The Building Blocks of Fundraising and Structuring Your Organization

From Palette Valo and he is a partner with this organization and he’s a corporate and securities lawyer with the background in C-suite technology, he is also a real estate entrepreneur, and he has a track record of building, aiding and advising transformative companies. And today I’m so happy that New Year is with me to help guide startup founders when it comes to fundraising strategies. We’re going to help. He’s going to help us differentiate the difference between. Debt as well as equity financing, we’ll we’ll discuss investor expectations. What are the founder preparations that also need to be done and to really ensure that founders have a structure for their business that’s effective so that they can make informed strategies and decisions as they grow. So welcome, new chair.

Mujir Muneeruddin

Thanks so much Hessie. Thanks for having me.

Hessie Jones

So just so everybody knows, Pallet Valo is an important partner for Altitude Accelerator and they continuously provide. Great guidance for many of our clients in helping them grow their businesses and structuring your company is one of the major things that they provide. So I’m going to ask questions from a Founders perspective, but it’ll it’ll be also good to understand this from the investors perspective. So let’s start with the question of timing. When’s the right time for a company to consider raising capital?

Mujir Muneeruddin

That’s a great question. Hessie, and I think you made a really important distinction earlier when you said that it’s very important to look at investment before you even jump into it from the investors perspective because they’re looking at success, they’re looking at an end result that in some ways is different than yours. As a founder, you’ve got a passion. In many cases, it might represent the culmination of your life’s work and your education and your training to get to that point. An investor is just looking to jump on the train and get to a destination. And sometimes it can seem a bit tawdry to a founder and they start getting offended. Like all you care about is money. But that’s what they signed on for. They signed on for that last leg of the journey, right? So it’s important to conceptualize that before you start shaking hands with those types of people. And there’s nothing and understanding there’s nothing wrong with that. That actually is the mechanism by which businesses get funded and how your bread gets buttered at the end of the day, right is is by investor looking to make money and being opportunistic you can align both of your destinations and your. This in a way that is is good for everybody and so I think that’s the first thing to really understand before you decide to make that plunge, if you will, into taking outside investment. So to get to your your question, I say I think the most important thing to consider or the the gospel. As I’ll say, when it comes to deciding when to take an outside investment is always later you always. Want to push? That moment down the road, because no matter what the moment you bring in an outside investor, you’ve got. Somebody from the outside looking in, asking you questions and it’s only natural for those questions and that oversight to start shaping your decisions and making you less creative, making you less in some ways true to your vision. Right. And you’ll see it all the time. Where? The OSC and regulators in Canada have done a. Great job of. Providing early stage mechanisms for companies to go public or raise outside investors, but you’ve seen so many horror stories in the market of companies that just went to the market too soon. And not only does it dilute the founders, but it actually takes you away from your vision at such an early stage because. And I remember Jeff Bezos had a great quote, and I’m going to really butcher the quote here. But he said something to the effect of. I’m in the business of being comfortable with being misunderstood for long periods of time. In other words, I’m OK with people thinking I’m a moron because I’m going into a deep dive and I’m coming out on the other end with the stronger. Business. In ways that throughout that entire cycle, it didn’t necessarily make sense, right? And when you go public or you raise outside investors. The public being the most extreme example. Right off the bat, you’re. Your idea of long term growth is defined in terms of quarters now. OK, so does that mean you’re gonna hit profit and quarter two quarter three? What does that mean? So it changes your entire mindset and now you’re answering to a whole different legion of questioners and and answering a different array of questions that are going to take you away from the business. Because the fundamental reality for companies is there’s the business and the operational side, and then there’s the capital market side. And if you engage with that side of the realm too soon. Right off the bat, you’re dividing yourself, so you’ve got to be ready to take that plunge. Right. And and another important factor in what I call the valuation principle, as we’ve discussed in the past is. The further along you can get your company, the more de risk it is for the investor. The more for example, revenue or other milestones you’re going to have such that your company is more valuable, right? And the more valuable your company is, the less of it you can sell for more, right. That’s really. That the best way of simplifying it. To really have the audience understand. What the valuation principle is is all about. So you really. Want to kick that down the road? As much as you can to. To maximize your valuation. Minimize your dilution.

Hessie Jones

And the the one thing that’s I think it’s important from this perspective because a lot of founders, when they when they need to raise sometimes it’s a cash flow crunch if they need money to be able to finish development of this or need to do this. And I keep saying. Don’t use that as your motivation to raise money. Because if you need $18,000 only to do this one thing I said, be careful about what that will cost you from an equity perspective. What do you say to companies who try to get an influx of cash because they need it as opposed to you know, for a small, short term need?

