HOW TO RAISE A SEED ROUND FOR A STARTUP IN INDIA? | METASTARTUP #9

guys welcome back to another episode of Menace startup one really cool thing is that I finally managed to go get a haircut between managing Avalon and doing the series for you guys I've had no time whatsoever so I'm glad that I finally managed to get a haircut it's been like three months and Counting and yesterday my co-founder Sean just came dragged me out which is why I missed out on yesterday's episode I'm really sorry about that to make up for it I'm putting up three back-to-back episodes off meta syrup which you can find on my youtube channel now I know a lot of you will be looking for co-founders at some point in the future so I have made a Facebook group called meta startup obviously Durr so I made a Facebook group which will encourage a lot of you to have discussion it's hard to have discussion on Instagram which is why we made this group and it's gonna be moderated by two people from my team evanov and nanda and hopefully you know we discuss a lot of important basics as well as some of the complex topics when we get there as usual don't forget to follow me on Instagram don't forget to subscribe to me on youtube because this content it's we're just kind of snowball we're gonna keep doing more and more of this I'm only going to slow down when I think that I put out enough content for you to be able to understand how to build a business from scratch to some amount of early revenue now for a second I wanna talk about success a lot of people think success is a binary thing you're either successful or not but what I've seen is that success that metric for success those goal posts for success keep changing as you get more successful so whenever people used to ask me if my startup was successful I didn't have an accurate answer because those goal posts kept changing did I feel successful after I raised my voice strong yes for a little bit did I feel successful after making my first sale yes but those goal posts moved again so those goal posts keep moving time and time again so teaching you how to be successful at running a startup is a moot point right it's it is it just isn't possible because those metrics for success change over time but in every startups journey in every startups life cycle there are a few milestones like raising your first round of funding that are similar between all startups and that are achievable so now that we're done with the basics of how to register honey we're gonna talk about equity and gap tables and how the business side of a start-up works when do VCS come in how much do you dilute how does the dilution work so we're gonna go through all those topics it is gonna be slightly finance heavy but I'm gonna explain these concepts in a way where even a 10 year old would be able to get them and absorb them and retain them for a lifetime so without much further ado we're gonna dive deep into the business end of things and I'm going to be doing most of this on my computer so the audio is gonna change a bit I'm really excited let's get started all right so guys welcome back in this video I'm going to be doing some hands-on work I'm gonna be showing you what a start-up looks like to everybody from its founder to its investors to future investors to a potential acquirer I'm gonna show you how it looks like from the business end of things now all this is loosely based around something that I've kind of learned from almost five or six years ago it was created by a man named Sal Khan the guy runs you through startup life cycles from scratch to death to even IPO and we're gonna follow a similar route but I'm gonna you know make it very india specific and I'm gonna add some points of my own all

right so let's go through what a start-up looks like in its early days we're gonna use this kind of as a digital whiteboard we're gonna go through what equity is what shares are how you know co-founders should split that equity yada we're gonna go through all of that on the stream right now so what is a start-up

in its early days fundamentally all right so let's let's draw this let's say you and your friends were sitting down you had like a great idea you want to sell maybe t-shirts online right and we're only gonna focus on digital businesses throughout the entirety of meta startup because I think you know every business should be digital today otherwise you don't have a chance right so let's say this is a big idea let me just draw that let's say idea now I have a question for you right what's this worth what is this idea worth and I know you can say take some time and you can say okay this idea is worth you know 50,000 rupees or 2 lakhs or 30 crores how do you know

or 30 lakhs or 30 crores how do you know the difference between a good idea and a bad one the thing is you don't know what the idea is worth so we're just gonna put a question mark here and we say we're gonna say we don't know what it's worth now let's say that this entire section displays the assets of a start-up now let me just write that down assets now assets of things that the startup actually owns right so the syrup technically owns the idea so let's just say you know this is the idea of the star now the startup has nothing else going for it right so let's come up with a simple formula to kind of determine what the value of the startup is so let's say the assets of the start-up assets is equal to liability and we'll come to word liability is in a bit liability plus equity right so we don't have any liabilities right now liabilities when you take debt or you know take a loan or something so we don't have any of that right now so let's just focus on assets equal to equity so I'm going to draw this right here this thing on the right and we say this is the equity

