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When you hear that a startup has a high valuation, it might sound like a win. It makes the company look valuable, and founders get to keep a larger ownership stake. However, having a high valuation can cause issues that could hurt your business in the long run, especially when working with venture capital firms or raising money from equity investors. Let’s look at why high valuations aren’t always a good thing when it comes to company financing and capital raising.

For more insights on this topic, you can check out this post on LinkedIn by Jasenko Hadzic here.

1. Investors may not prioritize your company

When you raise money from venture capital firms or angel networks, these investors offer more than just capital. They provide guidance, industry connections, and support to help your business grow. However, investors have limited time and resources, and they’ll focus more on businesses where they own a larger stake.

For example, if an investor owns 1% of your business but has 10% in another company, they’re likely to spend more time helping the company where they have a bigger stake. A high valuation often means your investors hold a smaller percentage of your company, which may result in less support from them. This can be an issue in seed rounds or early-stage equity investment when you need all the help you can get to grow.

2. Startups need time to grow into high valuations

A high valuation is based on the expectation that your company will grow rapidly. But what happens if your startup doesn’t meet those expectations as quickly as investors hoped?

Let’s say you raise money at a $12 million valuation during your seed round. You spend the funds on product development and hiring, but after several months, the business isn’t gaining traction. Now, you need to raise more money, but investors might lose confidence in your company. As a result, they could suggest a lower valuation for the next round of capital raising, which can signal to others that your business is struggling.

This situation can hurt your chances of getting further company financing from VC firms and other equity investors. In a crowded market where investors see hundreds of pitches, a lower valuation can make them choose a new opportunity over your startup. For a deeper dive into why high valuations can be tricky, you can read Rob Day’s perspective on why founders shouldn’t always be excited by high valuations here.

However, in times of tight capital, like in 2023, a down round (lower valuation) isn’t always a bad sign. It shows that investors still believe in your business and are willing to support it, even at a lower valuation.

3. Recruiting becomes more challenging

Most startups don’t have the cash to offer competitive salaries to attract top talent. Instead, they use stock options as part of their capitalization table to motivate employees. These stock options give workers the chance to own a piece of the company, and if the company succeeds, their shares could be worth a lot of money.

However, if your company has a high valuation, the cost for employees to buy their stock options is also high. This makes the options less appealing, as employees might not be able to afford them. Combine that with lower salaries and long hours, and employees may lose motivation.

Potential hires who ask about your capitalization table and realize that stock options are expensive might also be discouraged from joining your team. This can make it harder to recruit the skilled workers you need to grow.

Conclusion: High valuations aren’t always better for venture capital and company growth

While a high valuation might seem like a success, it can cause problems for your startup, especially when working with venture capital firms and equity investors. It can affect how much attention you get from investors, slow down your growth, and make it harder to attract top talent.

For successful capital raising and equity investment, it’s important to have a balanced valuation that allows your company to grow over time. This way, you can keep investors engaged, give your business time to meet expectations, and motivate employees with realistic stock options, ensuring your startup thrives in the long run.

If you're raising money for your startup, understanding equity, SAFEs, and dilution is crucial. Without this knowledge, you could accidentally give away too much of your business and end up with a smaller share when it becomes successful. Let’s break down these key concepts to ensure you're ready for venture capital and company financing.

For more insights into company financing, venture capital, and SAFEs, check out Raise Millions from Hustle Fund here.

Your pizza (company) and equity

Imagine a pizza in front of you. At the start, you and your co-founders own 100% of the pizza—this represents your business. Let’s say your pizza is worth $20, but your goal is to grow its value. Ideally, this pizza could be worth $1 billion someday, with the help of equity investors.

To achieve that growth, you’ll need help from others—venture capital firms, angel networks, or key employees. In return for their contributions, you'll give away slices of the pizza. Each slice represents equity investment, or ownership in your company. For example, if an investor receives 5% equity, they now own 5% of your business.

