Get your money as and when you need it. Not one big fat cheque for $X million dollars for the first 3 years. The less you take, the more you hold onto. I am talking about your equity stake. If you’re not trying to maximize your equity stake you might as well go and get a job with Larry Cubicle. Most VC’s worth their cheque books will understand money in tranches and encourage it. You should only draw down on what you need for two reasons.
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You can’t get a return on what you are not using
- You may be able to prove your concept with less money and sell more equity later at a premium.
Think of it this way:
- at T1 – $1 may equal 1% (Proof of Concept Funds)
- at T2 – $10 may equal 1% (Proved Market Expansion Funds)
At T2 investors often come looking for you!
You need to break down your requirements of funds into chunks. Where is the cash going and when?
If you get it all up front, it’s a simple misallocation of capital. It means you and your VC don’t know what you’re doing. There is also the waste risk, you won’t be tight enough.