new standard deal</a> of $500,000 gives you some slack, you will likely have to develop very smart habits around spending because fundraising is harder. Learning how to <a href=https://www.ycombinator.com/"http://www.paulgraham.com/aord.html/">stay alive</a> is arguably the most important skill you can have as a founder.I don’t think it’s a coincidence that two of the top YC companies, Airbnb and Stripe, were started in the depths of the last recession (2009).* They learned how important it is to build something people want and not assume investors will be there to save them early on.None of this is new. It’s common knowledge, especially in the tech community, that many successful startups were created during recessions (just search “startups + recession” and you’ll find a bunch of articles), which may be one reason we’ve seen high numbers of applications from founders leaving their big tech company jobs, especially in the last couple of months.If running a startup is like commanding an army, then YC is elite basic training. You’ll learn how to navigate the challenges (or realize you’re not up for it) when your company is small and with the support of advisors and YC batchmates. You’ll build a solid foundation of learning how to build something people want and staying alive. The YC training prepares you by default for succeeding through recessions. And it’s easier to internalize that training today when the macroenvironment supports it. The alternative is learning it on the battlefield when the stakes are way higher — when you’ve already raised money and have employees who depend on you. As YC founder Paul Graham <a href=https://www.ycombinator.com/"http://www.paulgraham.com/die.html/">wrote, “Bad shit is coming. It always is in a startup.” If you’re interested in starting a startup, we’re entering a counterintuitively good time to do it. It won’t be easy, but if you get through the early days, you’ll be better prepared than most. And if the challenge excites you, you probably have the right personality for it.*Their products were also tailored to a cost-sensitive environment. Stripe made it easier for brick-and-mortar businesses to cut costs by selling online and Airbnb created a new income stream for hosts and lower-priced accommodations for travelers.","comment_id":"63ed7c5ebb97530001aa5cd2","feature_image":"/blog/content/images/2023/02/stephblog.png","featured":true,"visibility":"public","email_recipient_filter":"none","created_at":"2023-02-15T16:44:14.000-08:00","updated_at":"2023-02-21T08:30:00.000-08:00","published_at":"2023-02-21T08:30:00.000-08:00","custom_excerpt":"In an economic downturn, there are obvious downsides of starting a startup — but there are also powerful upsides; because to survive, you have to *actually* build something people want.","codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a710c8","name":"Stephanie Simon","slug":"stephanie","profile_image":"/blog/content/images/2022/02/steph-af6b11e61b7a3c55b099c780fe0a359236ceaab496850b530d178aedb8cefb2c.jpg","cover_image":null,"bio":"Stephanie Simon is the Head of Admissions at Y Combinator. \n\nPrior to YC, she was a software engineer at Earnest and co-founded Murmur, a venture-backed local search startup.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/stephanie/"}],"tags":[{"id":"61fe29efc7139e0001a71173","name":"YC News","slug":"yc-news","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/yc-news/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"},{"id":"61fe29efc7139e0001a7117d","name":"Admissions","slug":"admissions","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/admissions/"},{"id":"63ed8ba5bb97530001aa5ced","name":"#271","slug":"hash-271","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"},{"id":"63ed8ba5bb97530001aa5cee","name":"#240","slug":"hash-240","description":null,"feature_image":null,"visibility":"internal","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/404/"}],"primary_author":{"id":"61fe29e3c7139e0001a710c8","name":"Stephanie Simon","slug":"stephanie","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/steph-af6b11e61b7a3c55b099c780fe0a359236ceaab496850b530d178aedb8cefb2c.jpg","cover_image":null,"bio":"Stephanie Simon is the Head of Admissions at Y Combinator. \n\nPrior to YC, she was a software engineer at Earnest and co-founded Murmur, a venture-backed local search startup.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/stephanie/"},"primary_tag":{"id":"61fe29efc7139e0001a71173","name":"YC News","slug":"yc-news","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/yc-news/"},"url":"https://ghost.prod.ycinside.com/why-would-you-start-a-startup-in-an-economic-downturn/","excerpt":"In an economic downturn, there are obvious downsides of starting a startup — but there are also powerful upsides; 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Businesses of every size—from new startups to public companies—use our software to accept payments and manage their businesses online Stripe is a proud partner of YC companies—from Airbnb (S09) to Defog (W23)—to help them grow their businesses and increase the GDP of the internet.","tags":["Banking as a Service","Fintech","SaaS"],"ycdc_status":"Active","logo_url":"https://bookface-images.s3.us-west-2.amazonaws.com/logos/bf38ca02aa7babf8dede1966cf48a36bfe4f8dd7.png?X-Amz-Algorithm=AWS4-HMAC-SHA256&X-Amz-Credential=ASIAQC4NIECAC6YOZS4C%2F20250414%2Fus-west-2%2Fs3%2Faws4_request&X-Amz-Date=20250414T102613Z&X-Amz-Expires=3600&X-Amz-Security-Token=IQoJb3JpZ2luX2VjEIf%2F%2F%2F%2F%2F%2F%2F%2F%2F%2FwEaCXVzLXdlc3QtMiJGMEQCIF8dNoJylGjmIc8zYNRBKtD52BKeXKIWv048gI1fwsfXAiAU9JQEAQzw477LMbJgKe6B1WM7ES5MYlRpDe4WDCRdyCrlAwgQEAAaDDAwNjIwMTgxMTA3MiIMvXfXBI%2BEX0UfM5z8KsID3J6F1gUaecWc4frGyIsvYdyk2g7ANKxWyUD892WQbDDGQ2m%2Bm3SI5QahD8buiRn9jb9vFrr5cfClE28VCn17A%2Bw6%2FiCxVKRporH%2BcM%2F7LTKRoU6EaxqeS1p%2BQaJv7MNBlOCW0jUi8FLjHje7hxbgm8GooEAaW4iQRQfduZsqfsK0BCZcCe45jNvd6F0ZGAK1z0yoglHj%2FeLqqRxwxoPbWFohPdp4xxNxVERht6FV4RonJQmGjFYNErBdxBNvJnI%2F%2BlDBlADhSa9Q2fWXrlmr%2FXTxZNp6j%2FNI%2Btp%2FNLnHqakYZDmT5oXuSXRZHU8gdGhKb0mYxgh4Lc4lXdIHYaH%2Bv6ltuHcncaE5Gh0icSYax94Du2YTRvv7zCy71qjK6SaLbe0iT2uh%2FtNpWS7O9E0FKxiCewUqUfTKodCkoHI9pBpKC2bHDnexsy2LwKwtndDFvGToE2kL5AWamHEe6kmrVVe4OMXnzy1MrGz4654PfkLaa0yqojhR03n9NRmatojUFSsL7qS83fPKqroydLMR3KNyAuLbrI60oAqYmgEFIubii1DGd%2B2P8ieJhK66JXNpTQAaYQj%2BFIO4x70PpfsSMZN4MMLT8r8GOqYBf2%2B%2B9ZOlDwKMVkHWpagTss8lVUx5aeXyNB0cNBJVKXeIOYvpBk5q8pd9vYy7u%2Bnyg4xEDSzV6DPZPByGv0n4s%2Fx0hmPABnUZXo65kuWOjUUjFgUTgl4RqNixIdBmjo6GxKzfORrBTrAQCfyJrQXU8fmtPsBxCUjnv5eg3eLWIKr0nILNGMloBoILpk2z1ASYzD2rwXdCb0YeA3uFX1apPSdvfuk%2FHQ%3D%3D&X-Amz-SignedHeaders=host&X-Amz-Signature=2cbe65e094dedffa87cd40a576b8e65b3db02b65e14c37105cbd315f793de1fe","year_founded":2009,"team_size":7000,"location":"San Francisco","linkedin_url":"https://www.linkedin.com/company/stripe/","twitter_url":"https://twitter.com/stripe","fb_url":"","cb_url":"","is_hiring":true,"active_job_count":3},{"id":271,"slug":"airbnb","name":"Airbnb","batch_name":"W09","small_logo_url":"https://bookface-images.s3.amazonaws.com/small_logos/3e9a0092bee2ccf926e650e59c06503ec6b9ee65.png","one_liner":"Book accommodations around the world.","website":"http://airbnb.com","long_description":"Founded in August of 2008 and based in San Francisco, California, Airbnb is a trusted community marketplace for people to list, discover, and book unique accommodations around the world — online or from a mobile phone. Whether an apartment for a night, a castle for a week, or a villa for a month, Airbnb connects people to unique travel experiences, at any price point, in more than 33,000 cities and 192 countries. And with world-class customer service and a growing community of users, Airbnb is the easiest way for people to monetize their extra space and showcase it to an audience of millions. \r\n\r\nNo global movement springs from individuals. It takes an entire team united behind something big. Together, we work hard, we laugh a lot, we brainstorm nonstop, we use hundreds of Post-Its a week, and we give the best high-fives in town. 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More importantly, they need to grow. In almost every case they will require outside capital to do these things.\nThe initial capital raised by a company is typically called “seed” capital. This brief guide is a summary of what startup founders need to know about raising the seed funds critical to getting their company off the ground.\nThis is not intended to be a complete guide to fundraising. It includes only the basic knowledge most founders will need. The information comes from my experiences working at startups, investing in startups, and advising startups at Y Combinator and Imagine K12. YC partners naturally gain a lot of fundraising experience and YC founder Paul Graham (PG) has written extensively on the topic <a href=https://www.ycombinator.com/"#e1\">1</a>, <a href=https://www.ycombinator.com/"#e2\">2</a>, <a href=https://www.ycombinator.com/"#e3\">3</a>, <a href=https://www.ycombinator.com/"#e4\">4</a>. His essays cover in more detail much of what is contained in this guide and are highly recommended reading.\n<a id='part1'></a>\n<h4>Why Raise Money?</h4>\nWithout startup funding the vast majority of startups will die. The amount of money needed to take a startup to profitability is usually well beyond the ability of founders and their friends and family to finance. A startup here means a company that is built to grow fast <a href=https://www.ycombinator.com/"#e12\">12</a>. High growth companies almost always need to burn capital to sustain their growth prior to achieving profitability. A few startup companies do successfully bootstrap (self-fund) themselves, but they are the exception. Of course, there are lots of great companies that aren’t startups. Managing capital needs for such companies is not covered herein.\nCash not only allows startups to live and grow, a war chest is also almost always a competitive advantage in all ways that matter: hiring key staff, public relations, marketing, and sales. Thus, most startups will almost certainly want to raise money. The good news is that there are lots of investors hoping to give the right startup money. The bad news is, “Fundraising is brutal” <a href=https://www.ycombinator.com/"#e1\">1</a>. The process of raising that money is often long, arduous, complex, and ego deflating. Nevertheless, it is a path almost all companies and founders must walk, but when is the time right to raise?\n<a id='part2'></a>\n<h4>When to Raise Money</h4>\nInvestors write checks when the idea they hear is compelling, when they are persuaded that the team of founders can realize its vision, and that the opportunity described is real and sufficiently large. When founders are ready to tell this story, they can raise money. And usually when you can raise money, you should.\nFor some founders it is enough to have a story and a reputation. However, for most it will require an idea, a product, and some amount of customer adoption, a.k.a. traction. Luckily, the software development ecosystem today is such that a sophisticated web or mobile product can be built and delivered in a remarkably short period of time at very low cost. Even hardware can be rapidly prototyped and tested.\nBut investors also need persuading. Usually a product they can see, use, or touch will not be enough. They will want to know that there is product market fit and that the product is experiencing actual growth.\nTherefore, founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate. How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. And to raise money founders need to impress. For founders who can convince investors without these things, congratulations. For everyone else, work on your product and talk to your users.\n<a id='part3'></a>\n<h4>How Much to Raise?</h4>\nIdeally, you should raise as much money as you need to reach profitability, so that you’ll never have to raise money again. If you succeed in this, not only will you find it easier to raise money in the future, you’ll be able to survive without new funding if the funding environment gets tight. That said, certain kinds of startups will need a follow-on round, such as those building hardware. Their goal should be to raise as much money as needed to get to their next “fundable” milestone, which will usually be 12 to 18 months later.\nIn choosing how much to raise you are trading off several variables, including how much progress that amount of money will purchase, credibility with investors, and dilution. If you can manage to give up as little as 10% of your company in your seed round, that is wonderful, but most rounds will require up to 20% dilution and you should try to avoid more than 25%. In any event, the amount you are asking for must be tied to a believable plan. That plan will buy you the credibility necessary to persuade investors that their money will have a chance to grow. It is usually a good idea to create multiple plans assuming different amounts raised and to carefully articulate your belief that the company will be successful whether you raise the full or some lesser amount. The difference will be how fast you can grow.\nOne way to look at the optimal amount to raise in your first round is to decide how many months of operation you want to fund. A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k x 5 x 18 = $1.35mm. What if you are planning to hire for other positions as well? Don’t worry about it! This is just an estimate and will be accurate enough for whatever mix you hire. And here you have a great answer to the question: “How much are you raising?” Simply answer that you are raising for N months (usually 12-18) and will thus need $X, where X will usually be between $500k and $1.5 million. As noted above, you should give multiple versions of N and a range for X, giving different possible growth scenarios based on how much you successfully raise.\nThere is enormous variation in the amount of money raised by companies. Here we are concerned with early raises, which usually range from a few hundreds of thousands of dollars up to two million dollars. Most first rounds seem to cluster around six hundred thousand dollars, but largely thanks to increased interest from investors in seed, these rounds have been increasing in size over the last several years.