table of the star all right so the equity table determines who owns what in a start-up it's basically a cap table it's the display of ownership of a start-up right so let's say in this startup we've got two co-founders you and your friends so Scylla let's say co-founder one and co-founder - all right now both of your good friends you say okay I'm going to start a startup and you guys decide to register the company now in India remember when you register a company you buy 10,000 shares at n rupees each so you know the rupee symbol looks like I think looks like something like this so that's roughly about 1 lakh so let me just write that down right now this is the paid up capital and the authorized capital of the company all right so let's say this is the valuation of the company it's early day every company in India when it starts out with the valuation which is 1 lakh right so this is how we start out now you know co-founder 1 and cofounder to eat we know that the total number of shares in the company are 10,000 so let's say we own 5,000 shares each of the co-founders owns 5,000 shares now I don't generally recommend co-founders

split equity half-and-half I've kind of run through this in my previous videos but for the purpose of making math easy in this video we're gonna have them split shares equally halfway you know that right on these co-founders have just an idea right so what else is added to the idea say you know co-founder one is a very good graphic designer and co-founder two you know he's greater to gistic so he's done logistics before so he brings that kind of experience so you know in the assets section let's call this the asset equity section right we can also call this the cap table but for now let's just call it the equity section now we have these skills right there are worth something again you can't really put a price on this but you know let's just put on everything that we have and these this is what the startup looks like at it's very early days so now let's assume you guys you know decide to launch that website you call it rhodes india calm clothes india calm right now I'm sure you see that there's a problem here which is that you know once you give out these shares if five thousand shares are given out to each person in your company and co-founder too he takes his five thousand shares and the very next day he decides to disappear now this happens all the time right so co-founder one and co-founder to say look you know you to get all your five thousand shares in the company you know these are yours these are allocated to you but you've got to spend a minimum amount of time in the company now let's say it takes four years for a startup to be successful right or four co-founders work to be you don't valid and worth it if and only if you know what co-founders are willing to stay for four years do they actually get their shares right so this is called a vesting period right at that done vesting period right so for four years these shares are kind of locked in they're still allocated to the individual people to the individual co-founders but you can only access you know all 5,000 shares after four years now you know there might be events like sickness and whatnot so maybe co-founder one is only able to work for one year or two years or three years what happens in that case right so to make you for that there's something called a cliff which is that at the end this is CLI FF at the end of every year 1/4 right of all these 5,000 shares are released to co-founder 1 and co-founder 2 so they get 1/4 of their shares every year right so this happens for 4 years until they get all 5,000 so at the end of the first year co-founder 1 gets 5000 divided by 1/4 of his shares right and these are called cliffs so different startups have different cliffs but usually it's a one-year cliff and a 4 you're wasting period that's kind of standard now we know that there are 10,000 shares in the company 10 rupees per share 1 lakh is the total paid up capital which is also at this point the valuation of the company so we're saying that all of this together is worth one lakh now let me just open a new sheet right now I'm going to refresh this page and talk about what happens when these startup goes for its first round of funding now there many different types of venture capitalists you can go to let's call them VCS but the one we're going to be talking about in this particular scenario is

angel investors now angels are typically you know they're not really VC's they're just you know people who've made a lot of money a couple of decades ago who wanna bet on different startups now and these are guys who you know make a lot of startup bets most of them fail these are the guys who take the most amount of risk because they invest at the earlier stage so they take a little less risk than the founders but a pretty significant risk in itself now we go to an angel and of course you know we've got to redraw our kind of assets section let me do that so this is the idea I'm just going to redraw this entire thing and this is these yields of the team of course and let's also draw our equity section because all of this is you know somebody owns this which is you and your co-founder seems to this cofounder one and co-founder two these are five thousand shares each I'm not going to denote them right now but what we do know is that at this stage a start-up begins to form something called a board so the board is basically the people who represent the startup right so let's make two faces yeah this is co-founder one and co-founder two because you guys all most of the shares you would be representing the board you just do that C F 1 and C F 2 right so you take the decisions you take a decision whether to I mean jointly this board takes the decision whether to raise a new round whether to kind of not take the round whether to expand in new markets yadda so these guys say the decision makers with the company now at this point you go to the angel and you say you know angel I want to raise around from you I think I need one crore I think it takes one crore for me to run this company for the next 18 months will you be willing to give me a crore and you know a lot of Angels shut the door they say you know we're not investing in closed startups it's just too late but one angel you know takes favour on you and says you know I see myself 20 years ago in you guys so I'm going to invest a crore in you guys and he says what is the

valuation or the pre-money valuation of your company now I want to introduce several terms here the first one of course is pre-money valuation I want to introduce another term called the funding amount and I want to introduce the post-money valuation right so these are three terms were going in introduced and the VC asks you what is your

