 12 years ago

and I am sure Vietnam is awesome, but is it awesome for building a startup? Numbers say no, otherwise most startups would be in Vietnam, not in SF :)

jv22222• 12 years ago

What is a typical % of equity to give away for the $750k?

How much should I raise in my angel round? How should I spend it?

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