Startup Venture Capital Assistance: Financial Strategies for Success

The accounting and finance team for funded startups

Companies raising venture capital require professional books and specialized financial advice. Because Kruze Consulting only works with funded startups, we know what numbers and advice you and your investors need.

Startups with VC funding need processes and systems to regularly report on the company’s financial position. Kruze produces Monthly Financials, Burn Rate Analysis, Cash Runway Analysis, Budget to Actuals and Variance Reports that are perfect for venture capital partners and board meetings. Startup founders who have raised venture capital must have the strategic financial skills to carefully manage burn, growth, headcount and more. And founders need to be ready to raise the next round of capital when the time comes.

Kruze Consulting’s clients have raised over half a billion dollars in venture capital funding in the past 12 months alone, so we know what it takes to be ready for the next round. From the first day of our White Glove Onboarding Experience, we work to deliver accurate financial statements and to begin creating a due diligence folder where, together, we can retain important information that you’ll need during the next venture capital round’s due diligence. Startups should have rock solid financials and their diligence materials prepped before a VC meeting ever occurs. Fundraising moves incredibly fast and if you appear unprepared to the VC partner, it will affect your valuation and total capital raised. Work with Kruze, be prepared. Read our downloadable VC due diligence checklist here!

Get outsourced Finance as a Service (FaaS) expertise for your VC-backed company

To get the professional bookkeeping and accounting services you need to effectively fundraise, you can rely on Finance as a Service (FaaS) from Kruze Consulting. Our FaaS programs provide you with an integrated financial team that can help your startup report on your company’s financial position and communicate that information to your investors. We have the experience your company needs to produce accurate financial statements and guide you through the due diligence process. Fundraising is a complex process and Kruze can help you be prepared!

Leverage our technological expertise for financial decisions

The accounting and finance industry are undergoing a transformation, driven by AI. Kruze Consulting is a leader in startup accounting and in adopting new AI-enhanced technologies to redefine our service and operations. Our CPAs are experts in leveraging accounting and financial technology, helping your startup function more effectively. Financial tools enhanced by AI can create efficiencies and cost savings, detect anomalies in financial data, and generate financial forecasts that allow startups to make data-driven decisions. Kruze has served on product advisory councils for major accounting and fintech software companies, helping them refine their AI and automation tools. That direct relationship also allows us to quickly address any issues and ensures we are on the cutting edge of technology and AI enhancements.

How to finance your company

Oftentimes, startup founders think of venture capital as the first way to finance their companies. VC funding is indeed a great way to finance your company; however, other financing options are available. Also, as your business grows, your financing needs will change. Let’s explore other ways to finance your startup besides venture capital.

Top Ways to Finance Your Early-Stage Company

• Bootstrapping
  • This is where you invest your own savings into the company
• Bank Loans
  • 2 Different Types of Bank Loans:
    • If you have not raised VC money, your bank loan will require a personal guarantee.
    • If you have raised VC money, you can raise Venture Debt with no personal guarantee.
• Other Debt Options
  • More Aggressive Debt: From places like Shopify Capital, Stripe Capital, Fundbox
  • Independent Fund or business development company lenders
  • Revenue Based Financing: For some revenue generating startups
  • Venture Debt may also possible from non-banks, if your startups has raised money from professional VCs
• VC Investment Instruments
  • Convertible Notes
  • SAFE Notes
  • Preferred Stock
  • Common Stock

Free resources to support your VC fundraise

Our clients have raised billions in VC funding. We’ve published several free resources that might help you in your funding journey.

Startup Pitch Deck Course

Our free Startup Pitch Deck Course contains over 8.5 hours, covering ever single slide in a deck - taught by 2 experts in venture funding, Haje Kamps, the TechCrunch writer who does the weekly pitch deck teardown series, and Healy Jones, a former VC and one of our VPs. There are 2 pitch deck templates (one B2B and one B2C) that you are free to use, plus study guides and more. Visit it here.

Top 10 Decks

We also review some of the best decks that have been successfully used to raise funding, from Uber to Y-Combinator’s suggested deck. Visit our Top Pitch Deck page.

Financial Model Templates

Of course, we love financial projections. Projections are an important part of your pitch, and you can grab our free, downloadable financial models here.

Funding stages 101 for VC-backed companies

Not every company follows these stages exactly - in fact, many skip the rounds before the Series A. But here are the most common stages of venture capital financed startup companies.

The data is compiled from Crunchbase, and has been updated based on what Kruze is seeing our clients raise. Kruze’s clients raise billions in funding every year, so we get to work with a lot of founders as they raise capital!

Again, not every company will need pre-seed funding or do a seed extension. But if you are on the VC-backed company progression, you will most likely have a Series A.

Major Dates for VC-Funded Startups

What are Convertible Notes?

Convertible notes often referred to as “converts,” are one of the most important securities used to fund early-stage startups.

While their popularity has declined some since the introduction of SAFEs, they continue to be one of the most common types of investments raised by seed-stage companies and are often used during Series A, Series B, etc. extension rounds.

Learn more about convertible notes or convertible debt.

What are SAFE Notes?

SAFE notes, or a simple agreement for future equity is really just a simplified version of convertible notes.

• Simple, Easy & Fast fundraising document for Angel & Seed Stage
• Safe notes are more founder-friendly than convertible debt
  • No Interest Rate
  • No Maturity Date
• Safe Notes convert at a future valuation - “The Cap”
• Safe Notes are technically Equity
  • However: some Safe Notes have a clause where those investors are paid back before other investors and founders - that kind of makes it debt
• Uncapped Round: When Safe Note’s have no valuation and investors convert at The Cap in the next round (not advisable)
• Be Careful: Stacking Safe Notes can surprise founders by the amount of dilution they pile up

What is Preferred Stock?