The upside of sharing your pizza

Giving away equity means your ownership decreases, but the right partners can help increase the value of your pizza. Even if you own only 15% of the pizza by the end, if the company’s value grows to $1 billion, your slice will be worth $150 million. This is why smart capital raising can be so valuable.

However, it’s crucial to be cautious about how much equity you give away during each seed round or VC firm investment. Each slice you give away represents a portion of your company, so you want to make sure you retain enough to stay motivated and in control.

Be careful with equity and dilution

Every time you give away a slice of your pizza (equity), your ownership percentage shrinks—this is called dilution. Founders typically give away 10-20% of their equity during each fundraising round. After a seed round, it’s common for founders to still own the majority of their company. However, by the time you reach your Series B, your slice may be smaller, but if the company is growing, this isn’t necessarily a bad thing.

Understanding the capitalization table (cap table) is critical here. The capitalization table tracks who owns what slice of the company and how ownership changes with each investment round. This helps you maintain control over your business and see how much equity each investor—whether they come from angel networks or VC firms—has received.

What are SAFEs?

Now, let’s talk about SAFEs (Simple Agreement for Future Equity). A SAFE isn’t a slice of pizza right away—it’s more like a ticket for a slice that the investor can claim in the future. With a SAFE, an investor isn’t given immediate equity; instead, they receive the promise of equity investment later.

In other words, a SAFE is an agreement that converts into equity when your company goes through an equity financing round, an acquisition, or an IPO. If the company fails, the SAFEs become worthless, which is why it’s important to understand how SAFEs impact your capital raising and company financing strategy.

For a deeper understanding of SAFEs, you can read an Investopedia article on this topic here.

Pre-money vs. post-money SAFEs

There are two types of SAFEs: pre-money and post-money. Pre-money SAFEs were introduced by venture capital accelerator Y Combinator to make it easier for startups to raise funds. However, pre-money SAFEs can make it hard to track how much of your pizza you’ve given away, leading to confusion about your actual ownership.

One founder discovered too late that he only owned 35% of his company after using pre-money SAFEs for several rounds of funding. This is why it’s important to keep your capitalization table up-to-date and clear.

Post-money SAFEs, on the other hand, provide more clarity. With post-money SAFEs, you can easily calculate how much of your company you’re selling in exchange for funding. For example:

• Example 1: If you raise $500,000 on a $5 million post-money valuation, you’re selling 10% of your company.
• Example 2: If you raise $1 million on a $5 million post-money valuation, you’re selling 20%.

This straightforward math helps both you and your equity investors understand how much equity is being given away with each capital raising round.

Conclusion: Protect your slice

In the end, it’s important to be strategic about how you distribute your equity. Whether you’re raising money through a seed round, SAFEs, or a direct equity investment from VC firms or angel networks, knowing how to manage dilution and understanding your capitalization table will help you maintain control over your company.

When you're starting a business, one of the most important decisions you'll make is where to incorporate your company. Eric Bahn, a successful entrepreneur and investor, learned this the hard way when he chose to set up his education startup as a California LLC rather than a Delaware C-Corp. Upon selling the business, his accountant revealed that he could have saved a significant amount on taxes had he chosen to incorporate in Delaware.

To help you avoid this costly mistake, here’s why incorporating your business in Delaware could be a smart move—especially if you’re planning to raise venture capital or seek equity investors.

1. Delaware is great for business

Delaware is renowned for its business-friendly laws, which are designed to help businesses thrive. The state's corporate governance laws make it easier for companies to handle compliance, legal matters, and lawsuits compared to other states with stricter regulations. This is particularly advantageous when dealing with equity investment and navigating the complexities of a capitalization table.

By incorporating in Delaware, you’ll have fewer legal obstacles, giving you more time to focus on growing your business and attracting venture capital firms.

2. Significant tax savings

A major reason why so many entrepreneurs opt for Delaware C-Corps is the potential for substantial tax savings. Under the Qualified Small Business Stock (QSBS) exemption, if your company has been operating as a Delaware C-Corp for over five years before being acquired, you could be exempt from paying federal taxes on the sale.

