A Product Market Fit Show | Startup Podcast for Founders
00:09:29 · Pablo Srugo, Lee Silverstone
[00:09:29] S1: Can do this as long as you have like this , it can be your first round. But like if you have us as a VC and you're raising the next round or anybody as an investor and you're raising the next round, like that's a pretty easy ask to your investors, Hey like can you help me drive FOMO by just like, you know, kind of saying that, you know, and maybe it's not even that much of a lie. 'cause by the way, if you don't raise, you will probably back me anyways. Like, unless you really don't like me. So I think that's just something everybody can use. What [00:09:53] S0: About first time founders? What about first time founders? How do first time founders build that like, you know, build that we're gonna go raise regardless of you ? I mean for us at Gym Track as first time founders for sure was 500 startups, like getting into an accelerator. That for us was for sure the like impetus or the driving factor behind it. What else have you seen from like first time founders? [00:10:16] S1: I think it's that, right? Like it's, it is back to that framework. Like you have to have enough like built like in terms of relationships that you can actually like make that credible. And I think like as one of the, one of the tips I think like first time founders like getting into an accelerator, it it like if obviously if you can go to yc yc, if you can go to 500, 500 if you can't go to texts , like, but basically going down the list. Yeah . Like [00:10:38] S0: Were you just rank , were you just ranking all the accelerators in in your, in your list? You were just
00:10:38 · Lee Silverstone, Pablo Srugo
[00:10:38] S0: Were you just rank , were you just ranking all the accelerators in in your, in your list? You were just [00:10:42] S1: A hundred percent. Yeah. Yeah. I <laugh> is that, I think that's for if you have an idea, like handler's obviously a good one. If you don't have an idea, there's a bunch of others that are pretty good if you don't have an idea. And then there's the ones where you actually have an idea and at the end of the day it's like a , it's like a badge, right? It's like if you go to Harvard, you have that Harvard badge, like people just take you more seriously. You go to yc, like that just happens. And , and I've seen time and time again like these companies get into YC and all of a sudden like their price went up by two x and like it's just so much easier for them to raise it just, it's a real thing. So that's another way that, but you have to find a way to build this army of relationships. Uh, I think as a first time founder, like, you know, I don't know what else you could actually realistically do to drive FOMO [00:11:22] S0: Besides build an actual business, you know? Yeah , sure . That's like it <laugh>. [00:11:27] S1: Oh right . That part <laugh>
00:11:27 · Pablo Srugo, Lee Silverstone
[00:11:27] S1: Oh right . That part <laugh> [00:11:28] S0: At the core of it is like, you know, that's, that's the part that, and I think that's like a trap that a lot of first time founders fall into is like fundraising is so foreign to people and it's so challenging and it's its own beast to take on. But like, like you said at the beginning, it's the 10%, it's the cream on the top, right? It's the everything else underneath is like the important part.
00:11:51 · Pablo Srugo
[00:11:51] S1: So let me , uh, let me tell you another one and this one, 'cause we were just talking about yc. So YC uh, obviously is like the , the poster child when it comes to like just seed stage in general, but like also setting standards, right? And so what happened with YC is, and I don't know if you if you know this, but I think I , I'm sure a lot of founders haven't realized this. YC started off they made the safe popular, right? Like before YC there was noticing and the original safe was a pre-money safe . Like that was actually the original instrument that YC put out. They realized that pre-money safes are actually terrible for investors because bottom line is you get diluted by other safes and there's nothing you can do to stop a founder to just keep continuously raise safes on saves. So at some point they flipped it and they went to a post money save . And because it's yc, no founders ask questions. And if YC says post money saves is the standard, well then post money saves are the standard. And not only are the standard, they must be great for founders. Like this is the assumption, like if you're doing a post money safe , you're a cool vc, right? Let me tell you something, there's nothing more diluted for a founder than a post-money safe <laugh> . It's, and I love post money safes . I shouldn't be saying this, I really shouldn't be saying this because I will turn every preference to a post money safe as I can't post money safes basically have , and I'll walk you through an example, but like they basically have baked in anti dilutive rights, like without having to fight for any of this stuff. You can't get diluted by safes, you can't get diluted by ESOPs, you can't get diluted by anything until the safe converts. It's incredible. And so I'll walk you through an example 'cause I've seen this, I've seen founders effectively stack post money saves on post money saves and the impact is huge and they don't realize it. Like they just literally don't realize it. So let me walk you through two , right? Like one of them is, and we'll make it super simple, right? So imagine you start off solo founder, you own a hundred percent of a company, right? You go and you raise one on 5 million as a post money safe . Okay? So you sold 20% of your business, right? Then you go and you add a 10% esop 'cause you need to hire people.
00:13:51 · Pablo Srugo
So you put 10% on option pool, cool. Then time goes by, you need more money and you go and you raise another post money safe . This time you know, things have gotten better. So you raise like two on 10, right? You sell another 20% because these are post money safes . The first investor didn't get diluted by that option. Pool didn't get diluted by that second investor. So if you actually look at your ownership, you've given 10% to the option pool, 20% to pre-seed investor, 20% to seed investor, that's 50% and you now own 50%. That's how much you've gone diluted right? Now imagine you did this exact same fund raise cycle, but you just did it on pre round . Like that's the only difference, right? And so you said, okay, you start off, you raise one on five on a pre round, you give 20%. When you add that 10% esop at some point that dilutes that first investor too. So you don't take a hundred percent of the hit, then you go and later on you raise two on 10 and that dilutes the ESOP and dilutes the first investor, not just you. When it's all said and done, instead of 50% you have 58%, like you just got eight more percentage points for free because it's not like you change the terms, you have to negotiate, you have to raise less money. None of that stuff literally for free. You got 8% more points. And this is only two stack saves . So when you do three or four of these saves, you get destroyed. And the craziest thing is, if I were to fight for anti dilutive rights on a term sheet, people would tell me I'm a shark, right? But if I offer them a post money save , they think I'm the coolest VC in the world. So like they <laugh> like, I dunno how YC made this happen. But it's incredible and it's , it is not good for founders.
00:15:21 · Lee Silverstone, Pablo Srugo
[00:15:21] S0: So what are founders supposed to do though? Because that , that seems to be the flavor du jour . Like, you know, regardless of what you do, I think most people will point back to, well this is what a YC is doing, so why isn't it what you're doing? [00:15:36] S1: I'd say , I'll say this, like if you're, if you're, I think it's simple. Like if you're raising from angels, do a pre-money safe . And I don't think like 90% angels will, will fight you on the difference, right? And then if you're raising from VCs, I don't know any VC that isn't happy doing a pre round, like a priced round almost. Most , most VCs are happy to just do a price round, do a priced round by the way, like most times we don't do a priced round. 'cause the founder's the one that's like, oh, priced round's more complicated. Like we'd rather just do safe. I like great. [00:16:02] S0: That is for the most part, founders are just like, they're not finance people [00:16:08] S1: For sure. They're not. No, of course [00:16:10] S0: They're just confused and they've heard other people say, oh yeah, I'd rather just do it safe. It's easier that way. [00:16:16] S1: A hundred percent, a hundred and before pretty money safes actually were super advantageous to founders. So great. [00:16:22] S0: It made sense. Things