Mujir Muneeruddin

Yeah, well, you know how they say in in vernacular the the, the, the worst time to buy a car is. When you need. To buy a car. Right. And it’s kind of like that when it comes to financing is the worst time to go to the market to raise money is when you need it.

If it’s not in an orderly way, the investors, especially the more sophisticated. Are going to be able to sniff out your desperation right off the. That and everything I just said about the valuation principle gets discounted down because even if you’re further along but your cash crunched, that just makes your investors salivate even more. So you gotta be really careful that you’ve got your 18 to 24 month runway planned out and maybe you’re raising money at the six or 12 month. Marker because what you’re showing people is, yeah, I will need the money. You can’t shirk me around here because I can go find somebody else in the next 6 to. Months. So you’ve really got to time it perfectly. And the other aspect of that timing that we’ve spoke about in the past and we’ll say it here for the audience benefit is being deal ready. The last thing you want. When you’re going to the market and doing so in an orderly fashion, is is doing all that at the last second and then having to come up with some spectacular effort just to be deal ready. You’re better off just making sure things are done right as and when they happen, you issue. To use very basic terms, you issue shares and and you document it when it happens instead of waiting for an audit where you hire lawyers and pay 10s of thousands of dollars to catch up on what you could have done for hundreds of dollars at the right time. Deal. Deal. Ready. And the state of being. Deal ready doesn’t need to be a spectacular thing if you do the right things on a first principles basis. Unspectacularly throughout the process.

Hessie Jones

OK. So when you say deal ready, it’s going to be different for an early stage founder pre revenue versus one that’s that’s ready for growth because because obviously there are going to be records that are available for that when you’re in the growth stage versus pre revenue where a lot of it is still. Very much speculative and modeling financial modeling, I would assume.

Mujir Muneeruddin

Yeah, and and Hessie, I think it’s important to have those conversations in the industry, right? I just had a conversation with actually an altitude alone, incidentally, a few days ago, whose business has done spectacularly well. And, you know, this founder and his team have done a great job actually keeping things up. In earnest such that when they came to me. It. Was it was totally surprising to them that we had a conversation on, say, Monday about, hey, major, how do I have a good conversation with the guy who might be? Interested and actually taking it a step back, he he wasn’t even necessarily having a conversation. He was just saying how do I be deal ready? Should I look at doing a term sheet and should I look at certain strategies and I kind of walked him through the process and amazingly one of the first meetings that he had actually got him. A. Term sheet. So the best thing for him was he was actually deal ready when he had that conversation. Right. And a lot of that deal, not necessarily that deal, but a lot of deals are very timely, right? Because so many things are coming together. It’s the market, it’s interest rates, it’s. Opportunities. It’s things that are subjective to the buyer where he or she needs. A particular opportunity to synergize with the rest of their portfolio. There are so many factors that come together to create that unique time that you don’t want to miss that bus of opportunity because you’ve got to get your minute books and get an audit done and that’s going to take 6 to 9. Months, right? Maybe, they’re going to be like, oh man, I just wish I did at the time. Yep. I could have as opposed to waiting. For the the. Right moment, which is it’s too late already, right. And so this particular alum was deal ready without even necessarily knowing. And you know it it I I don’t know if they’re going to do that deal, but it’s great that they’re ready to do it if they want to.

Hessie jones

So some of the things that you talked about? Are probably some things that. But founders haven’t even done yet, or they haven’t even thought that. Like when you talk about minute books, etcetera. So let’s get into some of that. Let’s start. Let’s start with the industry that the startup operates in and how does that influence the type of financing that they should pursue.

Mujir Muneeruddin

Yeah. No, that’s a great question, Hessie. And it has a very big impact on the type of investments that are attracted to your business and vice versa. So the ones that you realistically should pursue. So for example, if you’re in real estate, excuse me, the primary method of financing would be. Typically loans or lending financing where you’re taking on a debt instrument. There might be usually with loans, there’s some sort of debt servicing component. So you’re going to have to pay some periodical interest payment every quarter, every month or every year. In some rare cases, you can get a bullet financing on the back end where you say, look, it’s a two year term and I’ll pay everything back on. On maturity. And it can be alluring for a lot of startup founders to go the debt financing group because you think ohh, there’s no dilution, right? But then it creates this maximal impact of stress and risk on the back end. If you can’t actually come up with that money. On the redemption and typically lenders at earlier stages in Canada for sure are taking a personal guarantee. So not your personal assets. Maybe your house are at risk, right? So you really want to balance the allure of this big upside with the risk and it’s important that you understand. What you’re getting into, and so that’s on, that’s on the real estate side. On the tech side because you don’t really have typically real estate or hard assets with which to secure a loan. Typically it comes down to. Your projections the the value proposition of your business, the strength of your founders, the projections that an investor is going to make a very big bet on and the typical profile of an investor in this venture capital in the VC private equity high growth space. Emerging corporation space is. That they’re going to take 10 or 20 positions and expect 18 or 19 of. Them to fail. To get that one home run right. So it’s a different mindset of an investor that you’re looking at. But by that, by that token from their psyche’s perspective, if they’re going to take. A A risk and take a chance on your business. They’re going to go for a massive. Home run, right?

