Homework

Are you ready to play the funding game?

In an earlier chapter, I mentioned that we "corporate animals" are often the least prepared to start a business, let alone play the funding game. This was certainly true in my case. I had absolutely no understanding of that world. My experience with financing was limited to creating internal budgets and seeking approval up the chain of command.

If you're like me—coming from years in large, established companies—concepts such as seed and Series A rounds, term sheets, and convertible loan agreements will likely be unfamiliar territory. Phrases like "liquidation preferences," "tag-along rights," or "anti-dilution" will sound like a foreign language.

My advice, therefore, is to dedicate time to learning about funding rounds. This will boost your credibility with investors and help minimize legal costs. In my case, the book "Venture Deals" by Brad Feld and Jason Mendelson became my go-to reference when preparing for our Series A round (which never materialized). Learn from my mistake—read this 200+ page PDF early on. You'll be much better prepared when it's time to discuss your first term sheet.

You will be able to engage in intelligent conversations regarding the most appropriate method to raise your first round of funding (equity vs. convertible loan-based). Additionally, you will be able to advocate for terms that are most favorable to you as a founder. By doing so, you can significantly reduce the likelihood of investors taking advantage of your lack of experience. Better yet, you'll earn their respect and potentially negotiate your own terms if your innovative idea and initial results show promise.

I spent most of my first two years at flyiin chasing investors. It never occurred to me to prepare for the eventual funding negotiation. Instead, I was fixated on reaching out to investors, hoping to secure just 30 minutes of their time, and persuading airlines to join our original Air Travel Marketplace.

We were fortunate to have one angel investor during this period—a prominent airline industry figure who shared our vision and was passionate about the dynamics of airline sales and distribution. Formalizing his investment was straightforward. We simply used a basic convertible loan template agreement we'd found online.

My first term sheet negotiation came when a US-based hedge fund decided to invest in flyiin during the summer 2017. Luckily, this investor supported the founders, and their terms weren't too demanding. The negotiation went smoothly—they were keen to join our journey, and for a hedge fund, the investment was relatively small. We also got valuable insights from a well-established Berlin venture capital firm. Everything seemed on track until it wasn’t. We hit that "tax wall" (link) forcing us to bid farewell to this promising deal.

This experience, however, didn't guarantee better terms in future negotiations. In fact, when we sought another raise two years later, the opposite happened—our new pool of investors imposed much harsher terms. I'll dive into that in a future chapter. If anything, this first experience only made me realize the extent to which we were… screwed (pardon my French).

Key Takeaway #14

When it's time for you to negotiate the first term sheet, make sure you allocate enough hours to learn about funding. By doing so, you will be well-prepared to secure the best possible deal as a founder. Additionally, you will save on legal fees that can be invested elsewhere.