Discover more from Words, By Mat Sherman
Going From Verbal Agreement To Wire
The process of converting an interested investor to actual investor
This post is sponsored by Eikon Labs. Eikon Labs is a Tempe based startup design studio and runs a pitch deck creation machine. If you’re looking for a new pitch deck, new website, or just a better brand, check out Eikon Labs and tell them Seedscout sent you.
In the world of raising venture capital, I feel like so much is focused on getting the introduction, some focus on “nailing the pitch”, but not as much focus on the mechanics of literally going through the process of getting an investor’s money in your account once they commit. I sure am no expert here, but I have worked with 15+ investors at this point for Seedscout and have found my groove that seems to work. I want to share how i’ve gone about this process so you don’t have to figure it out alone.
How to Work With Early Believers
At the early stage, some investors invest because they simply believe in the founder. They don’t need to understand the round dynamics, who else is investing, minimum check size, etc. They just believe. So if a believer says “i’m in, send me the docs”, it means you have an interested investor! Now is your chance to wow them in how you run your fundraising mechanics. First off, you actually can’t send them the docs because:
You don’t know how much they are investing
They don’t know the valuation
I think most importantly, you don’t know if they are an actual believer or just a complete newb/fraudster
So after a believer says that they are in and to send the docs, you actually want to make it real for them. To make it real, send them an email and confirm the details. It could look something like this.
Great to hear you’re interested in investing in Seedscout! Just to get some details down here. Our current post money valuation is $15M on a standard YC SAFE. Our current minimum check size is $10k. If that is all ok with you, please tell me how much you are in for so I can draft up the docs.
There are three outcomes to you sending an email like this:
No reply/no interest
“I’m in for $X,XXX, send the docs”
For #1, as painful as it might be, just let it go. You don’t want to work with scrubs, you want to work with pros who are actually into what you’re doing. Don’t follow up six times. Follow up max two times and if you don’t hear back, move on (unpopular opinion here).
For #2, listen to the investor and use a judgement call. If your check size minimum is $10k and they only have $5k, it’s ok to let them invest if you like them. Vice versa, if your check size is $10k and they want to put in $75k, it’s ok to decline this as well to save some equity. This is essentially a negotiation but remember, these are believers. You don’t want to scare them off.
For #3, fantastic! This investor is looking like the real deal. Onto the next step.
How To Send Investment Docs
Get the SAFE From YC
First off, what the heck even is a doc? Well it means investment documents, and in our case, it means a SAFE. This could also be a convertible note. It could also be a term sheet. These are all docs. But for pre-seed investments, a SAFE will do. To get a SAFE, go to Y Combinator’s website, click SAFE in the navigation, then click a SAFE option from the list. If you don’t understand the differences between them, i’d pick the first one that says “Safe: Valuation Cap, no Discount”. This is how Seedscout has raised its $320k and I think there’s a reason it’s listed first.
Customize the SAFE
Once you download the SAFE, you need to customize for your early believers. The fields you need customize are anything that has brackets on each side of the word like “[Company Name]”, The “Post-Money Valuation Cap is $[_____________]”, etc. To be clear, the sections you should be customizing are:
Date of SAFE
State of Incorporation
Post Money Valuation Cap
Company Name (in signature page
Then just filling out the signature page
You don’t need change anything else in the SAFE. In fact, it’s expected that you don’t. So you download the SAFE, you customize it for your investor, then what? Well, it’s time to send the docs! You can optionally include your wire information here as well (you can also do this after they sign).
Sending the Docs
To send out the SAFE, you can use a product like Docsend or Hellosign or you can just send them the plain document. The point is to get the investor to sign, then you countersign. Before you send out the SAFE, you can also share your wire info with the investor as well. This allows them to sign and wire all at the same time. Your wire info should be accessible somewhere in your banking dashboard. Note that this felt uncomfortable to me at first so I always had investors sign the SAFE, then I send them my wire info. Now, I do it all at once.
Once the Money Hits
Once the money hits your account, usually 1-2 days after the wire is initiated, you officially have a new investor. Always tell the investor when the wire hits so they know the transaction went through and didn’t get lost. There are a few things you can do at this point to keep them happy as an investor and prime them for more checks and introductions to their network.
Add them to your cap table. It doesn’t hurt to get a cap table management software and add the investor to it. It shows professionalism and that you’re thinking long term. Speaking of long term, we work closely with LTSE Equity and LOVE their cap table management product. Try it out here.
Send them monthly updates. Investors like to know how their investment is doing. They like to know how they can help. They like to be engaged. There’s nothing better made for this than monthly updates. For every investor you add to your team, add them to a monthly update list. Try to make the update on the first of every month to show consistency and discipline.
Build a great company. Look, investors like being believers but they REALLY like getting rich off of being right before other people. So the best thing you can do for these early believers is quite simply building a machine and make them rich.
Ok, there you have it. Whether you’re a first time founder or an industry vet who wants a refresher on how things work these days, I hope this was helpful for you. And if you find that getting those early believers to even verbally commit is hard, maybe you’ll like what we’re building at Seedscout to support founders. See you all next time!