Because they have to in order for their portfolio to make sense. So they’re going to take an equity position that gives them a huge part of the upside because to them, they’re taking on an inordinate amount of risk by coming on. To your business at an early stage when most others would not. So it’s it’s really a catch 22 and you’ve got to balance those two things, but those are two examples. Where industries will largely dictate the type of financing that you can get. And that you should realistically look for not to say there aren’t exceptions, but generally if you want to veer outside those boxes, you’ve got to be very careful because. There’s a reason why the market tends to go in a certain way versus the other, and I think when you want to be outside the box, you’ve got to really understand the implications of being outside the box and why most people don’t do things the way you. Are if that makes sense?

Hessie Jones

Yeah, I think I think we also have to call out the fact that there are certain sectors of the industry, whether or not it be not-for-profit as well as the services industry that that don’t apply when it comes to equity, because in in, in many cases, let’s say within the services industry, there is no I guess unless you’re willing to sell the company unless there’s something that’s tech enabled that allows it to scale and allows the. An investor to make a whole lot of money in a short amount of time. Typically that this doesn’t happen so.

Mujir Muneeruddin

Exactly. And you hit it on the head. Hessie. That’s really the point that I was making earlier most service. Businesses, unless they’re SaaS or something that can scale exponentially. Are very dissuasive to an investor who is now taking on a lot of risk with a linear return on their on their on their investment, so it’s not really attractive to them, right, because they’re saying, look, you’re running a consulting business or you’re running a. Let’s say a cleaning business which is great, good, robust cash flow, but I’m going to come in. And. Put money in. Well, let’s assume that there’s no cash flow because cash flow kind of changes things and you can probably get a debt type of investor in that situation. But if it’s a service. Industry say, for example, somebody starting up a law firm or an accounting firm and other people are investing. Assuming you can do that legally within the professional rules of conduct, it’s still very risky for the investor because. A A law business or an accounting business is not that different than most businesses, which are typically likely to fail at an earlier stage because the founders simply do not know what they’re getting into, right. And there’s just so many reasons why a business could fail, but yet the investor, if they do well, is. The best they can do is is a is a linear return, right? Because law firms are not going to grow 100 X in one or two years, it’s going to be a steady trajectory of 50 percent, 75% if they’re doing really well, maybe 100%. That but divided between the founders and the investors. It doesn’t really workout. All the time, right?

Hessie Jones

OK. Sounds. Yeah, that makes sense. So let’s talk about the startup founders and the goals that they have and how that needs to correlate with what they need in terms of funding. Why are their goals important and what what are the questions they should be asking themselves themselves when they’re raising money?

Mujir Muneeruddin

Yeah, it’s similar to the question or the discussion we had earlier Hesse about making sure there’s an alignment among the investors and the founders. Right. You, you. Some of the questions you’re going to be asking the investor are: And let’s be honest in that situation, usually it’s the other way around. The investors are the ones asking you the. Questions.

But to the extent that I always say you want to get a maximal return on dilution. If you’ve made that decision that, OK, I’m going to go to the market now and part with some of my hard-earned equity and bring in an outside investor. The question that you asked should really go to. How well that investor can deliver to you more than simple dollars in the bank account. Can they deliver on the distribution side? On the marketing side, can they bring you industry expertise? Are they a savant in the area of practice or business that you’re in where they can really help provide mentorship because that’s also a critical component? That a lot of startups look to some of the Big V season the Valley as as they’ve seen all kinds of burn on all kinds of deals and it’s very valuable to have VC sitting on your board who understands the industry well assuming that you’re. Mature enough as a company to to not be. Distracted too much by by that level of oversight and and overbearing it. If I can say that. Yeah. Yeah, that’s what you really want to get across or glean from a meeting with an investors. Are they aligned? Is this somebody I can work with because they are becoming a bit of a partner. They’re going to share a boardroom with you. They’re going to be a Co shareholder with you. Especially under corporate law in Canada and the US, the entire system is set up to be very pro shareholder. So understand that when you’re bringing somebody in as a shareholder, they’ve got a lot of rights, which means they’ve got a lot of power. So you’ve you’ve got to be very sure about who you’re bringing in. And yet the other consideration is, are they bringing in more than just dollars because. I’m taking on a risk bringing somebody else into. The tent.