This tax break could save founders and equity investors a significant amount of money. For Eric Bahn, incorporating in Delaware could have greatly reduced his tax bill after the sale of his business. Additionally, venture capital and angel networks are more inclined to invest in Delaware C-Corps due to these tax advantages, ensuring everyone benefits during a capital raising event or exit.

It's important to consult a tax expert to understand all the specifics, but these savings make Delaware an appealing option for businesses looking to attract equity investors and venture-backed financing.

3. Investors and VCs prefer Delaware

Incorporating as a Delaware C-Corp is a no-brainer if you're planning to raise money from VC firms or angel networks. Investors, especially in seed rounds, prefer Delaware C-Corps due to the state’s predictable legal framework and favorable tax treatment. For example, investors won’t be taxed on profits while the business is operating but only on their gains when the company is sold or goes public.

By setting up as a Delaware C-Corp, you make your business more attractive to venture capital and equity investors, helping you secure investment more easily. In fact, many venture capital firms actively seek out Delaware C-Corps, so incorporating there puts you in a prime position to raise funding. Learn more about why venture capitalists prefer Delaware C-Corps here.

4. Switching to a Delaware C-Corp is simple

If you've already incorporated your company in another state, don’t worry—switching to a Delaware C-Corp is relatively straightforward. There are legal services that can help you transition quickly and smoothly, so you can start enjoying the benefits of Delaware incorporation right away.

Conclusion

Incorporating your business in Delaware offers several benefits, from its business-friendly laws to potential tax savings and increased attractiveness to venture capital firms and equity investors. The state's corporate structure is ideal for businesses planning to go through multiple rounds of capital raising or those preparing for a future seed round.

For entrepreneurs who want to maximize their opportunities and minimize their tax burdens, Delaware is a top choice. Take the time now to explore the advantages of Delaware incorporation—it could save you significant money and make your business more appealing to investors down the line.

For more insights on company financing and raising venture capital, check out Raise Millions from Hustle Fund here.

Getting an offer from an investor for your business is a big deal. It might feel like the right move is to say "yes" right away, but slowing down and thinking things through can actually help you get more than just money from the deal. Here are two important steps to take before agreeing to any investor's offer.

1. Say thank you, but don’t rush

When an investor shows interest in your business, the first thing you should do is thank them for believing in your idea. However, instead of quickly agreeing to their offer, let them know you're still figuring out the details of your fundraising.

One way to do this is by asking them to fill out a form that shows how much they want to invest and how they can help your business beyond just giving you money. This puts the decision-making power back in your hands, allowing you to see if they’re the right fit for your business.

By taking your time and not rushing to accept, you give yourself a chance to make sure this investor can provide more than just financial support. It also shows them that you’re careful and thoughtful about who you bring into your business.

For more details on this, you can check out this blog post from Hustle Fund.

2. Find out what they can offer besides money

Money is important, but a good investor can also offer advice, experience, and connections. Some investors have skills in different areas like marketing, leadership, or building strong teams. These skills can be just as valuable as their investment.

When deciding whether to accept an investor’s offer, think about how their knowledge and network could help you grow your business. The best investors bring more to the table than just cash—they can open doors, provide guidance, and help you avoid common mistakes.

Even if you don’t have many offers on the table, it’s still important to take the time to ask how an investor can contribute beyond money. Building relationships with investors who have a variety of skills will give your business more tools to succeed.

Questions to ask before you say yes

Before making a final decision, ask yourself these key questions:

• Does this investor have experience in my industry or with similar businesses?
• Can they introduce me to people who could help my company grow?
• How involved will they be beyond their financial investment?
• Do their long-term goals match up with mine for the company?
• Are their terms and expectations fair for where my business is right now?

These questions will help you figure out if an investor is truly the right fit for your company. For more questions to consider, take a look at this helpful Forbes article.