pre-money valuation what is the value of your idea plus your skills plus a prototype or whatever you might have at that point and you say you know I registered my company a few months ago so you know at that point the value of this company was a lack and the VC laughs at you and says at the early stage of a company the valuation of the company is dependent on a thumb rule which is in India anywhere between five to ten crores the this is the average pre-money valuation of most companies in India most seed stage companies in India that are digital and you might say and which surprised you say dude my the valuation my company was a lakh how did it go to five or ten crores all of a sudden and again there's no metrics to go by there's no revenue there's no it's just you go by a standard value which is anywhere between five to ten crores otherwise you end up you know devaluing a company completely right so the pre-money valuation the investor takes favour on you and he says you know what you guys are nice so I'm gonna give you ten crore valuation right he says he values the said ten crores again there is no way an idea and just skills about ten crores you might think that but if the startup ends up doing really well you will realize that you actually got a fair bargain for this right so we'll say the pre-money valuation of this company is ten crores and the investor says okay you know you want one crore I'll put in your 1 crore

right the post-money valuation is it's a very simple formula which is the pre-money valuation plus the funding amount which is 11 C are right the post-money valuation is basically what does the valuation of the company after the round with the assets of the company which is the idea and skills plus the new funding amount so the funding amount now essentially becomes an asset of the company right so it becomes this is 1 crore here and we know obviously for obvious reasons the total becoming 11 C R which is the post-money valuation right now what do we give the investor in return for this right shares in the company right to denote ownership now two questions you're gonna ask me here are

how many shares do we give away and what is the price per share because of any company should always be the same right for every share in the company the price is the exact same we know that there are 10,000 shares here split halfway between both the co-founders five and five thousand how many shares do we give the VC or the angel in this case the answer is you give them a thousand shares right and this is very straightforward simple you have ten crore valuation you're adding a crore on top that's 10% so you should 10% more shares not cured how the shares are not transferred it's not you give away a thousand shares from your pocket you introduce new shares under the company right and this is called dilution now a lot of people think that when delusion happens they losing something in the company now that's not technically true because although your stake is reduced the value of the company has increased to make up for it so don't worry too much about dilution at this stage try to focus on generating even more value or trying to settle at a slightly better valuation now there are downsides to having to higher valuation we're going to come to that in a little

bit now what is the price per share now we know that the angel holds this now what is the price per share so I want to introduce two formulas here which is the price per share equal to pre-money valuation divided by number of shares before the round in this case that would be the pre-money valuation ten crores divided by 10,000 we had 10,000 shares before the round which is equal to 10,000 so each share in the company now is valued at 10,000 rupees it used to be valued at 10 rupees and now it's gone up to 10,000 rupees now I'm going to introduce one last formula to you which is going to confuse you a little bit you might think that the angel has 10% in the company but he does not instead the stake of the angel is calculated as invested amount divided by post-money valuation which is in this case the one crore which is the funny amount divided by 11 CR which is the post-money valuation which comes out to 9. 09% he does not have ten percent in the company as you would think which is kind of straightforward instead it's 9. 09% in the company right whereas the cofounders of the company have the rest ninety point whatever now remember we valued this section of idea and skills at a certain amount and the angel is hoping that over time you add more assets to the company maybe it's a product maybe it's you know some revenue maybe it's some early customers and this is what the rest of meta startup deals with how do you increase this section of your assets of your company and the angel is hoping that at some point this goes from 10 crores this entire value of the company goes from 11 crores to maybe a hundred or two hundred crores at which point you sell the company and he's able to cash out so they're all looking at this section of a company getting bigger and bigger and all of this depends not just on cash in the bank but also on other kind of intangible assets and we're going to get to this in a little bit now the next thing the angel is gonna do is he's gonna wire some money to you he's just gonna make a simple bank transfer send you a crore straight in your company's corporate bank account and because he owns a decent amount of shares in the company he becomes one of your let me just draw a mustache I hope this is a good mustache he becomes one of your board members right so if you want a decent amount of equity in the company you can kind of elect board members and in this case the angel elects himself to be on your board so people can sit on boards of multiple different companies so for example I sit on the board of four different companies and it's pretty common to see you know decision makers between different companies to be the same person now sometimes as the company gets bigger you will be you know chunking this you might give away you know some Aesop's and let me just write that down this and it's called employee stock options you might give away some Aesop's to different employees so you know the co-founders will dilute but at this point you have to remember that not any individual person in the company can value it so this is wrong instead the entire company including the angel dilute to make a separate ESOP pool so they all kind of lose their shares to kind of put in this eSAB pool right and we're not going to dive deep into Aesop's here but typically when you go to an angel they will ask you to already have an esop so that they don't end up diluting to make a nice soft pool later in the next video this startup is going to go out and raise a Series A from institutional investors which are you know kind of serious investors who manage other people's money we're going to explore that in the next episode