Hessie Jones

Right. And for the most? Part A lot of founders may not realize that it is just more. It’s more than just a pocketbook. It’s more than just the money that they’re bringing in. And for founders, it’s actually in their best interest to figure out those that align strategically, because that’s exactly how they’re going to scale their business. With those kind of contacts and that kind of wisdom that they’re inheriting, OK, so let’s get into the different types of, let’s say, funding rounds and check sizes, because this is this is an area that founders may not necessarily know about and the valuation at each stage. So can you talk a little bit about that like from the beginning, like when you’re when you’re in early stage? Founder and you start with, let’s say yourself funding your business and then you go into friends and family and then what is the path after that?

Mujir Muneeruddin

Yeah, the the usual cycle is something like the founders put in their own money, of course. And then you’ll see a seed round, which may or may not be an Angel, or somebody who’s professional and might be friends and family who are willing to take a chance on you because they love you, and not necessarily because you’ve got all that pretty of a business just yet. And then you got into the friends and family. Round. And at some point you are going to start seeing traction in your business. And once you do that, that’s when you start looking to do the more meaningful rounds and not to say that the earlier rounds that we’ve discussed aren’t meaningful, but you’re you’re starting to play in the deeper waters you’re looking for. Venture investment. You’re looking for family office investment, even retail accredited investors and and ones that. Are a little. More a little more sophisticated, and are going to dig into your valuation and a lot of what you tell them, whereas at the earlier stages angels of course Angel Networks will be. Fairly sophisticated about asking you certain questions and all that, but they’re not putting in a whole lot of money and it’s kind of to them, it’s more like we’re going to give you a little bit of money to see what happens with it, but it’s not really a meaningful state for them. But once you get into the later rounds, it’s OK. Well, what have you raised so far? What’s your valuation? And how are you defending that valuation? And oftentimes you see founders make that mistake of, oh, I’m going to do a friends and family around for my Aunt Sally and Uncle Tom, and it’s going to be a $15 million valuation. So I can go brag on the market that I’m a $15 million company. And then you get to the the venture or the Series A round, and they’re like, you’re not worth more than 2,000,000 bucks and all of a sudden you’ve got. This down round. Right. And not to say that’s the end of the world, but it’s a little embarrassing. And and it does have an impact, right? It does have an impact on your series B. Then they’ll be like, oh, you took a huge down round. From your before your series, a right? Like what happen? On there and when you’re in those investor meetings, sometimes you don’t necessarily have all the time and the patience in the world from your investor and one bad question can derail the entire meeting. So you’ve got to be. Really careful, right? All these small little optics make a difference.

Hessie Jones

OK, so in the beginning like the and this is the the valuation principle that that we talked about earlier, but in the beginning this whole idea of valuing your company. It’s not clear. It ends up being a negotiation between the investor as well as the founder. But once that valuation is set, that becomes the basis for future valuations. So from your perspective in the beginning. I know there’s various ways to value your company. But if a founder came to you and said I’ve done this for the last three months and I have reached this milestone, I think I can develop my product in three months. What should my valuation be? How do you start to navigate that discussion before there’s? There’s even a talk with an investor.

Mujir Muneeruddin

I think you canvas, other industry experts and you say look I’m in SAS or I’m in e-commerce or I’m in XYZ sector you seek out the people that are knowledgeable in that space that are doing deals whether it’s on the M&A exit side, whether it’s the investment bankers who are raising. Capital based on valuations for companies in that space and you ask them, what do you think is a good multiple that’s going? In. The market right now for somebody like me, so you might hear somebody say, oh, if you’re in dental technology, you’ll get 5X if you’re in X education, you’re getting 7X right now. So you can kind of. Understand what you need to understand what the going market rate is for valuation and that’s going to it’s going. To be cyclical. Right. Times like right now or maybe last year when liquidity was a bit tighter in the market, the valuations won’t be as frothy as they would be in 2007 or or 2020 during COVID, when cash was just flying around, right? So those are all things. That you really. Have to factor in, but it all starts with Recon which is being deal ready before you have to be. Deal ready, right. It it all goes back to that same idea of not having to buy that car when you need to buy that car, right?