\n<a id='part4'></a>\n<h4>Financing Options</h4>\nStartup founders must understand the basic concepts behind venture financing. It would be nice if this was all very simple and could be explained in a single paragraph. Unfortunately, as with most legal matters, that’s not possible. Here is a very high level summary, but it is worth your time to read more about the details and pros and cons of various types of financing and, importantly, the key terms of such deals that you need to be aware of, from preferences to option pools. The articles below are a decent start.\n<ul>\n<li><a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks / Babk Nivi: Should I Raise Debt or Equity</a> </li>\n<li><a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html/">Fred Wilson: Financing Options</a> </li>\n<li><a href=https://www.ycombinator.com/"https://bothsidesofthetable.com/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didn-t-understand-9fccf6854dee#.z63i0cy5g\">Mark Suster on Convertible Debt</a> </li>\n<li>\n<a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/announcing-the-safe-a-replacement-for-convertible-notes/">Announcing the Safe</a>\nVenture financing usually takes place in “rounds,” which have traditionally had names and a specific order. First comes a seed round, then a Series A, then a Series B, then a Series C, and so on to acquisition or IPO. None of these rounds are required and, for example, sometimes companies will start with a Series A financing (almost always an “equity round” as defined below). Recall that we are focusing here exclusively on seed, that very first venture round.\nMost seed rounds, at least in Silicon Valley, are now structured as either convertible debt or simple agreements for future equity (safes) <a href=https://www.ycombinator.com/"#e17\">17</a>. Some early rounds are still done with equity, but in Silicon Valley they are now the exception.\n<a id='part5'></a>\n<h4>Convertible Debt</h4>\nConvertible debt is a loan an investor makes to a company using an instrument called a convertible note. That loan will have a principal amount (the amount of the investment), an interest rate (usually a minimum rate of 2% or so), and a maturity date (when the principal and interest must be repaid). The intention of this note is that it converts to equity (thus, “convertible”) when the company does an equity financing. These notes will also usually have a “Cap” or “Target Valuation” and / or a discount. A Cap is the maximum effective valuation that the owner of the note will pay, regardless of the valuation of the round in which the note converts. The effect of the cap is that convertible note investors usually pay a lower price per share compared to other investors in the equity round. Similarly, a discount defines a lower effective valuation via a percentage off the round valuation. Investors see these as their seed “premium” and both of these terms are negotiable. Convertible debt may be called at maturity, at which time it must be repaid with earned interest, although investors are often willing to extend the maturity dates on notes.\n<a id='part6'></a>\n<h4>Safe</h4>\nConvertible debt has been almost completely replaced by the safe at YC and Imagine K12. A safe acts like convertible debt without the interest rate, maturity, and repayment requirement. The negotiable terms of a safe will almost always be simply the amount, the cap, and the discount, if any. There is a bit more complexity to any convertible security, and much of that is driven by what happens when conversion occurs. I strongly encourage you to read the safe primer <a href=https://www.ycombinator.com/"#e18\">18</a>, which is available on <a href=https://www.ycombinator.com/"http://www.ycombinator.com/documents//">YC’s site</a>. The primer has several examples of what happens when a safe converts, which go a long way toward explaining how both convertible debt and safes work in practice.\n<a id='part7'></a>\n<h4>Equity</h4>\nAn equity round means setting a valuation for your company (generally, the cap on the safes or notes is considered as a company’s notional valuation, although notes and safes can also be uncapped) and thus a per-share price, and then issuing and selling new shares of the company to investors. This is always more complicated, expensive, and time consuming than a safe or convertible note and explains their popularity for early rounds. It is also why you will always want to hire a lawyer when planning to issue equity.\nTo understand what happens when new equity is issued, a simple example helps. Say you raise $1,000,000 on a $5,000,000 pre-money valuation. If you also have 10,000,000 shares outstanding then you are selling the shares at:\n</li>\n</ul>\n<ol>\n<li>$5,000,000 / 10,000,000 = 50 cents per share \nand you will thus sell…</li>\n<li>2,000,000 shares \nresulting in a new share total of…</li>\n<li>10,000,000 + 2,000,000 = 12,000,000 shares \nand a post-money valuation of…</li>\n<li>$0.50 * 12,000,000 = $6,000,000 \nand dilution of…</li>\n<li>\n2,000,000 / 12,000,000 = 16.7% \nNot 20%!\nThere are several important components of an equity round with which you must become familiar when your company does a priced round, including equity incentive plans (option pools), liquidation preferences, anti-dilution rights, protective provisions, and more. These components are all negotiable, but it is usually the case that if you have agreed upon a valuation with your investors (next section), then you are not too far apart, and there is a deal to be done. I won’t say more about equity rounds, since they are so uncommon for seed rounds.\nOne final note: whatever form of financing you do, it is always best to use well-known financing documents like YC’s safe. These documents are well understood by the investor community, and have been drafted to be fair, yet founder friendly.\n<a id='part7-2'></a>\n<h4>Valuation: What is my company worth?</h4>\nYou are two hackers with an idea, a few months of hacking’s worth of software, and several thousand users. What is your company worth? It should be obvious that no formula will give you an answer. There can only be the most notional sort of justification for any value at all. So, how do you set a value when talking to a potential investor? Why do some companies seem to be worth $20mm and some $4mm? Because investors were convinced that was what they were (or will be in the near future) worth. It is that simple. Therefore, it is best to let the market set your price and to find an investor to set the price or cap. The more investor interest your company generates, the higher your value will trend.\nStill, it can be difficult in some circumstances to find an investor to tell you what you are worth. In this case you can choose a valuation, usually by looking at comparable companies who have valuations. Please remember that the important thing in choosing your valuation is not to over-optimize. The objective is to find a valuation with which you are comfortable, that will allow you to raise the amount you need to achieve your goals with acceptable dilution, and that investors will find reasonable and attractive enough to write you a check. Seed valuations tend to range from $2mm-$10mm, but keep in mind that the goal is not to achieve the best valuation, nor does a high valuation increase your likelihood of success.\n<a id='part8'></a>\n<h4>Investors: Angels & Venture Capitalists</h4>\nThe difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part they are much more like hobbyists. Their decision making process is usually much faster–they can make the call all on their own–and there is almost always a much larger component of emotion that goes into that decision.\nVCs will usually require more time, more meetings, and will have multiple partners involved in the final decision. And remember, VCs see LOTS of deals and invest in very few, so you will have to stand out from a crowd.\nThe ecosystem for seed (early) financing is far more complex now than it was even five years ago. There are many new VC firms, sometimes called “super-angels,” or “micro-VC’s”, which explicitly target brand new, very early stage companies. There are also several traditional VCs that will invest in seed rounds. And there are a large number of independent angels who will invest anywhere from $25k to $100k or more in individual companies. New fundraising options have also arisen. For example, <a href=https://www.ycombinator.com/"https://angel.co/syndicates/">AngelList Syndicates</a> lets angels pool their resources and follow a single lead angel. <a href=https://www.ycombinator.com/"http://www.fundersclub.com/founders/">FundersClub invests selectively like a traditional VC, but lets angels become LPs in their VC funds to expand connections available to its founders.\nHow does one meet and encourage the interest of investors? If you are about to present at a demo day, you are going to meet lots of investors. There are few such opportunities to meet a concentrated and motivated group of seed investors. Besides a demo day, by far the best way to meet a venture capitalist or an angel is via a warm introduction. Angels will also often introduce interesting companies to their own networks. Otherwise, find someone in your network to make an introduction to an angel or VC. If you have no other options, do research on VCs and angels and send as many as you can a brief, but compelling summary of your business and opportunity (see <a href=https://www.ycombinator.com/"#part12\">Documents You Need</a> below).\n<a id='part9'></a>\n<h4>Crowdfunding</h4>\nThere are a growing number of new vehicles to raise money, such as <a href=https://www.ycombinator.com/"https://angel.co//">AngelList, <a href=https://www.ycombinator.com/"/">Kickstarter, and <a href=https://www.ycombinator.com/"/">Wefunder. These crowdfunding sites can be used to launch a product, run a pre-sales campaign, or find venture funding. In exceptional cases, founders have used these sites as their dominant fundraising source, or as clear evidence of demand. They usually are used to fill in rounds that are largely complete or, at times, to reanimate a round that is having difficulty getting off the ground. The ecosystem around investing is changing rapidly, but when and how to use these new sources of funds will usually be determined by your success raising through more traditional means.\n<a id='part10'></a>\n<h4>Meeting Investors</h4>\nIf you are meeting investors at an investor day, remember that your goal is not to close–it is to get the next meeting. Investors will seldom choose to commit the first day they hear your pitch, regardless of how brilliant it is. So book lots of meetings. Keep in mind that the hardest part is to get the first money in the company. In other words, meet as many investors as possible but focus on those most likely to close. Always optimize for getting money soonest (in other words, be greedy) <a href=https://www.ycombinator.com/"#e2\">2</a>.\nThere are a few simple rules to follow when preparing to meet with investors. First, make sure you know your audience–do research on what they like to invest in and try to figure out why. Second, simplify your pitch to the essential–why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company. Next make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets. In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long term commitment and most investors see lots of deals. Unless they like you and feel connected to your outcome, they will most certainly not write a check.\nWho you are and how well you tell your story are most important when trying to convince investors to write that check. Investors are looking for compelling founders who have a believable dream and as much evidence as possible documenting the reality of that dream. Find a style that works for you, and then work as hard as necessary to get the pitch perfect. Pitching is difficult and often unnatural for founders, especially technical founders who are more comfortable in front of a screen than a crowd. But anyone will improve with practice, and there is no substitute for an extraordinary amount of practice. Incidentally, this is true whether you are preparing for a demo day or an investor meeting.\nDuring your meeting, try to strike a balance between confidence and humility. Never cross over into arrogance, avoid defensiveness, but also don’t be a pushover. Be open to intelligent counterpoints, but stand up for what you believe and whether or not you persuade the investor just then, you’ll have made a good impression and will probably get another shot.\nLastly, make sure you don’t leave an investor meeting without an attempted close or at very minimum absolute clarity on next steps. Do not just walk out leaving things ambiguous.\n<a id='part11'></a>\n<h4>Negotiating and Closing the Deal</h4>\nA seed investment can usually be closed rapidly. As noted above, it is an advantage to use standard documents with consistent terms, such as YC’s safe. Negotiation, and often there is none at all, can then proceed on one or two variables, such as the valuation/cap and possibly a discount.\nDeals have momentum and there is no recipe towards building momentum behind your deal other than by telling a great story, persistence, and legwork. You may have to meet with dozens of investors before you get that close. But to get started you just need to convince <a href=https://www.ycombinator.com/"#e5\">5</a> one of them. Once the first money is in, each subsequent close will get faster and easier <a href=https://www.ycombinator.com/"#e6\">6</a>.\nOnce an investor says that they are in, you are almost done. This is where you should rapidly close using a handshake protocol <a href=https://www.ycombinator.com/"#e19\">19</a>. If you fail at negotiating from this point on, it is probably your fault.