It is unfortunate, but split-ups seem to happen somewhat frequently based on my unscientific survey and personal observations. I think the core of the problem is when founding teams don’t plan for a potential break-up at the start. It may seem pessimistic to go into business together with this mindset, but I feel it shows professional maturity. So, talk with your business advisors and lawyer about what would happen if your team lost one of the founders in the first year or two. Then, tweak your incorporation documents with your lawyer to get to something the founding team agrees is fair.

I'm a big fan of looking for the "ruts in the snow". So, follow the well-trodden path below to save yourself from a lot of stress:

Are You Ready?

1. Already did a FF Round: An FF (family & friends) round should already have happened before you go looking for money from unrelated parties (read: angels, family wealth offices, micro VCs, syndicate leads, etc.).
2. Have some traction: You should have built an initial version of your product (MVP) and gotten very early signs of traction of some sort. You may or may not have Product-Market Fit yet. The important thing is that you've progressed beyond the kitchen table idea and have had meaningfully interacted with customers - hopefully, paying ones.
3. Gotten your house in order: At a minimum, you have a strong understanding of your potential market and the problem you are addressing, you've figured out how to keep building out your product, you've got a plan for marketing and selling your product, you've fleshed out a simple financial model that shows how you will make money, and you've actually legally formed your company. Bonus points if you have had a lawyer double-check your FF round equity/debt documents¹ and helped you put together a cap table showing who owns what and under what terms. Finally, here is highly focused list of key things an early stage investor may ask for before investing: Point Nine's due diligence list)
4. Pitch deck is built: I'd be surprised if this is not the first thing you did to prepare for raising a round! There are a gazillion examples of pitch decks. The important thing to keep in mind is it should be like a great movie that takes someone from not knowing nor caring about your company to wanting to learn more: Problem - Market - Solution - Profit Potential - Team - $ Ask - Why.²
5. Don't worry about NDAs: You'll hear often that potential investors won't sign NDAs so you shouldn't ask. Sure, that's true at the pre-seed/seed rounds. The thing you don't hear is that you actually do want potential investors to talk so you should encourage it. You need buzz to attract potential investors. Just don’t list your secret sauce in your pitch deck or during your discussions. I don't need to know the nitty-gritty of how your special algorithms work for me to want to invest in your company. Later on, if I invest then I'm in the same boat as you so I'm not going to freely blab about your secret sauce to the world.

Find a Lead Investor

1. Who can be a lead investor? Keep an open mind. Your lead investor does not necessarily have to write the largest check, but needs to have a strong reputation so his/her commitment greatly influences those of other potential investors. It is much, much better to have a successful founder as a lead investor than anyone else. A well-known, early stage investor in your community (geographically or in your business space) is also a top choice. For example, a family wealth office known for investing in early stage deals in your community is a good choice.
2. Socialize: Focus heavily on finding that lead investor (actively invests in early stage deals, knows your space, etc.). Otherwise, you’ll end up with a lot of planes in the air and no landings as your list of potential investors who are "interested" grows.
3. You pitch: You (the founder) should be doing the pitching. Do not get others to pitch for you.
4. Stay organized: Keep track of the answers and materials you give potential investors in response to their questions so you can efficiently answer those same questions with other potential investors.
5. Reflect if not having success: If you are having no luck getting a lead investor then step back to examine why. Specifically, has your business gotten enough traction? Circle back to the beginning of this list and work on building more traction. Rinse and repeat until you’ve got a lead investor.
6. Who is buying?: Generally, the lead investor negotiates and puts forth a term sheet to the founders (not the other way around).²
7. Get a commitment: You've got a commitment when your term sheet has been negotiated and is acceptable to your lead investor. As strange as it sounds, potential investors may or may not sign the term sheet once you've negotiated it fully.³ It doesn't matter as long as it is what you and the investors agree on - it is just a guide for your lawyer to draft the full set of legal documents to memorialize the investment.

Round Up Other Investors

• Update your pitch deck with terms: Once a lead investor has set terms for investing then you should update your pitch deck to include those terms. At this point, the deal is set and you want to get yes/no decisions from potential investors.
• Ask your lead investor to help: A lead investor should help corral the cats so the founders can get more commitments. This could be as simple as lending his/her name to the effort as the founders do the herding or as much as actively engaging in back channel conversations with potential investors.

Begin Bringing in Planes for a Landing

• Set a target closing date: Once you've got real momentum toward getting your round fully committed then set an expected closing date to help further herd the cats. Once the train begins to leave the station, folks will start hopping on.
• Get legal documents drafted up: You now need to get the necessary legal documents written to match what is set down in the final term sheet. Please do not try to DIY your legal docs. Ask successful founders who have raised money to introduce you to a good corporate transaction lawyer. A good hack is to ask founders who raised money more than a year ago for recommendations so those founders will have had enough time to see if the guidance and resulting legal documents were good. You are not looking for the cheapest nor the most expensive lawyer. You want the ninja who is efficient, nondramatic, and will get it done.
• Give your investors time: Plan on potential investors needing up to 2 weeks to review final legal documents and source funds (e.g., liquidate public stock, etc.). Don’t put undue pressure on them or you can cause them to bolt. They are always looking for negative signals in an investment world where the odds are heavily stacked against them.

Close the Round

• E-sign all the way: Use DocuSign or some other mechanism to ensure you get complete, signed document sets.
• Cover your bases: Get your lawyer to opine on whether or not you need to get SEC registration. Store this.
• The actual closing: Closing will usually happen over about a week or by a certain date, but can stretch out as documents and bank wires come in. Keep the momentum to wrap up the round cleanly.

