Sharif El-Badawi, partner at 500 Startups, shared his experience with guests at the Unbox Lounge of Future Stars – Gitex 2017 in Dubai, and recommended Startup Cap Tables and KISS docs to have peace of mind.
In his talk Understanding Term Sheets, the manager of the MENA fund “500 Falcons” indicates that the best way to track ownership dilution is to update a Cap(capitalization) Table on an excel sheet with the record of shareholders, their pro-rata ownership and the price paid per share at each investment round. He made the difference between pre-money and post-money and warned about the wordy terms about dilution and protected prevision in case of liquidation, as they may sound benign but the founder may end up empty hands.
He recommended founder not to over structure at the beginning and to use the convertible notes and KISS (Keep It Simple Security) templates to sign in friendly terms with investors. These documents don´t price the company at the very beginning, and he marked important points on the document: attention to the name (the same as the registered corporation, with all the commas, dots or @); the conversion price (it happens in the next round, the acquisition premium); a section with the investor rights specifying the most favored nation (founders cannot give a better deal to new investors unless they balance with the previous one), and the pro-rata or participation rights of investors to maintain their percentage of ownership; and a section with the information rights to investors. “With a KISS document, we can wire you the money to start your company, so you can deal with visa and office space fast, “he added.
In general, whenever a founder signs with an investor, it is important to read twice the terms of maturity and the type of interest (simple of compounded) to avoid surprises, and a threshold detailing the next raise conversion ($1M is not the same as $1), and he remarked not to raise too much money in the first round because founder may give equity for a cheap price: “It is better to do it in 12-18 months. (…) When things go bad, owners cannot keep the high valuation.”
Apart of the team shares, the company shall issue shares or stock options for employees to keep them happy. El-Badawi suggested to schedule employees to access their first 25% of their total promised shares at the end of the first year of contract, and the other 75% may be distributed quarterly or monthly. “You may issue refreshers of 2-3% extra shares per year to keep employees motivated. You do it with your co-founders too,” he mentioned.
The investor also warned entrepreneurs not to use the KISS document as a crowbar to leverage with other investors, as it could put the entrepreneur off the game if the rumor spreads in the industry.
We hope to hear you soon again, Sharif. Thanks!!