\n<a id='part11-2'></a>\n<h4>Negotiations</h4>\nWhen you enter into a negotiation with a VC or an angel, remember that they are usually more experienced at it than you are, so it is almost always better not to try to negotiate in real-time. Take requests away with you, and get help from YC or Imagine K12 partners, advisors, or legal counsel. But also remember that although certain requested terms can be egregious, the majority of things credible VCs and angels will ask for tend to be reasonable. Do not hesitate to ask them to explain precisely what they are asking for and why. If the negotiation is around valuation (or cap) there are, naturally, plenty of considerations, e.g. other deals you have already closed. However, it is important to remember that the valuation you choose at this early round will seldom matter to the success or failure of the company. Get the best deal you can get–but get the deal! Finally, once you get to yes, don’t wait around. Get the investor’s signature and cash as soon as possible. One reason safes are popular is because the closing mechanics are as simple as signing a document and then transferring funds. Once an investor has decided to invest, it should take no longer than a few minutes to exchange signed documents online (for example via <a href=https://www.ycombinator.com/"https://www.clerky.com//">Clerky or <a href=https://www.ycombinator.com/"https://ironcladapp.com//">Ironclad) and execute a wire or send a check.\n<a id='part12'></a>\n<h4>Documents You Need</h4>\nDo not spend too much time developing diligence documents for a seed round. If an investor is asking for too much due diligence or financials, they are almost certainly someone to avoid. You will probably want an executive summary and a slide deck you can walk investors through and, potentially, leave behind so VCs can show to other partners.\nThe executive summary should be one or two pages (one is better) and should include vision, product, team (location, contact info), traction, market size, and minimum financials (revenue, if any, and fundraising prior and current).\nGenerally make sure the slide deck is a coherent leave-behind. Graphics, charts, screenshots are more powerful than lots of words. Consider it a framework around which you will hang a more detailed version of your story. There is no fixed format or order, but the following parts are usually present. Create the pitch that matches you, how you present, and how you want to represent your company. Also note that like the executive summary, there are lots of similar templates online if you don’t like this one.\n</li>\n</ol>\n1. Your company / Logo / Tag Line\n2. Your Vision – Your most expansive take on why your new company exists.\n3. The Problem – What are you solving for the customer–where is their pain?\n4. The Customer – Who are they and perhaps how will you reach them?\n5. The Solution – What you have created and why now is the right time.\n6. The (huge) Market you are addressing – Total Available Market (TAM) >$1B if possible. Include the most persuasive evidence you have that this is real.\n7. Market Landscape – including competition, macro trends, etc. Is there any insight you have that others do not?\n8. Current Traction – list key stats / plans for scaling and future customer acquisition.\n9. Business model – how users translate to revenue. Actuals, plans, hopes.\n10. Team – who you are, where you come from and why you have what it takes to succeed. Pics and bios okay. Specify roles.\n11. Summary – 3-5 key takeaways (market size, key product insight, traction)\n12. Fundraising – Include what you have already raised and what you are planning to raise now. Any financial projections may go here as well. You can optionally include a summary product roadmap (6 quarters max) indicating what an investment buys.\n<a id='part13'></a>\n<h4>Next</h4>\nIt is worth pointing out that startup investing is rapidly evolving and it is likely that certain elements of this guide will at some point become obsolete, so make sure to check for updates or future posts. There is now an extraordinary amount of information available on raising venture money. Several sources are referenced and more are listed at the end of this document.\nFundraising is a necessary, and sometimes painful task most startups must periodically endure. A founder’s goal should always be to raise as quickly as possible and this guide will hopefully help founders successfully raise their first round of venture financing. Often that will seem like a nearly impossible task and when it is complete, it will feel as though you have climbed a very steep mountain. But you have been distracted by the brutality of fundraising and once you turn your attention back to the future you will realize it was only a small foothill on the real climb in front of you. It is time to get back to work building your company.\nMany thanks to those whose knowledge or work have contributed to this document. Of course, any errors are all mine. Please send any comments or questions to <a href=https://www.ycombinator.com/"mailto:geoff@yahoo.com\">geoff@yahoo.com</a>.\n<a id='part14'></a>\n<h4>Appendix</h4>\nFundraising Rules to Follow\n<ul>\n<li>Get fundraising over as soon as possible, and get back to building your product and company, but also…</li>\n<li>Don’t stop raising money too soon. If fundraising is difficult, keep fighting and stay alive.</li>\n<li>When raising, be “greedy”: breadth-first search weighted by expected value <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>. This means talk to as many people as you can, prioritizing the ones that are likely to close.</li>\n<li>Once someone says yes, don’t delay. Get docs signed and the money in the bank as soon as possible.</li>\n<li>Always hustle for leads. If you are the hottest deal of the hour, that’s great, but everyone else needs to work like crazy to get angels and other venture investors interested.</li>\n<li>Never screw anyone over. Hold yourself and others on your team to the highest ethical standards. The Valley is a very small place, and a bad reputation is difficult to repair. Play it straight and you will never regret it. You’ll feel better for it, too.</li>\n<li>Investors have a lot of different ways to say no. The hardest thing for an entrepreneur is understanding when they are being turned down and being okay with it. PG likes to say, “If the soda is empty, stop making that awful sucking sound with the straw.” But remember that they might be a “yes” another time, so part on the best possible terms.</li>\n<li>Develop a style that fits you and your company.</li>\n<li>Stay organized. Co-founders should split tasks where possible. If necessary, use software like Asana to keep track of deals.</li>\n<li>Have a thick skin but strike the right balance between confidence and humility. And never be arrogant.</li>\n</ul>\nWhat Not to Do While Communicating with Investors\nDON’T:\n<ul>\n<li>Be dishonest in any way</li>\n<li>Be arrogant or unfriendly</li>\n<li>Be overly aggressive</li>\n<li>Seem indecisive – although it is okay to say you don’t know yet.</li>\n<li>Talk so much they cannot get a word in edgewise</li>\n<li>Be slow to follow-up or close a deal</li>\n<li>Break an agreement, verbal or written</li>\n<li>Create detailed financials</li>\n<li>Use ridiculous / silly market size numbers without clear justification</li>\n<li>Claim you know something that you don’t or be afraid to say you don’t know</li>\n<li>Spend time on the obvious</li>\n<li>Get caught up in unimportant minutiae – don’t let the meeting get away from you</li>\n<li>Ask for an NDA</li>\n<li>Try to play investors off each other when you are not a fundraising ninja</li>\n<li>Try to negotiate in real-time</li>\n<li>Over-optimize your valuation or worry too much about dilution</li>\n<li>Take a “No” personally</li>\n</ul>\n<div id=\"part15\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n A Brief Glossary of Key Terms \n </h2>\n\n The term you are looking for is not here? Disagree with the definition? Go to <a href=https://www.ycombinator.com/"http://www.investopedia.com//">Investopedia for a more authoritative source.\n \n<ul>\n<li>\n Angel Investor – A (usually) wealthy private investor in startup companies.\n </li>\n<li>\n Cap / Target Valuation – The maximum effective valuation for an investor in a convertible note.\n </li>\n<li>\n Convertible Note – This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock.\n </li>\n<li>\n Common Stock – Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges and preferences.\n </li>\n<li>\n Dilution – The percentage an ownership share is decreased via the issuance of new shares.\n </li>\n<li>\n Discount – A percentage discount from the pre-money valuation to give safe or note holders an effectively lower price.\n </li>\n<li>\n Equity Round – A financing round in which the investor purchases equity (stock) in the company.\n </li>\n<li>\n Fully Diluted Shares – The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants and other convertible securities.\n </li>\n<li>\n IPO – Initial Public Offering – the first sale of stock by a private company to the public.\n </li>\n<li>\n Lead Investor – Usually the first and largest investor in a round who brings others into the round.\n </li>\n<li>\n Liquidation Preference – A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.\n </li>\n<li>\n Maturity Date – The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)\n </li>\n<li>\n Equity Incentive Plan / Option Pool – The shares allocated and set aside for grants to employees and consultants.\n </li>\n<li>\n Preferred Stock – Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).\n </li>\n<li>\n Pre-money Valuation – The value of a company prior to when investor money is added.\n </li>\n<li>\n Pro-rata rights (aka pre-emptive rights) – Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.\n </li>\n<li>\n Protective Provisions – Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.\n </li>\n<li>\n Safe – Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.\n </li>\n<li>\n TAM – Total Available Market. In pitches, this is the estimated total revenue available for the product(s) you are selling.\n </li>\n<li>\n Venture Capitalist – A professional investor in companies, investing limited partners’ funds.\n </li>\n</ul>\n</div>\n<div id=\"part16\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n Sources \n </h2>\n<ol>\n<li>\n <a href=https://www.ycombinator.com/"http://www.paulgraham.com/fundraising.html/">A Fundraising Survival Guide</a>, Paul Graham Techniques for surviving and succeeding at fundraising\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/fr.html/">How To Raise Money</a>, Paul Graham Detailed thoughts on fundraising. A must read.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/equity.html/">The Equity Equation</a>, Paul Graham How to decide if you should accept an offer from an investor\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/future.html/">The Future of Startup Funding</a>, Paul Graham How startup funding is evolving\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/convince.html/">How to Convince Investors</a>, Paul Graham How to convince investors to invest in you\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/herd.html/">Investor Herd Dynamics</a>, Paul Graham How investors think about investing in early stage companies\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/">“Venture Deals”</a>, Feld and Mendelson Essential elements of a venture deal (book)\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.khanacademy.org/finance-economics/venture-capital-and-capital-markets/v/raising-money-for-a-startup/">Raising Money for a Startup</a>, Sal Khan Startup Fundraising from Sal Khan\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks: Debt or Equity,</a> Babak Nivi Discussion on debt vs. equity\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/first-time/">Venture Hacks: First Time</a>, Babak Nivi Advice for first time fundraisers.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html/">How Much Money To Raise</a>, Fred Wilson Advice on how much money to raise.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.paulgraham.com/growth.html/">“Startup = Growth”</a>, Paul Graham Description of a startup.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks / Babk Nivi: Should I Raise Debt or Equity</a> Discussion of whether raising debt or equity is the best answer.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html/">Fred Wilson: Financing Options</a> Another discussion of debt vs. equity\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand//">Mark Suster on Convertible Debt</a> An analysis of problems with convertible debt\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://www.clerky.com/transaction_templates/24/">Clerky Guide</a> Clerky docs and guides. A great place to start.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/announcing-the-safe-a-replacement-for-convertible-notes/">Announcing the Safe</a>, Paul Graham The simple agreement for future equity. A replacement for convertible notes.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.ycombinator.com/documents//">The Safe Primer</a>, Carolynn Levy Lots of detailed information on the safe and examples as to how it works in various cases.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://www.ycombinator.com/handshake//">The Handshake Deal Protocol</a>, Paul Graham A standard protocol to help ensure that verbal commitments turn into transactions.\n </li>\n</ol>\n</div>\n","comment_id":"1097667","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2016-01-07T10:02:32.000-08:00","updated_at":"2021-10-20T13:39:30.000-07:00","published_at":"2016-01-07T10:02:32.000-08:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a71092","name":"Geoff Ralston","slug":"geoff-ralston","profile_image":"/blog/content/images/2022/02/geoff.jpg","cover_image":null,"bio":"Geoff Ralston is the former President of Y Combinator and has been with YC since 2011. Prior to YC, he built one of the first web mail services, RocketMail which became Yahoo Mail in 1997.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/geoff-ralston/"}],"tags":[{"id":"61fe29efc7139e0001a7115e","name":"Fundraising","slug":"fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/fundraising/"},{"id":"61fe29efc7139e0001a71162","name":"Seed Fundraising","slug":"seed-fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/seed-fundraising/"},{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"}],"primary_author":{"id":"61fe29e3c7139e0001a71092","name":"Geoff Ralston","slug":"geoff-ralston","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/geoff.jpg","cover_image":null,"bio":"Geoff Ralston is the former President of Y Combinator and has been with YC since 2011. Prior to YC, he built one of the first web mail services, RocketMail which became Yahoo Mail in 1997.