Hessie Jones

Yeah. Yeah. OK. So, let’s get into the different types of financing and I want to start with debt before we go into equity, because debt isn’t only necessarily about like getting a loan or a line of credit can have some significant impacts on the business either earlier on or even later on when they’re in their Series A. So what? What does this look like as a financing round for investors like, well, why go into debt financing?

Mujir Muneeruddin

Yeah, I think it’s the allure of. I can get money from somebody else and not dilute at all, and at the end of it I’m going to build this business spectacularly and just give them back their money and I’m going to take all the upside. That allure in in many ways can be the pipe dream that leads people down rabbit holes that they really shouldn’t be going down. Right. Or or chasing waterfalls, right? That’s really what it comes down to is there’s a lot of you can see from the outside the the attractiveness of debt financing. But you have to recognize the downside risk, and it’s typically absolute because. When your your loan fails, typically the downside is catastrophic because. You’ve. Signed a personal guarantee or your company is going to be foreclosed upon based on the assets that you put up as collateral versus equity? Which by definition there is no obligation for you or your company. To to pay unless there is money in the company. Right. And that’s probably not the best way to put it, but in many ways, if you’re insolvent, it is actually. Illegal for the OBCA. You know, prevailing corporate law for you to actually pay on on equity. So the investor can’t even force you to pay if you don’t have the money. There’s actually no ability for them to enforce payment. So even if your company goes under and the worst that you did was you raised. A bunch of common shares, that’s. The investors are, as we’d say, SOQL out of luck, right? Whereas in debt, they’ve probably got a personal guarantee against you and the assets of the business and it’s catastrophic, right? All all because maybe somebody thought they would get that, that, that Unicorn deal on the back end. So that’s not to dissuade people.

You may be the outlier. Your situations might be very unique, but just know that in tech especially, you’re going outside the beaten path when you take debt financing and most time debt financing, especially if it’s not. In a asset heavy or an established industry is going to come with debt servicing because that’s a risk mitigation tool for a lender. They’re going to say, OK, well, I want to make sure my loans in good standing and one of the best ways to do that is to. Have you pay? Me every month, right. So now all of a sudden the one thing you need at the early stages of your business?

Our cash and you’re having to partner with that cash to service the debt and that’s why. There’s a lot of very sophisticated investors like Mark Cuban that have very choice words for people that take loans at early stages. I mean, in marks in, in, in Mark Cubans words, it’s the stupidest thing that an investor could do that. Sorry sort of foundry could do, right.

Hessie Jones

Can I ask you a weird question and I don’t know if this is. It’s not necessarily weird, but it it is an anomaly because open AI as you know, is a nonprofit organization. And yet , Microsoft has invested millions. If not, I would say maybe in the Billings at this point to to try to make the money back and they realize. It’s going to take a long time for them to actually see in ROI and like what we’ve seen in the news is that in the meantime, any kind of revenues that are incurred by open AI are is given back. To Microsoft as part of their original investment because because of this realization. Like from that perspective as a nonprofit organization, but also as a tech company, like what are the implications of that? Because with this, how is this this structure is very different because most tech corporations. As you know are are for profit corporations, yeah.

Mujir Muneeruddin

Well, I think the implication for a not-for-profit in the tech space is that it’s very unlikely that you’re able to raise money. Because you’re not providing investors despite your risk profile. With a huge upside that they can then use to raise investors because ultimately a lot of these venture capitalists or a lot of these institutional investors are really just conduits to invest other people’s money. So they’ve got to generate a return on their back end for their investors. There’s visa via their portfolio, so if you can’t make your portfolio work with these outsized returns on the 1 and 20 deals that do well, the model just doesn’t really. Work right and. Open AI’s case I think when you are. The the the industry leader and the industry creator in so many ways of a really frontier industry and sector to begin with, that just has taken the world by storm. That’s the one in the billion scenario that you can pull something like that off and it. Speaks. To the. The unique profile of the investor to begin with, right, because Microsoft is so handsomely profitable across the board that they can afford to invest in an open AI for in many ways intangible reasons. Right? Because what they’re trying to do is, look, we don’t know where AI is going, but if we can get. The world’s biggest superstar in. AI or one of? Them we can slowly port our company over to being native in that space over time, right? All the while generating all these handsome profits that we do from our our core business so they can afford to do that and it’s not compromised by the quarterly ISM that we talked about earlier because their quarterlies are continuing to generate them. Excellent profits and frankly investors understand why you would take a position in open AI. So again, Microsoft is one in a kajillion. There’s not many of those that can afford to take that kind of a swing on an open AI. Right and and and synergistic like open AI, I use ChatGPT. Like multiple times a day. I’m I’m a chronic abuser, right? It’s it’s it’s worked out well and and Microsoft is they’re able to Patriote that technology that they’re able to. Really integrate that within their broader platform. It’s it’s it makes a lot of sense, even if ostensibly they’re not getting a return on that asset across the board, it’s probably enhancing all their product offerings kajillion.