Wrap Up

• Announce it: Announce to the world that your round is closed and get back to business. Announcements can help you attract new customers and talent. Give credit to your lead investor. He/she will appreciate the gesture since the press release will help improve his/her deal flow.
• Organize your records: Make sure your lawyers give you an updated cap table for your records. You can build one yourself, but it is a better use of your time to outsource it to get it done right. You’ll need the cap table and fully-signed documents for future rounds.
• Begin investor updates: Start immediately sending out periodic (monthly) updates to investors (good, bad, need help with something, financials, etc.). Something simple, yet consistent, is far better than radio silence.

Good luck!

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Footnotes:

1. Yes, FF rounds can get really screwed up and forever affect the company. I'm not a proponent of DIY legal when it comes to something with such large impact, yet small legal costs. A corporate transaction lawyer who has done a lot of early stage deals can easily put together a plain-Jane convertible note for you.
2. Should you include proposed investment terms in your pitch deck? You'll get a lot of opinions about this and they are often all valid depending on the situation. If I'm selling something then I want to talk about price after I've got the prospective customer excited about the product, in this case, the company. If I'm buying (as a potential investor) then I want to triage deals as quick as possible and a grossly overpriced deal is one filter I use. But, if the price being presented is the "MSRP" in the sense that the founders are looking to raise at these terms, but a lead investor is not yet secured then I am not going to say "no" to a deal on price alone. I'll indicate I'm interested and wait for a lead investor to negotiate reasonable terms (if I don't feel like I'd be a good lead investor on the deal). Thus, having proposed deal terms in your deck could signal that you have a lead investor then the conversation can be weird when you don't yet have a lead investor. Regardless of whether you put proposed terms in your deck, you should absolutely spend time researching and talking with people to figure out valuation ranges you're ok with, the investment vehicle (e.g., convertible note) you'd like to use, and high-level terms you want (no board seat for pre-seed investors, no super pro rata rights for anyone, etc.).
3. No signature on a term sheet, what? Some potential investors might view the term sheet as a legally binding document. It isn't, but it is not worth losing sleep over.

I’ve been the CFO in several software companies that have all raised money. I am also an active angel investor in B2B SaaS companies. Both roles have given me a vantage point to see how rounds are being done, by who, and how in the Birmingham startup ecosystem.

A lot has been written about raising money to fuel your startup or scaleup. I’ll save you trouble and list a couple that are really good:

• How to Raise Seed Stage Funding by Justin Kan
• Raising a Series A Venture Financing by Justin Kan
• The SaaS Funding Napkin by Christoph Janz of Point Nine Capital

But, I’ve heard grumbles over the years from Birmingham startup folks that “no one is funding startups in Birmingham”. I know funding is happening, though. I think the problem is awareness. Thus, I created a grid organized by stage of the company to show the sources of seed and growth capital available to Birmingham-based B2B SaaS companies:

• Sources of seed and growth capital for B2B SaaS

If you know of other sources I missed or have suggested modifications to this list then please contact me.

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The following flowed out of me in a few minutes without any self-censorship:

• Don’t believe your own hype.
• It takes a long time; there is not an overnight success. Specifically, I’m talking about a decade or more to build something substantial.
• There is a survivorship bias in the stories out there (especially within mass media).
• Be passionate about the market you are serving first and foremost (too many people are caught up with their technology toys and/or whiz-bang when customers just want solutions).
• Focus is a must and it must be reflected by your actions. It is a marathon or, perhaps, more like a century race. Many times it seems like “pivoting” gets tossed around when people are actually just not focused nor committed to doing the hard work.
• Pull the best team members, contractors, advisors, investors, and so forth you can from all around the world. Don’t be afraid to go broad in search of the best talent and partners.
• Building a product company is different than building a custom dev shop. It is easy to dismiss those who are building product companies (SaaS) in the early years simply because the financials are much smaller in the first few years.

In a nutshell, it is a lot of hard work, you’ll wonder if it was worthwhile, but I think it is for those who have the grit to stay at it.

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This is why you hear that you can learn more from failure than from success. I get it, but I think success stories can also be good learning opportunities, as long as you can recognize what could have gone wrong and why.

Dancing through a minefield

The guys behind Codetree wrote a fantastic article on their adventures with buying their SaaS business. Their blow-by-blow diary from when they first started looking at the business until they sealed the deal is an instructive read for anyone trying to understand how software businesses are really bought and sold. Even though it was a small business at the time ($48k ARR), the core process and emotions involved are basically the same even when you add more zeros to the numbers.

What must be true?

When you set out to buy a software business, there are a lot of things that can go wrong. Due diligence lists are supposed to help you uncover potential issues before you make your purchase so you can decide if 1) you still want to proceed with the deal, 2) abandon the deal, or 3) proceed with the deal as long as there are some modifications to the price and/or terms of the deal.

Like the Codetree guys did, you should write out why you are buying the business, what has to be true for it to be a good deal, and what will need to happen in the future for it to be a great deal. As Warren Buffett says, “…[it is] far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.”

People matter… a lot

In my past life I was part of a deal where we bought the code and customer contracts of a SaaS company that was basically bankrupt. Even though we had super talented folks on our dev team and the market was adjacent to our current one, the business still struggled after we folded it in.

The lessons we learned were 1) it is tough to ask your dev team to pick up someone else’s software project when there isn’t anyone left from the original project and 2) customer expectations may be much different than what you may think going in.

I feel like the Codetree buyers were fortunate that they were buying from a known quantity, Derrick Reimer, a co-founder of Drip, who wouldn’t have wanted his reputation soiled by a bad deal. I read between the lines that this seemed to be the case given Derrick’s post-deal assistance that came as part of the deal.

In the end, who you are buying from can be more important than what you are buying. While reading the Codetree article, keep this in mind.

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