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/geoff-ralston/"},"primary_tag":{"id":"61fe29efc7139e0001a7115e","name":"Fundraising","slug":"fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/fundraising/"},"url":"https://ghost.prod.ycinside.com/how-to-raise-a-seed-round/","excerpt":"Why Raise Money – When to Raise Money – How Much to Raise? – Financing Options – Convertible Debt – Safe – Equity – Valuation – Investors","reading_time":20,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"61fe29f1c7139e0001a717f9","uuid":"5afbbacc-c7ec-400f-a48d-c45b59d13c23","title":"A Guide to Seed Fundraising","slug":"this-brief-guide-is-a-summary-of-what-startup-founders-need-to-know-about-raising-the-seed-funds-critical-to-getting-their-company-off-the-ground","html":" \nContents:\n<div class=\"half left\">\n<ul>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part1\">Why Raise Money</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part2\">When to Raise Money</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part3\">How Much to Raise?</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part4\">Financing Options</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part5\">Convertible Debt</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part6\">Safe</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part7\">Equity</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part7-2\">Valuation</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part8\">Investors</a>\n </li>\n</ul>\n</div>\n<div class=\"half right\">\n<ul>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part9\">Crowdfunding</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part10\">Meeting Investors</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part11\">Closing the Deal</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part11-2\">Negotiations</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part12\">Documents You Need</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part13\">Next</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part14\">Appendix</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part15\">Glossary</a>\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part16\">Sources</a>\n </li>\n</ul>\n</div>\n<h4>Introduction</h4>\nStartup companies need to purchase equipment, rent offices, and hire staff. More importantly, they need to grow. In almost every case they will require outside capital to do these things.\nThe initial capital raised by a company is typically called “seed” capital. This brief guide is a summary of what startup founders need to know about raising the seed funds critical to getting their company off the ground.\nThis is not intended to be a complete guide to fundraising. It includes only the basic knowledge most founders will need. The information comes from my experiences working at startups, investing in startups, and advising startups at Y Combinator and Imagine K12. YC partners naturally gain a lot of fundraising experience and YC founder Paul Graham (PG) has written extensively on the topic <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e1\">1</a>, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e3\">3</a>, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e4\">4</a>. His essays cover in more detail much of what is contained in this guide and are highly recommended reading.\n<h4>Why Raise Money?</h4>\nWithout startup funding the vast majority of startups will die. The amount of money needed to take a startup to profitability is usually well beyond the ability of founders and their friends and family to finance. A startup here means a company that is built to grow fast <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e12\">12</a>. High growth companies almost always need to burn capital to sustain their growth prior to achieving profitability. A few startup companies do successfully bootstrap (self-fund) themselves, but they are the exception. Of course, there are lots of great companies that aren’t startups. Managing capital needs for such companies is not covered herein.\nCash not only allows startups to live and grow, a war chest is also almost always a competitive advantage in all ways that matter: hiring key staff, public relations, marketing, and sales. Thus, most startups will almost certainly want to raise money. The good news is that there are lots of investors hoping to give the right startup money. The bad news is, “Fundraising is brutal” <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e1\">1</a>. The process of raising that money is often long, arduous, complex, and ego deflating. Nevertheless, it is a path almost all companies and founders must walk, but when is the time right to raise? \n<h4>When to Raise Money</h4>\nInvestors write checks when the idea they hear is compelling, when they are persuaded that the team of founders can realize its vision, and that the opportunity described is real and sufficiently large. When founders are ready to tell this story, they can raise money. And usually when you can raise money, you should.\nFor some founders it is enough to have a story and a reputation. However, for most it will require an idea, a product, and some amount of customer adoption, a.k.a. traction. Luckily, the software development ecosystem today is such that a sophisticated web or mobile product can be built and delivered in a remarkably short period of time at very low cost. Even hardware can be rapidly prototyped and tested.\nBut investors also need persuading. Usually a product they can see, use, or touch will not be enough. They will want to know that there is product market fit and that the product is experiencing actual growth.\nTherefore, founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate. How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. And to raise money founders need to impress. For founders who can convince investors without these things, congratulations. For everyone else, work on your product and talk to your users.\n<h4>How Much to Raise?</h4>\nIdeally, you should raise as much money as you need to reach profitability, so that you’ll never have to raise money again. If you succeed in this, not only will you find it easier to raise money in the future, you’ll be able to survive without new funding if the funding environment gets tight. That said, certain kinds of startups will need a follow-on round, such as those building hardware. Their goal should be to raise as much money as needed to get to their next “fundable” milestone, which will usually be 12 to 18 months later.\nIn choosing how much to raise you are trading off several variables, including how much progress that amount of money will purchase, credibility with investors, and dilution. If you can manage to give up as little as 10% of your company in your seed round, that is wonderful, but most rounds will require up to 20% dilution and you should try to avoid more than 25%. In any event, the amount you are asking for must be tied to a believable plan. That plan will buy you the credibility necessary to persuade investors that their money will have a chance to grow. It is usually a good idea to create multiple plans assuming different amounts raised and to carefully articulate your belief that the company will be successful whether you raise the full or some lesser amount. The difference will be how fast you can grow.\nOne way to look at the optimal amount to raise in your first round is to decide how many months of operation you want to fund. A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k x 5 x 18 = $1.35mm. What if you are planning to hire for other positions as well? Don’t worry about it! This is just an estimate and will be accurate enough for whatever mix you hire. And here you have a great answer to the question: “How much are you raising?” Simply answer that you are raising for N months (usually 12-18) and will thus need $X, where X will usually be between $500k and $1.5 million. As noted above, you should give multiple versions of N and a range for X, giving different possible growth scenarios based on how much you successfully raise.\nThere is enormous variation in the amount of money raised by companies. Here we are concerned with early raises, which usually range from a few hundreds of thousands of dollars up to two million dollars. Most first rounds seem to cluster around six hundred thousand dollars, but largely thanks to increased interest from investors in seed, these rounds have been increasing in size over the last several years. \n<h4>Financing Options</h4>\nStartup founders must understand the basic concepts behind venture financing. It would be nice if this was all very simple and could be explained in a single paragraph. Unfortunately, as with most legal matters, that’s not possible. Here is a very high level summary, but it is worth your time to read more about the details and pros and cons of various types of financing and, importantly, the key terms of such deals that you need to be aware of, from preferences to option pools. The articles below are a decent start.\n<ul>\n<li><a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks / Babk Nivi: Should I Raise Debt or Equity</a></li>\n<li><a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html/">Fred Wilson: Financing Options</a></li>\n<li><a href=https://www.ycombinator.com/"https://bothsidesofthetable.com/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didn-t-understand-9fccf6854dee#.z63i0cy5g\">Mark Suster on Convertible Debt</a></li>\n<li><a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/announcing-the-safe-a-replacement-for-convertible-notes/">Announcing the Safe</a></li>\n</ul>\nVenture financing usually takes place in “rounds,” which have traditionally had names and a specific order. First comes a seed round, then a Series A, then a Series B, then a Series C, and so on to acquisition or IPO. None of these rounds are required and, for example, sometimes companies will start with a Series A financing (almost always an “equity round” as defined below). Recall that we are focusing here exclusively on seed, that very first venture round.\nMost seed rounds, at least in Silicon Valley, are now structured as either convertible debt or simple agreements for future equity (safes) <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e17\">17</a>. Some early rounds are still done with equity, but in Silicon Valley they are now the exception.\n<h4>Convertible Debt</h4>\nConvertible debt is a loan an investor makes to a company using an instrument called a convertible note. That loan will have a principal amount (the amount of the investment), an interest rate (usually a minimum rate of 2% or so), and a maturity date (when the principal and interest must be repaid). The intention of this note is that it converts to equity (thus, “convertible”) when the company does an equity financing. These notes will also usually have a “Cap” or “Target Valuation” and / or a discount. A Cap is the maximum effective valuation that the owner of the note will pay, regardless of the valuation of the round in which the note converts. The effect of the cap is that convertible note investors usually pay a lower price per share compared to other investors in the equity round. Similarly, a discount defines a lower effective valuation via a percentage off the round valuation. Investors see these as their seed “premium” and both of these terms are negotiable. Convertible debt may be called at maturity, at which time it must be repaid with earned interest, although investors are often willing to extend the maturity dates on notes.\n<h4>Safe</h4>\nConvertible debt has been almost completely replaced by the safe at YC and Imagine K12. A safe acts like convertible debt without the interest rate, maturity, and repayment requirement. The negotiable terms of a safe will almost always be simply the amount, the cap, and the discount, if any. There is a bit more complexity to any convertible security, and much of that is driven by what happens when conversion occurs. I strongly encourage you to read the safe primer <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e18\">18</a>, which is available on <a href=https://www.ycombinator.com/"http://www.ycombinator.com/documents//">YC’s site</a>. The primer has several examples of what happens when a safe converts, which go a long way toward explaining how both convertible debt and safes work in practice.\n<h4>Equity</h4>\nAn equity round means setting a valuation for your company (generally, the cap on the safes or notes is considered as a company’s notional valuation, although notes and safes can also be uncapped) and thus a per-share price, and then issuing and selling new shares of the company to investors. This is always more complicated, expensive, and time consuming than a safe or convertible note and explains their popularity for early rounds. It is also why you will always want to hire a lawyer when planning to issue equity.\nTo understand what happens when new equity is issued, a simple example helps. Say you raise $1,000,000 on a $5,000,000 pre-money valuation. If you also have 10,000,000 shares outstanding then you are selling the shares at:\n<ol>\n<li>**$5,000,000 / 10,000,000 = 50 cents per share*** \nand you will thus sell…</li>\n<li>2,000,000 shares \nresulting in a new share total of…</li>\n<li>10,000,000 + 2,000,000 = 12,000,000 shares \nand a post-money valuation of…</li>\n<li>$0.50 * 12,000,000 = $6,000,000 \nand dilution of…</li>\n<li>2,000,000 / 12,000,000 = 16.7% \nNot 20%!</li>\n</ol>\nThere are several important components of an equity round with which you must become familiar when your company does a priced round, including equity incentive plans (option pools), liquidation preferences, anti-dilution rights, protective provisions, and more. These components are all negotiable, but it is usually the case that if you have agreed upon a valuation with your investors (next section), then you are not too far apart, and there is a deal to be done. I won’t say more about equity rounds, since they are so uncommon for seed rounds.\nOne final note: whatever form of financing you do, it is always best to use well-known financing documents like YC’s safe. These documents are well understood by the investor community, and have been drafted to be fair, yet founder friendly.