Hessie jones

I want to. Get to the the other investors of open AI because this leads into that this is very relevant to the question that we talked about debt financing, because some of their other investors include the JP Morgans and some of the big banks. But instead of actually buying equity into. Into open AI, they’ve provided that sorry convertible debt. So can you explain the like from a convertible debt perspective, the outside the the outside value for? Banks doing this and and why it’s important for founders to even think about this option for themselves.

Mujir Muneeruddin

Yeah. So look, see, I can’t claim to know too much about open AI specific situation. I know it’s a little complicated, so I won’t profess to be an expert, right. But if the question is. Yeah. The question is more about.

Hessie Jones

Convertible debt then?

Mujir Muneeruddin

Convertible debt. Yeah, so convertible debt, look within the hierarchy of investment structures that a startup can take on, it’s generally considered one of the most toxic from the perspective of the founder because what you’re really doing is you’re giving up the entire upside with. With the investor not getting any of the taking any of the downside or really sharing in any of the risk. So they’re in many ways convertible notes or debentures have a coupon. So you’re servicing the debt the way you would. A conventional loan, but the conventional loan, the upside you would typically get from that is. If things go well, you just give them back their money and then you you’re off to the races. But here the moment you do extremely well, they’re taking the upside too, right? So it’s generally considered to be A and I’m not saying this is always the case, but it’s generally considered. To be a. Toxic form of financing such that if you go into the market and this is interesting, there’s always. Flex is in the in in in the capital market space. The type of financing. That you’re pursuing? Says a lot about your business. Or at least that’s the the investor perception. If you’re going straight to the market, offering a common share deal, for example, you’re going to be perceived as being stronger and more commanding than somebody who’s going to market right off the bat seeking convertible.

They’re going to say, OK, you must be really desperate if you’re looking for a CD. Convertible note right off. Or in general.

Hessie Jones

Well, what about later on when, let’s say you don’t want to raise another round equity round but and you want to reduce obviously to reduce further dilution. So you do some short term debt finance through a convertible just to mitigate that the chance of dilution.

Mujir Muneeruddin

Yeah. So I I guess the right thing, the better thing to do is if you can to just get a straight loan in that situation, right, it’s it’s In many ways. We we talked about the valuation principle, how good of a deal can you get the moment you’re going to the market for a convertible debenture, you’re getting yourself the worst deal possible, right in that sense. So you’re telling the market like I can’t get any better deal for myself. So please can you give me. A convertible debenture. Right, so so.

In theory, a good startup in that situation would say OK, I just want loans because I don’t need anymore equity. I don’t want to dilute. Are are you interested and the bank would say, OK, you’re mature enough and you’ve got enough of a cash flow proposition that we can put the money in. But the moment you go for convertible debentures and banks, don’t even typically do convertible debentures, that’s going to be often an investment bank retail investors a lot, a lot of not always but even. A lot of vulture funds love that. Kind of stuff. Right, because it’s very aggressive for them and it’s a great deal if you get a in a in a good business that’s doing well and or that has a lot of prospects, but it’s distress for poor management or something. Temporary boy. As an investor, you love that kind of deal to be invertible though, right?

Hessie Jones

Right. Yeah. Now let’s talk. Let’s talk about the very, very early stages and let’s talk about stages because they actually don’t fall into either a debt or an equity instrument. Can you talk a little bit about the safes and why it would be a good opportunity for some early startup founders to consider this for financing.

Mujir Muneeruddin

Yeah, safe notes are really attractive to a lot of startups because a they minimize the paperwork and by extension the the amount of money you gotta pay lawyers at an early stage. So it it streamlines the process and makes it a lot simpler. But B one of the most important features of a safe is that you’re actually deferring the valuation. To a later. Date right. So if I’m early in my company’s group. And let’s say I can command at best a $1 million valuation. If I do a common share issuance, it’s going to be at that $1 million valuation. So I will crystallize my round valuation and that’s it, no matter what. Like, I’ve always sold these shares at 1,000,000 valuation and I’m sustaining that dilution. But the beauty with a. Safe node is often what you’re saying, or the prevailing form what it’s saying. You give me 250,000 today and I won’t fix the valuation of those shares until my next round typically and you will get in at 75% of that round in terms of evaluation and and that’s awesome for a start up because if your next round. Is you took the investors money 250,000 and that got you to some kind of critical mass in terms of your product offering and your next valuations 10 million you were able to. Really. Yet you were able to get away with a lot less dilution because now you’ve got those people coming in at a 25% discount to 10 million versus them just coming in at the 1,000,000 valuation, which obviously you would have to give up a lot more of your company at that clip.

