EquityZen Knowledge Center

EquityZen has curated this list of quality resources for secondary investors, shareholders and company representatives.
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The Metrics Required for Raising a Series A Round

Series AVenture CapitalFounderFundraising

Shriram Bhashyam   September 17, 2014

After closing our seed round a few months back, my co-founders and I decided to figure out what traction we'd need to reach the next fundraising milestone, Series A. I was surprised to find that there's not a great single resource on the internet that sets out current market VC expectations for Series A companies. So we're now providing that resource. We did a lot of digging into this, including asking mentors, current investors, and prospective investors. Here's what we found.

Series A is an order of magnitude greater, in terms of diligence and required metrics, than the seed round. Current market conditions--the Series A Crunch--don't help either. There is a lot of capital available for seed rounds, with a new micro-VC fund seemingly popping up daily, and AngelList, SeedInvest, etc. also adding to the pool of capital ready to deploy for seed investments. But Series A involves big institutional players, who have strict mandates and fiduciary duties to their LPs. The bar is set much higher to raise your A round than was required for your seed round.

Through our research, here's what we've found vis-a-vis metrics needed to raise a Series A round from institutional venture investors.

General. Let's start with an important caveat: there is not one set of metrics that applies to every business and we can't paint all investors with a single broad stroke. Below are general guidelines that are broadly applicable and further down I discuss sector-specific metrics.

  • Product/market fit. What is product-market fit? It has been discussed ad nauseum by many thought leaders, including Marc Andreessen, but I like Andrew Chen's elegant take: when people who know they want your product are happy with what you're offering.
  • Proof of repeatable business and large market demand provable by data. You need a productized, not customized, offering customers are paying for.
  • Clear path to scale and new business acquisition.
  • Identify customer acquisition cost and customer lifetime value. Naturally, these metrics should point to customer profitability.
E-commerce. This is a dense market, with diminishing margins, and heavy-weight incumbents (see Amazon). Also, VCs are licking their wounds from companies like Fab and Gilt (wasn't Gilt supposed to IPO for the last 4 years?).
  • $1 million monthly recurring revenue (MRR) is the key metric here.
Consumer Apps. Another crowded field and the shadow of King Digital looms.
  • 50K daily active users.
  • 25% month-over-month (MoM) user growth.
SaaS. Jason Lemkin (the SaaStr himself, of Storm Ventures) has noted the following:
  • $50-150K MRR.
  • > 100% YoY growth on MRR or annual run rate (ARR) basis.
We've built PayRight, a B2B SaaS tool for companies to efficiently manage their equity and cash compensation. Naturally, we've looked into B2B SaaS-specific metrics:
  • $1.5MM ARR.
Marketplace. Marketplaces are tricky (trust us, we know) because of the chicken/egg problem with supply and demand (buyers want to see good supply, and good sellers will list where there are buyers). It is understood that liquid marketplaces also take a while to build.
  • $500K-$1 million in monthly gross market volume (GMV).
  • 20-30% MoM growth in GMV.
  • Liquidity: > 10% demand/supply ratio.
  • Transaction velocity: the time it takes to have a transaction clear should be decreasing.
Further Resources.  We've built an Excel cap table tool that's freely available for download. Check it out here. Need more horsepower? Check out PayRight.

Disagree? Have more knowledge to add to to the communal pot? Let us know in the comments section below.
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How to Make a Cap Table for Pre Series A Companies (Free Template)

Series ACap TableInvestor

Atish Davda   November 11, 2013

Much of what we do at EquityZen is inform founders, employees, and occasionally, angel investors on the economics of start-ups. One topic that seems unfairly puzzling is the company's capitalization table ("cap-table"). A cap-table is a list of who owns what in a company.
After trying out several entry-level cap-table management services, EquityZen discovered we had to make prohibitive assumptions to use them (e.g. every investor has the same terms or the company has no convertible debt), or maintain a supplementary record ourselves. Given the prevalence of convertible notes as an instrument to raise pre-Series A, these solutions just weren't that useful.

So, we decided to create a cap-table spreadsheet in Excel that handles convertible debt. Download it here for free (link). The file contains three worksheets ("tabs"). There are two main scenarios considered, one in each worksheet. At the very bottom of each worksheet, you will see a set of assumptions in the scenario.

How to read the spreadsheet:
  • Whenever you see a red triangle, hold your mouse over it for an explanatory comment.
  • Blue text are inputs. Edit those and the other cells will update accordingly.
  • Each time you edit a scenario (set of blue fields), you should run Goal Seek (or Solver for the Excel purists) for an accurate result. Calculating the final dilution is an iterative exercise. Or simply enable macros and use the Recalculate button.
  • How do you know you have an accurate calculation? The value in cell J11 (Total Ownership) should be very close to 100% (+/- 0.5% error).
  • In additional to summary values at the top, columns Ownership (%), and Share Value ($) deserve extra attention.
Having come across equity grants at dozens if not hundreds of companies, we know there is no one-size-fits-all formula, but the spreadsheet is meant to be a starting point. If it does the trick as is (and it should for the majority of you), consider yourself lucky for having a simple cap-table. It will only get messier as the business grows.

This cap-table is purposely a simplified view on cap-tables. If you have questions on how to modify this spreadsheet for your specific scenario, or simply have comments for us, we'd love to hear. Contact us here (link), or email hello@equityzen.com.

Some Advice From EquityZen:
Do your best to keep a clean cap-table. What defines a clean cab-table?
  • A minimal amount of Angel/Friends+Family investors (ie: two $50k Angels are better than ten $10k F&F Investors)
  • Minimal different equity Series (and therefore less permutations of outcomes for your investors)
A clean cap-table will make your company more attractive to VC investment. If you only have two different forms of equity (founders' common stock and Seed Preferred), any future investor can very quickly conclude their payout in an exit. However, if there are multiple series of equity (and therefore multiple liquidity preferences, sets of voting rights, information rights, etc), that calculation becomes a whole lot messier and could be the difference between a 7-digit investment and a VC passing on you.

The same goes as an acquisition target: messy cap tables will scare off potential suitors, as they'll realize they have a lot of operational work involved to complete the acquisition.

Read more on this topic here, from the Wall Street Journal: http://on.wsj.com/HwM8IM

Disclaimer
This post and sample cap table spreadsheet is provided as a learning tool on an as-is basis with no guaranties. We are not lawyers and this post should not be considered advice legal, tax, or otherwise. We recommend you consult your counsel and tax specialist before making final decisions.

Update
We've gotten a lot of positive feedback about the cap table tool and also many questions. If you're a company who has used the tool and has outgrown it, check out our SaaS tool, PayRight.

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