Conclusion: Take your time and choose wisely

Accepting an investor’s offer is a big decision. Instead of jumping at the first chance for funding, take a little time to evaluate whether this investor can offer more than just money. The right investor will be a long-term partner who helps you grow your business in different ways. By thinking carefully and making smart choices, you’ll be setting your business up for future success.

If you're starting a new company and looking for investors, it's important to be prepared for the questions they might ask. Venture capitalists (VCs) are people or firms that invest money in startups in exchange for a share of the company. They want to make sure that your business has a good chance of success before they invest.

1. Your team: who are you and your co-founders?

Investors want to know about the people running the company. They might ask:

• What's your background and the backgrounds of your co-founders?
• How did you meet your co-founders, and how long have you worked together?
• Why are you passionate about solving this problem?
• How do you handle disagreements among the team?
• How is the ownership (equity) of the company divided among the founders?

They ask these questions to see if your team has the skills and commitment needed to make the business successful.

2. The problem: What issue are you solving?

VCs need to understand the problem your company is trying to fix. They may ask:

• What specific problem does your product or service address?
• How serious or widespread is this problem?
• Who experiences this problem, and why does it exist?

Being able to clearly explain the problem shows that you understand your market and the needs of potential customers.

3. Your solution: How does your product fix the problem?

After understanding the problem, investors want to know about your solution. Questions might include:

• How are people currently dealing with this problem?
• What is your product or service, and how is it different from what's already out there?
• Do you have any unique technology or patents?
• What are your plans for developing your product over the next 6 to 12 months?

You need to show how your solution stands out and why it's better than existing options.

4. The market: Is there demand for your product?

Investors care about the size of your market. They might ask:

• Why is now the right time for your solution?
• How big is the market for your product?
• How many people need this solution?
• How much are people currently spending to solve this problem?

Showing that there is a large and growing market can make your company more attractive to investors.

5. Customer acquisition: How will you get and keep customers?

VCs are interested in how you plan to attract and retain customers. They may ask:

• Who is your ideal customer?
• How are you currently reaching these customers?
• How much does it cost to acquire a customer?
• What is your strategy for marketing and sales?
• How do you plan to get customers in the future?

Having a clear plan for gaining and keeping customers shows that you know how to grow your business.

6. Competition: Who else is in the market?

Investors will want to know about your competitors. They might ask:

• What makes your solution different from others?
• Who are your main competitors?
• What if a large company decides to enter your market?
• What advantages do you have over your competitors?

Understanding your competition helps investors see how you can succeed in the market.

7. Traction: How is your business doing so far?

VCs look for signs that your business is gaining momentum. They may ask:

• When did you start the company?
• How many customers or users do you have?
• Do you have any important partnerships or contracts?
• What are your revenues and profit margins?
• How engaged are your users or customers?
• Have you seen growth in sales or user numbers?

Showing progress can increase investor confidence in your business.

8. Fundraising: What are your financial needs?

Finally, investors will ask about your funding requirements. Questions might include:

• How much money have you raised so far, and from whom?
• How much are you looking to raise now?
• What will you use the funds for?
• What is your current monthly spending (burn rate)?
• Do you have a lead investor?
• What milestones do you aim to achieve with this funding?

Being clear about your financial needs and plans shows that you have thought carefully about the future of your business.

Conclusion: Be ready for investor questions

When meeting with venture capitalists, it's important to be prepared for their questions. Understanding what investors are looking for can help you make a good impression and improve your chances of securing funding. Take the time to think about your answers to these questions, and you'll be better equipped to convince investors that your startup is worth their investment.

For more tips on preparing for VC meetings, check out Elizabeth Yin’s full list of questions VCs may ask early-stage founders.

This guide is designed to help early-stage founders understand the types of questions they might face when seeking venture capital funding. By preparing thoughtful answers, you can increase your chances of success in securing the investment you need to grow your business.

Let’s face it—raising money when you don’t have traction feels like convincing someone to invest in an invisible unicorn. You don’t have users, your product might still be in the oven, but hey, you need that cash to bring your vision to life! So how do you get investors to throw money at your idea when you’ve got no numbers to back it up? Simple. You sell them the dream.