\n<h4>Valuation: What is my company worth?</h4>\nYou are two hackers with an idea, a few months of hacking’s worth of software, and several thousand users. What is your company worth? It should be obvious that no formula will give you an answer. There can only be the most notional sort of justification for any value at all. So, how do you set a value when talking to a potential investor? Why do some companies seem to be worth $20mm and some $4mm? Because investors were convinced that was what they were (or will be in the near future) worth. It is that simple. Therefore, it is best to let the market set your price and to find an investor to set the price or cap. The more investor interest your company generates, the higher your value will trend.\nStill, it can be difficult in some circumstances to find an investor to tell you what you are worth. In this case you can choose a valuation, usually by looking at comparable companies who have valuations. Please remember that the important thing in choosing your valuation is not to over-optimize. The objective is to find a valuation with which you are comfortable, that will allow you to raise the amount you need to achieve your goals with acceptable dilution, and that investors will find reasonable and attractive enough to write you a check. Seed valuations tend to range from $2mm-$10mm, but keep in mind that the goal is not to achieve the best valuation, nor does a high valuation increase your likelihood of success.\n<h4>Investors: Angels & Venture Capitalists</h4>\nThe difference between an angel and a VC is that angels are amateurs and VCs are pros. VCs invest other people’s money and angels invest their own on their own terms. Although some angels are quite rigorous and act very much like the pros, for the most part they are much more like hobbyists. Their decision making process is usually much faster–they can make the call all on their own–and there is almost always a much larger component of emotion that goes into that decision.\nVCs will usually require more time, more meetings, and will have multiple partners involved in the final decision. And remember, VCs see LOTS of deals and invest in very few, so you will have to stand out from a crowd.\nThe ecosystem for seed (early) financing is far more complex now than it was even five years ago. There are many new VC firms, sometimes called “super-angels,” or “micro-VC’s”, which explicitly target brand new, very early stage companies. There are also several traditional VCs that will invest in seed rounds. And there are a large number of independent angels who will invest anywhere from $25k to $100k or more in individual companies. New fundraising options seem to arrive every year, for example, <a href=https://www.ycombinator.com/"https://angel.co/syndicates/">AngelList Syndicates</a> in which angels pool their resources and follow a single lead angel.\nHow does one meet and encourage the interest of investors? If you are about to present at a demo day, you are going to meet lots of investors. There are few such opportunities to meet a concentrated and motivated group of seed investors. Besides a demo day, by far the best way to meet a venture capitalist or an angel is via a warm introduction. Angels will also often introduce interesting companies to their own networks. Otherwise, find someone in your network to make an introduction to an angel or VC. If you have no other options, do research on VCs and angels and send as many as you can a brief, but compelling summary of your business and opportunity (see <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#part12\">Documents You Need</a> below).\n<h4>Crowdfunding</h4>\nThere are a growing number of new vehicles to raise money, such as <a href=https://www.ycombinator.com/"https://angel.co//">AngelList, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round//">Kickstarter, <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round//">FundersClub, and <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round//">Wefunder. These crowdfunding sites can be used to launch a product, run a pre-sales campaign, or find venture funding. In exceptional cases, founders have used these sites as their dominant fundraising source, or as clear evidence of demand. They usually are used to fill in rounds that are largely complete or, at times, to reanimate a round that is having difficulty getting off the ground. The ecosystem around investing is changing rapidly, but when and how to use these new sources of funds will usually be determined by your success raising through more traditional means.\n<h4>Meeting Investors</h4>\nIf you are meeting investors at an investor day, remember that your goal is not to close–it is to get the next meeting. Investors will seldom choose to commit the first day they hear your pitch, regardless of how brilliant it is. So book lots of meetings. Keep in mind that the hardest part is to get the first money in the company. In other words, meet as many investors as possible but focus on those most likely to close. Always optimize for getting money soonest (in other words, be greedy) <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>.\nThere are a few simple rules to follow when preparing to meet with investors. First, make sure you know your audience–do research on what they like to invest in and try to figure out why. Second, simplify your pitch to the essential–why this is a great product (demos are almost a requirement nowadays), why you are precisely the right team to build it, and why together you should all dream about creating the next gigantic company. Next make sure you listen carefully to what the investor has to say. If you can get the investor to talk more than you, your probability of a deal skyrockets. In the same vein, do what you can to connect with the investor. This is one of the main reasons to do research. An investment in a company is a long term commitment and most investors see lots of deals. Unless they like you and feel connected to your outcome, they will most certainly not write a check.\nWho you are and how well you tell your story are most important when trying to convince investors to write that check. Investors are looking for compelling founders who have a believable dream and as much evidence as possible documenting the reality of that dream. Find a style that works for you, and then work as hard as necessary to get the pitch perfect. Pitching is difficult and often unnatural for founders, especially technical founders who are more comfortable in front of a screen than a crowd. But anyone will improve with practice, and there is no substitute for an extraordinary amount of practice. Incidentally, this is true whether you are preparing for a demo day or an investor meeting.\nDuring your meeting, try to strike a balance between confidence and humility. Never cross over into arrogance, avoid defensiveness, but also don’t be a pushover. Be open to intelligent counterpoints, but stand up for what you believe and whether or not you persuade the investor just then, you’ll have made a good impression and will probably get another shot.\nLastly, make sure you don’t leave an investor meeting without an attempted close or at very minimum absolute clarity on next steps. Do not just walk out leaving things ambiguous. \n<h4>Negotiating and Closing the Deal</h4>\nA seed investment can usually be closed rapidly. As noted above, it is an advantage to use standard documents with consistent terms, such as YC’s safe. Negotiation, and often there is none at all, can then proceed on one or two variables, such as the valuation/cap and possibly a discount.\nDeals have momentum and there is no recipe towards building momentum behind your deal other than by telling a great story, persistence, and legwork. You may have to meet with dozens of investors before you get that close. But to get started you just need to convince <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e5\">5</a> one of them. Once the first money is in, each subsequent close will get faster and easier <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e6\">6</a>.\nOnce an investor says that they are in, you are almost done. This is where you should rapidly close using a handshake protocol <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e19\">19</a>. If you fail at negotiating from this point on, it is probably your fault.\n<h4>Negotiations</h4>\nWhen you enter into a negotiation with a VC or an angel, remember that they are usually more experienced at it than you are, so it is almost always better not to try to negotiate in real-time. Take requests away with you, and get help from YC or Imagine K12 partners, advisors, or legal counsel. But also remember that although certain requested terms can be egregious, the majority of things credible VCs and angels will ask for tend to be reasonable. Do not hesitate to ask them to explain precisely what they are asking for and why. If the negotiation is around valuation (or cap) there are, naturally, plenty of considerations, e.g. other deals you have already closed. However, it is important to remember that the valuation you choose at this early round will seldom matter to the success or failure of the company. Get the best deal you can get–but get the deal! Finally, once you get to yes, don’t wait around. Get the investor’s signature and cash as soon as possible. One reason safes are popular is because the closing mechanics are as simple as signing a document and then transferring funds. Once an investor has decided to invest, it should take no longer than a few minutes to exchange signed documents online (for example via <a href=https://www.ycombinator.com/"https://www.clerky.com//">Clerky or <a href=https://www.ycombinator.com/"https://ironclad.ai//">Ironclad) and execute a wire or send a check.\n<h4>Documents You Need</h4>\nDo not spend too much time developing diligence documents for a seed round. If an investor is asking for too much due diligence or financials, they are almost certainly someone to avoid. You will probably want an executive summary and a slide deck you can walk investors through and, potentially, leave behind so VCs can show to other partners.\nThe executive summary should be one or two pages (one is better) and should include vision, product, team (location, contact info), traction, market size, and minimum financials (revenue, if any, and fundraising prior and current).\nGenerally make sure the slide deck is a coherent leave-behind. Graphics, charts, screenshots are more powerful than lots of words. Consider it a framework around which you will hang a more detailed version of your story. There is no fixed format or order, but the following parts are usually present. Create the pitch that matches you, how you present, and how you want to represent your company. Also note that like the executive summary, there are lots of similar templates online if you don’t like this one.\n<ol>\n<li>Your company / Logo / Tag Line</li>\n<li>Your Vision – Your most expansive take on why your new company exists.</li>\n<li>The Problem – What are you solving for the customer–where is their pain?</li>\n<li>The Customer – Who are they and perhaps how will you reach them?</li>\n<li>The Solution – What you have created and why now is the right time.</li>\n<li>The (huge) Market you are addressing – Total Available Market (TAM) >$1B if possible. Include the most persuasive evidence you have that this is real.</li>\n<li>Market Landscape – including competition, macro trends, etc. Is there any insight you have that others do not?</li>\n<li>Current Traction – list key stats / plans for scaling and future customer acquisition.</li>\n<li>Business model – how users translate to revenue. Actuals, plans, hopes.</li>\n<li>Team – who you are, where you come from and why you have what it takes to succeed. Pics and bios okay. Specify roles.</li>\n<li>Summary – 3-5 key takeaways (market size, key product insight, traction)</li>\n<li>Fundraising – Include what you have already raised and what you are planning to raise now. Any financial projections may go here as well. You can optionally include a summary product roadmap (6 quarters max) indicating what an investment buys.</li>\n</ol>\n<h4>Next</h4>\nIt is worth pointing out that startup investing is rapidly evolving and it is likely that certain elements of this guide will at some point become obsolete, so make sure to check for updates or future posts. There is now an extraordinary amount of information available on raising venture money. Several sources are referenced and more are listed at the end of this document.\nFundraising is a necessary, and sometimes painful task most startups must periodically endure. A founder’s goal should always be to raise as quickly as possible and this guide will hopefully help founders successfully raise their first round of venture financing. Often that will seem like a nearly impossible task and when it is complete, it will feel as though you have climbed a very steep mountain. But you have been distracted by the brutality of fundraising and once you turn your attention back to the future you will realize it was only a small foothill on the real climb in front of you. It is time to get back to work building your company.\nMany thanks to those whose knowledge or work have contributed to this document. Of course, any errors are all mine. Please send any comments or questions to <a href=https://www.ycombinator.com/"mailto:geoff@yahoo.com\">geoff@yahoo.com</a>.\n<a id=\"email-bottom\" href=https://www.ycombinator.com/"http://eepurl.com/cbJZnj/">Sign up for weekly recaps of The Macro</a>.\n<div id=\"part14\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n Appendix \n </h2>\n<h4>\n Fundraising Rules to Follow \n </h4>\n<ul>\n<li>\n Get fundraising over as soon as possible, and get back to building your product and company, but also…\n </li>\n<li>\n Don’t stop raising money too soon. If fundraising is difficult, keep fighting and stay alive.\n </li>\n<li>\n When raising, be “greedy”: breadth-first search weighted by expected value <a href=https://www.ycombinator.com/"http://www.themacro.com/articles/2016/01/how-to-raise-a-seed-round/#e2\">2</a>. This means talk to as many people as you can, prioritizing the ones that are likely to close.