Securing and managing funding can be one of the most exciting—and nerve wracking—parts of being an entrepreneur. Often, the financial and legal implications may seem overwhelming.
But fret not. You don’t need to be a lawyer or a CPA to negotiate a good funding deal. But you do have to be smart—and careful.
Avoid these 9 start-up funding mistakes at all costs:
Mistake #1: Having an unrealistic valuation of your company
Overestimating your business’s earning potential will not only damage your credibility with funders, but it may also have consequences down the line.
Consider this scenario: suppose you overvalued your company, and your first-round equity funders agreed on a high price. Later, you ask for a second, larger round from a different group (with deeper pockets). These new guys may be more sophisticated, and don’t think your company is worth as much as you thought. They pay less, and your equity value sinks. This is called a funding downround.
Down rounds like this can be disastrous because they anger early investors. The first-round stock is now worth less, your business takes a hit to its reputation, and your ability to raise future capital becomes limited.