Here’s the inside scoop on how to raise money with zero traction and a whole lot of potential.

Investors don’t need traction—They need a good story

At the pre-seed stage, investors know you’re probably not rolling in users. And believe it or not, they’re okay with that. What really gets them excited isn’t the fact that you’ve got a killer app in the works, but whether you’ve got a killer plan. Investors like Hustle Fund’s Eric Bahn stress that what they really want to see is your thesis for traction—basically, your blueprint for how you’ll go from zero to hero. For more insights on how investors evaluate early-stage startups, check out Eric’s full take on the subject here.

Think of it this way: They’re not investing in what you have now; they’re investing in what you’re going to create. You just need to convince them you know the difference between a side project and a future money-making machine. Here’s how you make it happen.

1. Your go-to-market strategy: More than “It’ll go viral”

Every founder thinks their product is so cool it’ll go viral overnight. Spoiler alert: it won’t. But that’s okay! What investors want to see is that you’ve got a real plan to get your product into the hands of users.

You need a solid Go-to-Market (GTM) strategy that shows exactly how you’ll target your audience and get them hooked. Say something like, “We’re building a sales team to target mid-size companies in the fintech space.” That’s way better than, “Our product is so good, it’ll sell itself.” Pro tip: It won’t.

2. Pre-launch hype: Make them want it before they can have it

You don’t need traction to generate buzz. In fact, you can create hype before you even launch. GrowthMode outlines brilliant pre-launch marketing strategies that can get people buzzing about your product long before it hits the market. Building anticipation not only shows investors there’s interest, but also helps to create an early audience for your product. Read more about how to build pre-launch buzz here.

Here’s how to create FOMO for something that hasn’t even hit the market yet:

• Tease like a pro: Use social media, emails, and a killer website to tease what’s coming. Sneak peeks, teaser videos, and mysterious countdowns are your friends.
• Waitlists are your secret weapon: Build a waitlist and make people feel special for signing up. Throw in some exclusive content or early access offers.
• Get influencers on board: Team up with influencers to spread the word. People love hearing about cool new things from people they already trust.
• Content is king: Be the authority in your space by publishing valuable content that hints at your awesome upcoming product.

3. Show the problem, sell the solution

Okay, so you don’t have users yet, but that doesn’t mean you can’t show there’s a market hungry for your product. Hit investors with cold, hard facts. Use stats, trends, and pain points to show that your product solves a real problem people will pay to fix.

For example:
“We’ve identified that 65% of SMBs struggle with customer retention, costing them an average of $50,000 annually. Our solution will cut that churn rate in half.”

Boom. You’ve just demonstrated market demand without needing a single customer.

4. Social proof: Hype by association

Even if you don’t have users, you can still flex some credibility. Ever heard of social proof? It’s where early adopters, press mentions, or influencer shoutouts give your product that shiny, "people are talking" glow.

Got early partnerships? Maybe a notable figure gave you a nod on LinkedIn? Highlight it. Did your teaser campaign get featured in a cool tech blog? Throw that into your pitch deck like confetti.

5. Don’t fake it, own it

If you don’t have traction, don’t pretend you do. Investors can smell a bluff from a mile away. What they appreciate more is honesty—and a clear roadmap. Be upfront about where you are and show a detailed timeline of your next steps.

Tell them when you’ll launch your MVP, when you’ll do beta testing, and how you’ll scale post-funding. Confidence + transparency = investor trust.

Wrap-up: Selling the dream, not the now

Raising money without traction? Easy—it’s all about getting investors to fall in love with the future you’re building, even if it doesn’t exist yet. Sell them on the potential, the buzz, and the iron-clad plan you’ve got to make it all happen.

So, put together that Go-to-Market strategy, start building hype before you even launch, and show investors you’ve got what it takes to turn your vision into a reality. They’ll be throwing money your way faster than you can say “pre-seed.”