Priced Rounds and the Road to Increased Certainty
Most things that are done well require patience, time and effort. Scrambled eggs are better when you cook them low and slow. Priced rounds require a significant amount of upfront accounting but give you a better picture of how much your company is worth and consider possibilities for the future. But sometimes you’re starving, and you need breakfast. Sometimes you’re struggling, and you need cash fast.
In a priced round, you and your investors agree on a “pre-money valuation” (what your company is worth before money gets put in) and then how much more money the company needs to achieve its goals. While your investors are protected by negotiated agreements, you have to think about incentive opportunities for your employees, the composition of the board of directors, and several other important variables for the future of your company. Negotiating all these variables can take quite a bit of time, but here’s what you can do in the meantime.
Investors who see potential in your business can invest through an unpriced round. An unpriced round is when you’ve got interest in your company and investors put money in without necessarily receiving equity at the time they invest. In exchange, they receive an instrument which can convert into equity in a subsequent priced round. The main vehicles for this are convertible notes and Simple Agreements for Future Equity (SAFEs).
A convertible note is a debt instrument that converts to equity under predetermined conditions, such as raising a priced round. A SAFE is not debt, so while a convertible note includes an interest rate and maturity rate, a SAFE does not. Both can have valuation caps, discounts and agreements to offer investors the same terms as future investors on subsequent investment rounds. Both of these routes are relatively quick, affordable (in terms of advisors’ fees) and straightforward, and strict valuations aren’t always necessary if you’re not sure how to determine the appropriate metrics to measure your company’s value.
Priced rounds offer clear terms and certainty down the road. This method appeals to investors and generates a buzz around your company. Negotiating a priced round can help prevent misunderstandings among you and your investors.
Obviously, every company’s needs are different. If you have a relatively clear understanding of your company’s value and a vision for the ownership, a priced round may be what is best. If you are still figuring out where your company is headed and need more flexibility and control, convertible notes or SAFEs may be what is best for you. If you are looking into a financing, please consult with legal and tax advisors.
In a priced round, you and your investors agree on a “pre-money valuation” (what your company is worth before money gets put in) and then how much more money the company needs to achieve its goals. While your investors are protected by negotiated agreements, you have to think about incentive opportunities for your employees, the composition of the board of directors, and several other important variables for the future of your company. Negotiating all these variables can take quite a bit of time, but here’s what you can do in the meantime.
Investors who see potential in your business can invest through an unpriced round. An unpriced round is when you’ve got interest in your company and investors put money in without necessarily receiving equity at the time they invest. In exchange, they receive an instrument which can convert into equity in a subsequent priced round. The main vehicles for this are convertible notes and Simple Agreements for Future Equity (SAFEs).
A convertible note is a debt instrument that converts to equity under predetermined conditions, such as raising a priced round. A SAFE is not debt, so while a convertible note includes an interest rate and maturity rate, a SAFE does not. Both can have valuation caps, discounts and agreements to offer investors the same terms as future investors on subsequent investment rounds. Both of these routes are relatively quick, affordable (in terms of advisors’ fees) and straightforward, and strict valuations aren’t always necessary if you’re not sure how to determine the appropriate metrics to measure your company’s value.
Priced rounds offer clear terms and certainty down the road. This method appeals to investors and generates a buzz around your company. Negotiating a priced round can help prevent misunderstandings among you and your investors.
Obviously, every company’s needs are different. If you have a relatively clear understanding of your company’s value and a vision for the ownership, a priced round may be what is best. If you are still figuring out where your company is headed and need more flexibility and control, convertible notes or SAFEs may be what is best for you. If you are looking into a financing, please consult with legal and tax advisors.