\n </li>\n<li>\n Once someone says yes, don’t delay. Get docs signed and the money in the bank as soon as possible.\n </li>\n<li>\n Always hustle for leads. If you are the hottest deal of the hour, that’s great, but everyone else needs to work like crazy to get angels and other venture investors interested.\n </li>\n<li>\n Never screw anyone over. Hold yourself and others on your team to the highest ethical standards. The Valley is a very small place, and a bad reputation is difficult to repair. Play it straight and you will never regret it. You’ll feel better for it, too.\n </li>\n<li>\n Investors have a lot of different ways to say no. The hardest thing for an entrepreneur is understanding when they are being turned down and being okay with it. PG likes to say, “If the soda is empty, stop making that awful sucking sound with the straw.” But remember that they might be a “yes” another time, so part on the best possible terms.\n </li>\n<li>\n Develop a style that fits you and your company.\n </li>\n<li>\n Stay organized. Co-founders should split tasks where possible. If necessary, use software like Asana to keep track of deals.\n </li>\n<li>\n Have a thick skin but strike the right balance between confidence and humility. And never be arrogant.\n </li>\n</ul>\n<h4>\n What Not to Do While Communicating with Investors \n </h4>\n\n DON’T…\n \n<ul>\n<li>\n Be dishonest in any way\n </li>\n<li>\n Be arrogant or unfriendly\n </li>\n<li>\n Be overly aggressive\n </li>\n<li>\n Seem indecisive – although it is okay to say you don’t know yet.\n </li>\n<li>\n Talk so much they cannot get a word in edgewise\n </li>\n<li>\n Be slow to follow-up or close a deal\n </li>\n<li>\n Break an agreement, verbal or written\n </li>\n<li>\n Create detailed financials\n </li>\n<li>\n Use ridiculous / silly market size numbers without clear justification\n </li>\n<li>\n Claim you know something that you don’t or be afraid to say you don’t know\n </li>\n<li>\n Spend time on the obvious\n </li>\n<li>\n Get caught up in unimportant minutiae – don’t let the meeting get away from you\n </li>\n<li>\n Ask for an NDA\n </li>\n<li>\n Try to play investors off each other when you are not a fundraising ninja\n </li>\n<li>\n Try to negotiate in real-time\n </li>\n<li>\n Over-optimize your valuation or worry too much about dilution\n </li>\n<li>\n Take a “No” personally\n </li>\n</ul>\n</div>\n<div id=\"part15\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n A Brief Glossary of Key Terms \n </h2>\n\n The term you are looking for is not here? Disagree with the definition? Go to <a href=https://www.ycombinator.com/"http://www.investopedia.com//">Investopedia for a more authoritative source.\n \n<ul>\n<li>\n Angel Investor – A (usually) wealthy private investor in startup companies.\n </li>\n<li>\n Cap / Target Valuation – The maximum effective valuation for an investor in a convertible note.\n </li>\n<li>\n Convertible Note – This is a debt instrument that will convert into stock; usually preferred stock but sometimes common stock.\n </li>\n<li>\n Common Stock – Capital stock typically issued to founders and employees, having the fewest, or no, rights, privileges and preferences.\n </li>\n<li>\n Dilution – The percentage an ownership share is decreased via the issuance of new shares.\n </li>\n<li>\n Discount – A percentage discount from the pre-money valuation to give safe or note holders an effectively lower price.\n </li>\n<li>\n Equity Round – A financing round in which the investor purchases equity (stock) in the company.\n </li>\n<li>\n Fully Diluted Shares – The total number of issued and outstanding shares of capital stock in the company, including outstanding warrants, option grants and other convertible securities.\n </li>\n<li>\n IPO – Initial Public Offering – the first sale of stock by a private company to the public.\n </li>\n<li>\n Lead Investor – Usually the first and largest investor in a round who brings others into the round.\n </li>\n<li>\n Liquidation Preference – A legal provision in a company’s charter that allows stockholders with preferred stock to get their money out of a company before the holders of common stock in the event of an exit.\n </li>\n<li>\n Maturity Date – The date at which a promissory note becomes due (or at which it will automatically convert to stock in the case of a convertible note)\n </li>\n<li>\n Equity Incentive Plan / Option Pool – The shares allocated and set aside for grants to employees and consultants.\n </li>\n<li>\n Preferred Stock – Capital stock issued in a company that have specific rights, privileges and preferences compared to the common stock. Convertible into common stock, either automatically (e.g., in an IPO) or at the option of the preferred stockholder (e.g., an acquisition).\n </li>\n<li>\n Pre-money Valuation – The value of a company prior to when investor money is added.\n </li>\n<li>\n Pro-rata rights (aka pre-emptive rights) – Contractual rights that allow the holder to maintain their percentage ownership in subsequent financing rounds.\n </li>\n<li>\n Protective Provisions – Provisions in a company’s charter that give exclusive voting rights to holders of preferred stock. For example, the approval of these stockholders, voting separately from other stockholders, may be required for an acquisition.\n </li>\n<li>\n Safe – Simple Agreement for Future Equity – Y Combinator’s replacement for convertible debt.\n </li>\n<li>\n TAM – Total Available Market. In pitches, this is the estimated total revenue available for the product(s) you are selling.\n </li>\n<li>\n Venture Capitalist – A professional investor in companies, investing limited partners’ funds.\n </li>\n</ul>\n</div>\n<div id=\"part16\" class=\"endnotes\">\n<h2 class=\"donthyphenate\">\n Sources \n </h2>\n<ol>\n<li>\n <a href=https://www.ycombinator.com/"http://www.paulgraham.com/fundraising.html/">A Fundraising Survival Guide</a>, Paul Graham Techniques for surviving and succeeding at fundraising\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/fr.html/">How To Raise Money</a>, Paul Graham Detailed thoughts on fundraising. A must read.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/equity.html/">The Equity Equation</a>, Paul Graham How to decide if you should accept an offer from an investor\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/future.html/">The Future of Startup Funding</a>, Paul Graham How startup funding is evolving\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/convince.html/">How to Convince Investors</a>, Paul Graham How to convince investors to invest in you\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://paulgraham.com/herd.html/">Investor Herd Dynamics</a>, Paul Graham How investors think about investing in early stage companies\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/">“Venture Deals”</a>, Feld and Mendelson Essential elements of a venture deal (book)\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.khanacademy.org/finance-economics/venture-capital-and-capital-markets/v/raising-money-for-a-startup/">Raising Money for a Startup</a>, Sal Khan Startup Fundraising from Sal Khan\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks: Debt or Equity,</a> Babak Nivi Discussion on debt vs. equity\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/first-time/">Venture Hacks: First Time</a>, Babak Nivi Advice for first time fundraisers.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html/">How Much Money To Raise</a>, Fred Wilson Advice on how much money to raise.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.paulgraham.com/growth.html/">“Startup = Growth”</a>, Paul Graham Description of a startup.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://venturehacks.com/articles/debt-or-equity/">Venture Hacks / Babk Nivi: Should I Raise Debt or Equity</a> Discussion of whether raising debt or equity is the best answer.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.avc.com/a_vc/2011/07/financing-options-convertible-debt.html/">Fred Wilson: Financing Options</a> Another discussion of debt vs. equity\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.bothsidesofthetable.com/2012/09/05/the-truth-about-convertible-debt-at-startups-and-the-hidden-terms-you-didnt-understand//">Mark Suster on Convertible Debt</a> An analysis of problems with convertible debt\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://www.clerky.com/transaction_templates/24/">Clerky Guide</a> Clerky docs and guides. A great place to start.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://ycombinator.wpengine.com/announcing-the-safe-a-replacement-for-convertible-notes/">Announcing the Safe</a>, Paul Graham The simple agreement for future equity. A replacement for convertible notes.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"http://www.ycombinator.com/documents//">The Safe Primer</a>, Carolynn Levy Lots of detailed information on the safe and examples as to how it works in various cases.\n </li>\n<li>\n <a href=https://www.ycombinator.com/"https://www.ycombinator.com/handshake//">The Handshake Deal Protocol</a>, Paul Graham A standard protocol to help ensure that verbal commitments turn into transactions.\n </li>\n</ol>\n</div>\n","comment_id":"1097662","feature_image":null,"featured":false,"visibility":"public","email_recipient_filter":"none","created_at":"2016-01-07T09:54:44.000-08:00","updated_at":"2021-10-20T13:39:35.000-07:00","published_at":"2016-01-07T09:54:44.000-08:00","custom_excerpt":null,"codeinjection_head":null,"codeinjection_foot":null,"custom_template":null,"canonical_url":null,"authors":[{"id":"61fe29e3c7139e0001a71092","name":"Geoff Ralston","slug":"geoff-ralston","profile_image":"/blog/content/images/2022/02/geoff.jpg","cover_image":null,"bio":"Geoff Ralston is the former President of Y Combinator and has been with YC since 2011. Prior to YC, he built one of the first web mail services, RocketMail which became Yahoo Mail in 1997.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/geoff-ralston/"}],"tags":[{"id":"61fe29efc7139e0001a7115e","name":"Fundraising","slug":"fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/fundraising/"},{"id":"61fe29efc7139e0001a71169","name":"Seed","slug":"seed","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/seed/"},{"id":"61fe29efc7139e0001a71174","name":"Advice","slug":"advice","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/advice/"},{"id":"61fe29efc7139e0001a7116d","name":"Essay","slug":"essay","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/essay/"}],"primary_author":{"id":"61fe29e3c7139e0001a71092","name":"Geoff Ralston","slug":"geoff-ralston","profile_image":"https://ghost.prod.ycinside.com/content/images/2022/02/geoff.jpg","cover_image":null,"bio":"Geoff Ralston is the former President of Y Combinator and has been with YC since 2011. Prior to YC, he built one of the first web mail services, RocketMail which became Yahoo Mail in 1997.","website":null,"location":null,"facebook":null,"twitter":null,"meta_title":null,"meta_description":null,"url":"https://ghost.prod.ycinside.com/author/geoff-ralston/"},"primary_tag":{"id":"61fe29efc7139e0001a7115e","name":"Fundraising","slug":"fundraising","description":null,"feature_image":null,"visibility":"public","og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"codeinjection_head":null,"codeinjection_foot":null,"canonical_url":null,"accent_color":null,"url":"https://ghost.prod.ycinside.com/tag/fundraising/"},"url":"https://ghost.prod.ycinside.com/this-brief-guide-is-a-summary-of-what-startup-founders-need-to-know-about-raising-the-seed-funds-critical-to-getting-their-company-off-the-ground/","excerpt":" ","reading_time":20,"access":true,"og_image":null,"og_title":null,"og_description":null,"twitter_image":null,"twitter_title":null,"twitter_description":null,"meta_title":null,"meta_description":null,"email_subject":null,"frontmatter":null,"feature_image_alt":null,"feature_image_caption":null},{"id":"6357f9044557ad0001018040","uuid":"b73507ea-8de6-4799-8305-1554bd33437c","title":"How to maintain engineering velocity as you scale","slug":"how-to-maintain-engineering-velocity-as-you-scale","html":"Engineering is typically the function that grows fastest at a scaling startup. It requires a lot of attention to make sure the pace of execution does not slow and cultural issues do not emerge as you scale.We’ve learned a lot about pace of execution in the past five years at Faire. When we launched in 2017, we were a team of five engineers. From the beginning, we built a simple but solid foundation that allowed us to maintain both velocity and quality. When we found product-market fit later that year and started bringing on lots of new customers, instead of spending engineering resources on re-architecturing our platform to scale, we were able to double down on product engineering to accelerate the growth. In this post, we discuss the guiding principles that allowed us to maintain our engineering velocity as we scaled.