Hessie Jones

So if you’re coming in as an investor, and I’ve heard this a couple of times about what investors views are when it comes to SAFES is this more beneficial for the founder than it is for the investor because it’s not? Priced.

Mujir Muneeruddin

Yeah, in theory it is. Yeah, absolutely. And. That’s why it’s so popular among. Among startup founders, and it’s all the rage nowadays. Well, not nowadays. I should say it was more during the the the heyday of 2020-2021, when startups are raising money pretty easily. I think the. The barrage of fake notes that we were seeing from a couple of years ago is probably slowed down as money for risky early stage investments has gone down. But absolutely, I think you could characterize safe node as as very pro. I mean in terms of the spectrum, it’s very pro startup versus the the convertible debenture being very Pro investor.

Hessie Jones

OK, so let’s, let’s say near the end of the founders journey they’ve raised above the capital through these different rounds. At what point would you say and maybe this is I? I should say this a different way. From a dilution perspective, what should you make sure as a founder in terms of how much equity should you retain after let’s say a series B to make sure that at the end of the day when a liquidity event happens that you’re not left high and dry with nothing? How do you manage that along the way?

Mujir Muneeruddin

Well, look, there’s a. Lot of good financial planning that goes into it and that’s part of having a good financial advisor and accountant to really help you map out your long term cash flow projections and your your runway. That’s very important to understand that your your current burn rate, how many months can you survive if you want that runway to be 1824? From a capital raising perspective, it always looks healthy, but I think there’s also something important that a lot of founders should understand. That. Before they, well before they even get into the analysis of whether they want to raise money and it was captured by a good friend of mine who is very big in the startup of private equity tech space. And he told me, look, the best startups don’t need any money because they are cash flow. Positive at an earlier stage, they don’t need to bring in outside people’s money. So when we talk about the flexes and the signals to the market, in theory the moment you go to the market, there’s some reason that you’re going to the market that. Uh. That, that, that requires you to be there because you can’t sustain yourself based on cash flow. That’s not always a negative thing. Obviously Shopify went to market and and no one’s going to take fault in their business proposition. But that’s just the general spectrum of things, right.

So. But I think it’s important for founders. To realize the goal, shouldn’t be to get to a point where you. Can raise outside money that should be seen as a necessity to get you to the next stage. But the ideal is always if you can. Bootstrap it and then finance it through cash flow. Now again, that’s not always cash flow. Might not give you the exit velocity that you need to to really get things to the next stage, or if you are in something like AI like a new industry where you want to really achieve a certain scale very quickly, cash waiting for cash flow to to boil your trajectory is is not going to be maybe the best strategy. So you you obviously gotta make extenuating considerations like that, but in general, there’s just important to understand that. It’s not part of the ideal business cycle to raise outside money. The the ideal business cycle is you get to being profitable without having to bring in any outside money.

Hessie Jones

Right, I think, I think the idea though is that if you’re going to do it in short, in a short amount of time and if you can scale it faster, the only way to do that is really with outside money. And if you end up.

Mujir Muneeruddin

You’re right has to be. To be fair. I mean, there are certain industries like pharma well where the entire industry is based upon. Years of R&D and things that burn a lot of cash before you’ll ever get to the point where you can. Generate sales so. Everything I’m saying like it’s it’s got to be tempered by the specific industry that you’re in. Right. There’s no sort of 11 size fits all, but the reason that I kind of gave that proposition or that principle is just to help investors understand the. You want to raise money very guardedly and very cautiously, right? It’s not some happy event that you raise money that that, that just means that you. Brought somebody else. In. Right. Yeah. And it goes to.

Hessie Jones

Yes.

Mujir Muneeruddin

The valuation principle, like put it off as much as you can, right?

Hessie Jones

Yeah. Yeah, it’s very interesting that you say that I I think it’s because of some of the. articles that I’m reading are are saying that it there’s a a positive signal to the market when you actually do raise because it creates a confidence in the kind of company that you’re building as well. But you’re absolutely right at at some point in time. You have to understand or balance out the risks to you as an individual and to your business. One thing somebody said to me, though, yeah, I may be diluted.