<h2 id=\"four-guiding-principles-to-maintaining-velocity\">Four guiding principles to maintaining velocity</h2>Faire’s engineering team grew from five to over 100 engineers in three years. Throughout this growth, we were able to sustain our pace of engineering execution by adhering to four important elements:<ol><li><a href=https://www.ycombinator.com/"https://www.ycombinator.com/blog/how-to-maintain-engineering-velocity-as-you-scale/#1-hire-the-best-engineers\">Hiring the best engineers</a></li><li><a href=https://www.ycombinator.com/"https://www.ycombinator.com/blog/how-to-maintain-engineering-velocity-as-you-scale/#2-build-a-solid-long-term-foundation-from-day-one\">Building solid long-term foundations from day one</a></li><li><a href=https://www.ycombinator.com/"https://www.ycombinator.com/blog/how-to-maintain-engineering-velocity-as-you-scale/#3-track-engineering-metrics-to-drive-decision-making\">Tracking metrics to guide decision-making</a></li><li><a href=https://www.ycombinator.com/"https://www.ycombinator.com/blog/how-to-maintain-engineering-velocity-as-you-scale/#4-keep-teams-small-and-independent\">Keeping teams small and independent</a></li></ol><h2 id=\"1-hire-the-best-engineers\">1. Hire the best engineers</h2>You want to hire the best early team that you can, as they’re going to be the people helping you scale and maintain velocity. And good people follow good people, helping you grow your team down the road.This sounds obvious, but it’s tempting to get people in seats fast because you have a truckload of priorities and you’re often the only one doing engineering recruiting in those early years. What makes this even harder is you often have to play the long game to get the best engineers signed on. Your job is to build a case for why your company is the opportunity for them. We had a few amazing engineers in mind we wanted to hire early on. I spent over a year doing coffee meetings with some of them. I used these meetings to get advice, but more importantly I was always giving them updates on our progress, vision, fundraising, and product releases. That created FOMO which eventually got them so excited about what was happening at Faire that they signed up for the ride.While recruiting, I looked for key competencies that I thought were vital for our engineering team to be successful as we scaled. These were:<h3 id=\"a-experts-at-our-core-technology\">a. Experts at our core technology</h3>In early stages, you need to move extremely fast and you cannot afford to make mistakes. We wanted the best engineers who had previously built the components we needed so they knew where mistakes could happen, what to avoid, what to focus on, and more. For example, we built a complex payments infrastructure in a couple of weeks. That included integrating with multiple payment processors in order to charge debit/credit cards, process partial refunds, async retries, voiding canceled transactions, and linking bank accounts for ACH payouts. We had built similar infrastructure for the Cash App at Square and that experience allowed us to move extremely quickly while avoiding pitfalls.<h3 id=\"b-focused-on-delivering-value-to-customers\">b. Focused on delivering value to customers</h3>Faire’s mission is to empower entrepreneurs to chase their dreams. When hiring engineers, we looked for people who were amazing technically but also understood our business, were customer focused, were passionate about entrepreneurship—and understood how they needed to work. That is, they understood how to use technology to add value to customers and product, quickly and with quality. To test for this, I would ask questions like: “Give me examples of how you or your team impacted the business.” Their answers would show how well they understood their current company’s business and how engineering can impact customers and change a company’s top-line numbers.I also learned a lot when I let them ask questions about Faire. I love when engineering candidates ask questions about how our business works, how we make money, what our market size is, etc. If they don't ask these kinds of questions, I ask them things like: “Do you understand how Faire works?” “Why is Faire good for retailers?” “How would you sell Faire to a brand?” After asking questions like these a few times, you’ll see patterns and be able to quickly identify engineers who are business-minded and customer-focused.Another benefit of hiring customer-focused engineers is that it’s much easier to shut down projects, start new ones, and move people around, because everyone is focused on delivering value for the customer and not wedded to the products they helped build. During COVID, our customers saw enormous change, with in-person trade shows getting canceled and lockdowns impacting in-person foot traffic. We had to adapt quickly, which required us to stop certain initiatives and move our product and engineering teams to launch new ones, such as our own version of <a href=https://www.ycombinator.com/"https://blog.faire.com/thestorefront/introducing-faire-summer-market-our-first-online-trade-show-event//">online trade shows</a>.<h3 id=\"c-grit\">c. Grit</h3>When we first started, we couldn’t afford to build the most beautiful piece of engineering work. We had to be fast and agile. This is critical when you are pre-product-market fit. Our CEO Max and a few early employees would go to trade shows to present our product to customers, understand their needs, and learn what resonated with them. Max would call us with new ideas several times a day. It was paramount that our engineers were <a href=https://www.ycombinator.com/"https://angeladuckworth.com/grit-book//">gritty and able to quickly make changes to the product. Over the three or four days of a trade show, our team deployed changes nonstop to the platform. We experimented with offerings like:<ul><li>Free shipping on first orders</li><li>Buy now, pay later</li><li>Buy from a brand and get $100 off when you re-order from the same brand</li><li>Free returns</li></ul>By trying different value propositions in a short time, our engineering team helped us figure out what was most valuable to our customers. That was how we found strong product-market fit within six months of starting the company.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://lh3.googleusercontent.com/CrRDf25EV8if-oP6rfEnSYeA_ttfKsayeQoM61gMOYFODZvpYsId0z2Y5RQ8z5xH4zt8UQaPBOwe1xus8oaqKQW1zxqNxz_ss9LHTpWyCc6tWsyJUm6_g6lVUtb6PkHluwNcqIU9MN3silgCLqtNHO2S8RkPcQCHBYiVPhK9Fteoiq_w9dZJqaxTqA/" class=\"kg-image\" alt loading=\"lazy\"></figure>Our trade show storefront back when we were called Indigo Fair.<h2 id=\"2-build-a-solid-long-term-foundation-from-day-one\">2. Build a solid long-term foundation from day one</h2>The number one impediment to engineering velocity at scale is a lack of solid, consistent foundation. A simple but solid foundation will allow your team to keep building on top of it instead of having to throw away or re-architecture your base when hypergrowth starts.To create a solid long-term foundation, you first need to get clear on what practices you believe are important for your engineering team to scale. For example, I remember speaking with senior engineers at other startups who were surprised we were writing tests and doing code reviews and that we had a code style guide from the very early days. But we couldn’t have operated well without these processes. When we started to grow fast and add lots of engineers, we were able to keep over 95% of the team focused on building features and adding value to our customers, increasing our growth. Once you know what long-term foundations you want to build, you need to write it down. We were intentional about this from day one and documented it in our <a href=https://www.ycombinator.com/"https://craft.faire.com/handbook-89f166841ec9/">engineering handbook</a>. Today, every engineer is onboarded using this handbook.The four foundational elements we decided on were:<h3 id=\"a-being-data-driven\">a. Being data-driven</h3>The most important thing is to build your data muscle early. We started doing this at 10 customers. At the time, the data wasn’t particularly useful; the more important thing was to start to collect it. At some point, you’ll need data to drive product decision-making. The longer you wait, the harder it is to embed into your team.Here’s what I recommend you start doing as early as possible:<ul><li>Set up data pipelines that feed into a data warehouse.</li><li>Start collecting data on how people are using your product. As you add features and iterate, record how those changes are impacting user interactions. All of this should go into a data warehouse that is updated within minutes and made available to your team. As your product gets increasingly complex, it will become more and more important to use data to validate your intuition.</li><li>We use Redshift to store data. As user events are happening, our relational database (MySQL) replicates them in Redshift. Within minutes, the data is available for queries and reports.</li><li>Train your team to use experimentation frameworks.</li><li>Make it part of the product development process. The goal is to transform your intuition into a statistically testable statement. A good place to start is to establish principles and high-level steps for your team to follow when they run experiments. We’ve set principles around when to run experiments vs. when not to, that running rigorous experiments should be the default (and when it isn’t), and when to stop an experiment earlier than expected. We also have teams log experiments in a Notion dashboard.</li><li>The initial focus should be on what impact you think a feature will have and how to measure that change. As you’re scoping a feature, ask questions like: How are we going to validate that this feature is achieving intended goals? What events/data do we need to collect to support that? What reports are we going to build? Over time, these core principles will expand.</li><li>The entire team should be thinking about this, not just the engineers or data team. We reinforced the importance of data fluency by pushing employees to learn SQL, so that they could run their own queries and experience the data firsthand.</li><li>It’ll take you multiple reps to get this right. We still miss steps and fail to collect the right data. The sooner you get your team doing this, the easier it will be to teach it to new people and become better at it as an organization.</li></ul><h3 id=\"b-our-choice-of-programming-language-and-database\">b. Our choice of programming language and database</h3>When choosing a language and database, pick something you know best that is also scalable long-term. If you choose a language you don’t know well because it seems easier or faster to get started, you won’t foresee pitfalls and you’ll have to learn as you go. This is expensive and time-consuming. We started with Java as our backend programming language and MySQL as our relational database. In the early days, we were building two to three features per week and it took us a couple of weeks to build the framework we needed around MySQL. This was a big tradeoff that paid dividends later on.<h3 id=\"c-writing-tests-from-day-one\">c. Writing tests from day one</h3>Many startups think they can move faster by not writing tests; it’s the opposite. Tests help you avoid bugs and prevent legacy code at scale. They aren’t just validating the code you are writing now. They should be used to enforce, validate, and document requirements. Good tests protect your code from future changes as your codebase grows and features are added or changed. They also catch problems early and help avoid production bugs, saving you time and money. Code without tests becomes legacy very fast. Within months after untested code is written, no one will remember the exact requirements, edge cases, constraints, etc. If you don’t have tests to enforce these things, new engineers will be afraid of changing the code in case they break something or change an expected behavior. There are two reasons why tests break when a developer is making code changes:<ul><li>Requirements change. In this case, we expect tests to break and they should be updated to validate and enforce the new requirements.</li><li>Behavior changes unexpectedly. For example, a bug was introduced and the test alerted us early in the development process.</li></ul>Every language has tools to measure and keep track of test coverage. I highly recommend introducing them early to track how much of your code is protected by tests. You don’t need to have 100% code coverage, but you should make sure that critical paths, important logic, edge cases, etc. are well tested. <a href=https://www.ycombinator.com/"https://leanylabs.com/blog/good-unit-tests//">Here are tips for writing good tests</a>.<h3 id=\"d-doing-code-reviews\">d. Doing code reviews</h3>We started doing code reviews when we hired our first engineer. Having another engineer review your code changes helps ensure quality, prevents mistakes, and shares good patterns. In other words, it’s a great learning tool for new and experienced engineers. Through code reviews, you are teaching your engineers patterns: what to avoid, why to do something, the features of languages you should and shouldn’t use. Along with this, you should have a coding style guide. Coding guides help enforce consistency and quality on your engineering team. It doesn’t have to be complex. We use a tool that formats our code so our style guide is automatically enforced before a change can be merged. This leads to higher code quality, especially when teams are collaborating and other people are reviewing code.We switched from Java to Kotlin in 2019 and we have a comprehensive style guide that includes recommendations and rules for programming in Kotlin. For anything not explicitly specified in our guide, we ask that engineers follow <a href=https://www.ycombinator.com/"https://kotlinlang.org/docs/coding-conventions.html/">JetBrains’ coding conventions</a>.These are the code review best practices we share internally:<ul><li>#bekind when doing a code review. Use positive phrasing where possible (\"there might be a better way\" instead of \"this is terrible\"; \"how about we name this X?\" instead of \"naming this Y is bad\"). It's easy to unintentionally come across as critical, especially if you have a remote team.</li><li>Don't block changes from being merged if the issues are minor (e.g., a request for variable name change, indentation fixes). Instead, make the ask verbally. Only block merging if the request contains potentially dangerous changes that could cause issues or if there is an easier/safer way to accomplish the same.</li><li>When doing a code review, ensure that the code adheres to your style guide. When giving feedback, refer to the relevant sections in the style guide.</li><li>If the code review is large, consider checking out the branch locally and inspecting the changes in IntelliJ (Git tab on the bottom). It’s easier to have all of the navigation tools at hand.</li></ul><h2 id=\"3-track-engineering-metrics-to-drive-decision-making\">3. Track engineering metrics to drive decision-making</h2>Tracking metrics is imperative to maintaining engineering velocity. Without clear metrics, Faire would be in the dark about how our team is performing and where we should focus our efforts. We would have to rely on intuition and assumptions to guide what we should be prioritizing. Examples of metrics we started tracking early (at around 20 engineers) included:<ul><li>Uptime. One of the first metrics we tracked was <a href=https://www.ycombinator.com/"https://docs.datadoghq.com/integrations/uptime//">uptime. We started measuring this because we were receiving anecdotal reports of site stability issues. Once we started tracking it, we confirmed the anecdotal evidence and dedicated a few engineers to resolve the issue.</li><li>CI wait time. Another metric that was really important was CI wait time (i.e., time for the build system to build/test pull requests). We were receiving anecdotal reports of long CI wait times for developers, confirmed it with data, and fixed the issue.</li></ul><figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://lh3.googleusercontent.com/KiE8tjsqkFvtJFmyY_6-IinXuT1A6C4x6JBUSX9qb9nDHB9lurJZAlHocGDEi3Sx_HSHNuBxozMBljGOsNokrQIJ9Hk6ZolI39yQtKPz0yuAbue0G2weaKWXqD65_Gbal_LYuEC5TpPoGIdCGd0jflhy1yRQzuG-pxV1IePbh8LuEtvqehC1gHs5lw/" class=\"kg-image\" alt loading=\"lazy\"></figure>This is a dashboard we created in the early days of Faire to track important engineering metrics. It was updated manually by collecting data from different sources. Today, we have more comprehensive dashboards that are fully automated.Once our engineering team grew to 100+, our top-level metrics became more difficult to take action against. When metrics trended beyond concerning thresholds, we didn’t have a clear way to address them. Each team was busy with their own product roadmap, and it didn’t seem worthwhile to spin up new teams to address temporary needs. Additionally, many of the problems were large in scale and would have required a dedicated group of engineers. We found that the best solution was to build <a href=https://www.ycombinator.com/"https://www.datadoghq.com/blog/the-power-of-tagged-metrics//">dimensions so that we could view metrics by team. Once we had metrics cut by team, we could set top-down expectations and priorities. We were happy to see that individual teams did a great job of taking ownership of and improving their metrics and, consequently, the company’s top-level metrics.<h4 id=\"an-example-transaction-run-duration\">An example: transaction run duration</h4>Coming out of our virtual trade show, <a href=https://www.ycombinator.com/"https://blog.faire.com/thestudio/faire-summer-market-2021-our-global-trade-show-event-is-coming-in-july//">Faire Summer Market</a>, we knew we needed significant investment in our database utilization. During the event, site usage pushed our database capacity to its limits and we realized we wouldn’t be able to handle similar events in the future.In response, we created a metric of how long transactions were open every time our application interacted with the database. Each transaction was attributed to a specific team. We then had a visualization of the hottest areas of our application along with the teams responsible for those areas. We asked each team to set a goal during our planning process to reduce their database usage by 20% over a three-month period. The aggregate results were staggering. Six months later, before our next event—<a href=https://www.ycombinator.com/"https://blog.faire.com/thestorefront/announcing-faires-2022-winter-virtual-trade-show-events//">Faire Winter Market</a>—incoming traffic was 1.6x higher, but we were nowhere close to maxing out our database capacity. Now, each team is responsible for monitoring their database utilization and ensuring it doesn’t trend in the wrong direction.<h3 id=\"managing-metrics-with-kpi-scorecards\">Managing metrics with KPI scorecards</h3>We’re moving towards a model where each team maintains a set of key performance indicators (KPIs) that get published as a scorecard reflecting how successful the team is at maintaining its product areas and the parts of the tech stack it owns.We’re starting with a top-level scorecard for the whole engineering team that tracks our highest-level KPIs (e.g., <a href=https://www.ycombinator.com/"https://docs.datadoghq.com/tracing/guide/configure_an_apdex_for_your_traces_with_datadog_apm//">Apdex, database utilization, CI wait time, severe bug escapes, flaky tests). Each team maintains a scorecard with its assigned top-level KPIs as well as domain-specific KPIs. As teams grow and split into sub-teams, the scorecards follow the same path recursively. Engineering leaders managing multiple teams use these scorecards to gauge the relative success of their teams and to better understand where they should be focusing their own time.Scorecard generation should be as automated and as simple as possible so that it becomes a regular practice. If your process requires a lot of manual effort, you’re likely going to have trouble committing to it on a regular cadence. Many of our metrics start in DataDog; we use their API to extract relevant metrics and push them into Redshift and then visualize them in Mode reports.As we’ve rolled this process out, we’ve identified criteria for what makes a great engineering KPI:<ul><li>Can be measured and has a believable source of truth. If capturing and viewing KPIs is not an easy and repeatable task, it’s bound to stop happening. Invest in the infrastructure to reliably capture KPIs in a format that can be easily queried.</li><li>Clearly ladders up to a top-level business metric. If there isn’t a clear connection to a top-level business metric, you’ll have a hard time convincing stakeholders to take action based on the data. For example, we’ve started tracking pager volume for our critical services: High pager volume contributes to tired and distracted engineers which leads to less code output, which leads to fewer features delivered, which ultimately means less customer value.</li><li>Is independent of other KPIs. When viewing and sharing KPIs, give appropriate relative weight to each one depending on your priorities. If you’re showing two highly correlated KPIs (e.g., cycle time and PR throughput), then you’re not leaving room for something that’s less correlated (e.g., uptime). You might want to capture some correlated KPIs so that you can quickly diagnose a worrying trend, but you should present non-duplicative KPIs when crafting the overall scorecard that you share with stakeholders.</li><li>Is normalized in a meaningful way. Looking at absolute numbers can be misleading in a high-growth environment, which makes it hard to compare performance across teams. For example, we initially tracked growth of overall infrastructure cost. The numbers more than doubled every year, which was concerning. When we later normalized this KPI by the amount of revenue a product was producing, we observed the KPI was flat over time. Now we have a clear KPI of “amount spent on infrastructure to generate $1 in revenue.” This resulted in us being comfortable with our rate of spend, whereas previously we were considering staffing a team to address growing infrastructure costs.</li></ul>We plan to keep investing in this area as we grow. KPIs allow us to work and build with confidence, knowing that we’re focusing on the right problems to continue serving our customers.<h2 id=\"4-keep-teams-small-and-independent\">4. Keep teams small and independent</h2>When we were a company of 25 employees, we had a single engineering team. Eventually, we split into two teams in order to prioritize multiple areas simultaneously and ship faster. When you split into multiple teams, things can break because people lose context. To navigate this, we developed a pod structure to ensure that every team was able to operate independently but with all the context and resources they needed. When you first create a pod structure, here are some rules of thumb:<ul><li>Pods should operate like small startups. Give them a mission, goals, and the resources they need. It’s up to them to figure out the strategy to achieve those goals. Pods at Faire typically do an in-person offsite to brainstorm ideas and come up with a prioritized roadmap and expected business results, which they then present for feedback and approval.</li><li>Each pod should have no more than 8 to 10 employees. For us, pods generally include 5 to 7 engineers (including an engineering manager), a product manager, a designer, and a data scientist.</li><li>Each pod should have a clear leader. We have an engineering manager and a product manager co-lead each pod. We designed it this way to give engineering a voice and more ownership in the planning process.</li><li>Expect people to be members of multiple pods. While this isn’t ideal, there isn’t any other way to do it early on. Resources are constrained, and you need a combination of seasoned employees and new hires on each pod (otherwise they’ll lack context). Pick one or two people who have lots of context to seed the pod, then add new members. When we first did this, pods shared backend engineers, designers, and data analysts, and had their own product manager and frontend engineer.</li><li>If you only have one product, assign a pod to each well-defined part of the product. If there’s not an obvious way to split up your product surface area, try to break it out into large features and assign a pod to each.</li><li>Keep reporting lines and performance management within functional teams. This makes it easier to maintain:</li></ul>\t\t(1) Standardized tooling/processes across the engineering team and balanced \t\tleadership between functions\t\t(2) Standardized career frameworks and performance calibration. We give our \t\tmanagers guidance and tools to make sure this is happening. For example, I \t\thave a spreadsheet for every manager that I expect them to update on a \t \t\tmonthly basis with a scorecard and brief summary of their direct reports’ \t\t \t\tperformance.<h3 id=\"how-we-stay-on-top-of-resource-allocation-census-and-horsepower\">How we stay on top of resource allocation: Census and Horsepower</h3>Our engineering priorities change often. We need to be able to move engineers around and create, merge, split, or sunset pods. In order to keep track of who is on which team—taking into account where that person is located, their skill set, tenure at the company, and more—we built a tool called Census.Census is a real-time visualization of our team’s structure. It automatically updates with data from our ATS and HR system. The visual aspect is crucial and makes it easier for leadership to make decisions around resource allocation and pod changes as priorities shift. Alongside Census, we also built an algorithm to evaluate the “horsepower” of a pod. If horsepower is showing up as yellow or red, that pod either needs more senior engineers, has a disproportionate number of new employees, or both.<figure class=\"kg-card kg-image-card kg-card-hascaption\"><img src=https://www.ycombinator.com/"https://lh3.googleusercontent.com/pJk7SUqsmeQLU_dYU3BrN5wMnzyHwVySmydpuiNbHgDddt_FzwwQzCQ_pQH75FX-InduoRGg5hSVhcfXZxRC3FztBZ3aF_2JnwIFMBOhjSey2cgRQEqs38oORhgZgrtwrmgO7CM-WSU_34oeyp15hdzHOrH_FAXTlFlJOt-A87J4Brce_ri3MER8RA/" class=\"kg-image\" alt loading=\"lazy\"><figcaption>.</figcaption></figure>Census.<figure class=\"kg-card kg-image-card\"><img src=https://www.ycombinator.com/"https://lh3.googleusercontent.com/N7btbx4GDkomhZp8wj0CMlTiGywqDffV6qCakK6aZEILScjRiIqjhwjV1q2AlT6bmrzU9vqo_pa1ggXn8j_C0CWsO4BEQdHoq5EcPfOhZwhe8tg1oMmmmDeYQXNrjF99WOdM5AKVTT5GAisZM_idtecOsjdXH_qQ2ezvEVRLltbkMfmk1j3qouwt7g/" class=\"kg-image\" alt loading=\"lazy\"></figure>Pods are colored either green, yellow, or red depending on their horsepower. 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Why would you start a startup in an economic downturn?

by Stephanie Simon2/21/2023

There will likely be a recession in 2023, and the major downsides to starting a startup are obvious: There is less money in the system so selling and fundraising are harder; investors have less money to invest and companies have less money to spend on products.

But these are also reasons it’s an especially good time to start a startup, especially with YC.

Cost-sensitive customers can be helpful in the early days of your company. If they pay you in this tough environment, it's a stronger signal. There’s a higher likelihood you’re building something they really want.

And though our new standard deal of $500,000 gives you some slack, you will likely have to develop very smart habits around spending because fundraising is harder. Learning how to stay alive is arguably the most important skill you can have as a founder.

I don’t think it’s a coincidence that two of the top YC companies, Airbnb and Stripe, were started in the depths of the last recession (2009).* They learned how important it is to build something people want and not assume investors will be there to save them early on.

None of this is new. It’s common knowledge, especially in the tech community, that many successful startups were created during recessions (just search “startups + recession” and you’ll find a bunch of articles), which may be one reason we’ve seen high numbers of applications from founders leaving their big tech company jobs, especially in the last couple of months.

If running a startup is like commanding an army, then YC is elite basic training. You’ll learn how to navigate the challenges (or realize you’re not up for it) when your company is small and with the support of advisors and YC batchmates. You’ll build a solid foundation of learning how to build something people want and staying alive.

The YC training prepares you by default for succeeding through recessions. And it’s easier to internalize that training today when the macroenvironment supports it. The alternative is learning it on the battlefield when the stakes are way higher — when you’ve already raised money and have employees who depend on you.

As YC founder Paul Graham wrote, “Bad shit is coming. It always is in a startup.” If you’re interested in starting a startup, we’re entering a counterintuitively good time to do it. It won’t be easy, but if you get through the early days, you’ll be better prepared than most. And if the challenge excites you, you probably have the right personality for it.

*Their products were also tailored to a cost-sensitive environment. Stripe made it easier for brick-and-mortar businesses to cut costs by selling online and Airbnb created a new income stream for hosts and lower-priced accommodations for travelers.

Author

Stephanie Simon
Stephanie Simon is the Head of Admissions at Y Combinator. Prior to YC, she was a software engineer at Earnest and co-founded Murmur, a venture-backed local search startup.