Mujir Muneeruddin

I just jump in very quickly to, to your point, the reason why you raise money is, is is actually important too, right? Is a lot of situations that you referred to there where it’s a strong signal to the market not all. Of them, there is a certain market validation and a lot of times companies go public. We see because they want. The the notoriety of being a public company, the profile changes and whatnot. Right. But it also depends on why you raise the money, right? Some companies like you think of Facebook, for example, if I recall, Facebook actually went public, not necessarily because they needed the money, but because I think a lot of not because they needed the public money, but because I think they actually had a regulatory reason. That is where the regulators were essentially saying that, look, we’re going to treat you as a public company because you have so many investors or you’ve grown to a certain size. So they said, OK, so we might as well now go do a gargantuan IPO now that we’re forced to become a public company, let’s just go all out. And if you remember that IPO it was. It didn’t do so well initially because they were able to overprice it so much, right? Because they were so oversubscribed, right. So those signals that you’re talking about, the reason why Facebook was able to do so well is because they were able to send all the right signals. So we don’t need your money. We just want it because we’re being forced to ruble. So. Right and so all those things do resonate definitely.

Hessie Jones

OK. That’s awesome. I’m learning so much. You have no idea. I think I have one more question for you because I think we’re running out of time. But if there is a way you could sum up what it looks like from a, you know what? What does success look like for a company that’s done this right? That that’s done that structure their company in the right way that that’s actually asked themselves the right questions and brought on the right investors. What would they look like when, let’s say they get acquired or when they IPO?

Mujir Muneeruddin

Yeah, I mean. Success. I wish I had the answer to that question. Success is like beauty in the. Eye of the beholder, right? So if you’re, I suppose you could say. Success. The best way to measure it is the extent to which you achieve your goals right? Your goal was to exit and you’re able to pull that off within the range of what you were looking for. That success right? For some people, that’s not good enough because they got to a certain point and they thought they could have done better, but then the deal they got wasn’t that good. So it could go on forever. In some cases, it’s not fair. Because in that latter scenario, you’d look back and you go look in absolute terms, you were a success even if you were not content, it was successful, right? But that person might not feel that they were successful. So it means different things to different people. But ultimately, the way the outside world is going to look at you is how well did you accomplish what you set out to do?

Right. It’s like. Any one of these great conquerors that we study in history, whether it’s Alexander or Cyrus, or when when they said I’m. Going to take over the. World you judge them based on how well they. Accomplished those goals, right? And so many people. That were not Alexander and Cyrus. That didn’t get. There, right. So.

Hessie Jones

Yeah. And I think you’re right, a lot of it’s personal. And then? Then the day we’ll we’ll start to ask themselves, what do I want written on my headstone when I die? Like what difference did I make in the world? And maybe you’re right, it is a personal thing. It it. It may not necessarily. Would be as tangible as we make it out to be, so I think.

Mujir Muneeruddin

And then return to investors. Then it would be to founders, right founders, investors make a lot of money, but the founders didn’t get the the same handshake or vice versa, right? So.

Hessie Jones

So. Yeah, absolutely. Absolutely. There is a balance, but sometimes they say even if I’m diluted to five percent, 5% of 100 million is not so bad at the end of the day, so.

But anyway I want to thank you so much for for joining me. This was I I think one of the highlights of some of the podcasts I’ve done that this year and just learning more about this topic and you’ve given me a lot to think about and you’ve disrupted some of the thinking that I’ve already had. About raising money. So thank you so much.

Mujir Muneeruddin

No thanks for having me. I see. And I think it comes down. To all those principles are great to know what they are like. It’s always good to know what the rules are, and this is maybe something I attribute to my legal background is the rules. I always look at as land mines in the field and you’re trying to get the client or or the business to the other side of the land mine to the the greener pastures. Or the the. The the field the the gold mine on on on the back end, right. So the rules are there to help guide your way and to to. Tell you what not to do right, but that doesn’t mean that you don’t traverse the field for risk of of hitting up against the rules and and the do nots. You know, so all those things that you’re saying are important to know, but you also need to really understand beyond them and understand why the rule is what the rule is so that you can navigate it.

The why is is the critical thing, not so much the what.

Hessie Jones

Right. Thank you so much, Mujir.

Mujir Muneeruddin

Thank you. Thanks for having me.

Hessie Jones

I appreciate it. So for our audience, this is indicative of the type of topics that we cover in our investor readiness program and you know people like muggier really help our founders really understand topics like this. So if you are interested in going to our. What attending one of our sessions on investor rating is please go to our program page altitudeaccelerator.ca. If you do have topics that you want us to explore on tech uncensored, please e-mail us at communications at altitudeaccelerator.ca. Tech Uncensored is powered and produced by altitude accelerator. We’re hosted on Spotify and you can find us wherever you get your podcasts. In the meantime, everyone have fun and stay safe.