Preferred stock or preferred equity is a share class. Venture capitalists like to invest in preferred stock because it comes with many attractive rights and privileges vs. common stock. And those benefits make them willing to pay up and pay a higher valuation for the preferred stock. Kruze’s client raise a LOT of preferred stock - learn how to account for preferred stock here.

Benefits of Preferred Stock

• Liquidation preference - these days, it’s typically 1X. (they get their money back before Common Stock participates)
• Ability to block a big decision just by voting as a share class.
• Redemption rights 7 to 10 years out
• Accruing Dividends (Cumulative & Non-Cumulative)
  • Non-Cumulative is more friendly to founders and employees

Preferred Stock vs. Common Stock

• Venture Capitalists don’t invest in common stock; they invest in preferred stock.
• Common stock is typically owned by employees and the founders
• The Founders shares and Employee stock are usually in common stock
• In the beginning, the Par Value of Common Stock is very low
• Common stock will always be at a discount compared to preferred stock

What is Common Stock?

Common stock is typically the share class that the founders and employees have in a startup. When the company gets incorporated, the first share class that’s issued is common. Typically, the founders get a significant percentage and carve out a stock option pool which the employees get. They also determine the par value or the price it is worth on paper. This is usually like 1/100th of a share. Common stock is worthless at first because you haven’t built anything yet. However, that is the perfect time for founders to buy their shares and for early-stage employees to exercise their shares.Common stock goes on your balance sheet and in your equity session. Common stock is always cheaper than preferred stock. It’s what the founders get, it’s what the employees get, and it’s what stock options come in. So it is an excellent way for people to have ownership in the startup. Learn how to set up an employee stock option plan here.

Common Stock Simplified:

• First stock issued when a company incorporates
• Share class that the Founders and Employees share in the startup
• The Par Value of Common Stock is super low to start
• When you exercise your options, don’t forget to file an 83B and check with the CPA about personal tax filing
• Preferred Stock is what Venture Capitalists ask for when they invest
  • Preferred stock has a liquidation preference
• Stock options are granted in common stock - we have free resources on how to model a stock option pool
• 409A valuation is required to validate the price of common stock
• As a company gets closer to a significant acquisition or IPO, the cost of common & preferred get closer

What Is The Benefit of Having A Branded VC Lead Your Funding Round?

Having a well-known VC firm lead your funding round offers a lot of advantages. Top VC firms have extensive contacts throughout the venture capital ecosystem, and they’re able to encourage other firms to join in your round. Top VC firms typically can write larger checks, and they are invaluable sources of operational information for startups, since they have been through this process repeatedly.

Venture Capital Bridge Loans

Not every startup has a perfect, straight up and to the right growth curve. In fact, your startup may have some bumps along the way - and if those bumps align when it’s time to raise your next round, you may need to take on what is called a “bridge loan.”

This type of “loan” typically comes from a startups’ existing venture capital investors. So this sort of financing is only available to VC-backed companies that already have deep-pocketed VC investors.

Financing of this sort for a venture capital backed company will either be a convertible note or a SAFE note. Convertible notes and SAFE notes will have an equity conversion feature, so are not a “priced” round - instead, there will be some terms that favor the VCs who provide the bridge. Usually this will be in the form of a conversion cap. Remember, this is a financing for a company that is in trouble - so the terms are not going to be that great for the startup or the founders. Read more about bridge loans here.

What is a cram down round when financing a startup?

Cram down rounds essentially “compress” all the ownership positions of previous investors, founders, angels, and other owners of a startup. In a down round, startups offer additional shares at a lower price than the shares had sold for in a previous financing round. A cram down round is a down round in which the new financing terms may severely dilute the ownership positions of any investors that don’t participate in the cram down round.

Cram downs are a painful part of many downrounds. There is a clear increase in downrounds post-2021 bubble bursting, and many founders are facing difficult decisions on how to raise capital at a lower valuation. We’ve published our “Guide to Downrounds” - check it out to get tactical advice on what to watch out for when bringing on capital at a lower valuation.

Why do venture capital general partners invest in other VC funds?

General partners (GPs) are the people who run venture capital funds, and limited partners (LPs) are the investors who provide the funds for startup investments. And yes, GPs do invest in other venture capital funds. They have detailed knowledge of the VC landscape and are able to evaluate other opportunities. They also have often worked with other VC firms in the past and know that they can work well together. Finally, venture capital investing has the potential to generate high returns.

What is a 2 and 20 venture capital fee structure in startup funding?

Two and twenty is the standard fee structure that venture capital firms charge their investors. The “two” stands for the 2% management fee that’s applied against the fund’s value each year, generally for the first five years. That covers salaries, administration, and other costs to run the fund. The “twenty” applies to the percentage of profit sharing, called the “carry,” for the fund. Once the fund distributes capital back to all the investors, the fund keeps 20% of the profit earned by the fund. The remaining 80% is distributed to the investors.

What’s behind increased requests of financial statements?

Currently (in July 2022) we are seening a large increase in requests for startup financials from venture capitalists. VCs are looking both at historical information and future projections. While this has always been part of the due diligence process, as the funding market has gotten tighter venture capital firms are digging more deeply to determine how capital was spent, and how startups plan to use capital in the future. Startup founders and CEOs need to make sure financials are in good shape, and be prepared to present them to VCs.

The return of structured term sheets in late stage VC

Structured term sheets included that offer preferential terms to VC investors, like superior preferences, liquidity rights, or dividend or cash payment components. In the current market (August 2022), venture capital has tightened up, and startups looking for funding may find that they need money, but the startup valuation is higher than it should be. Rather than accept a down round at a lower valuation, the startups might accept a more structured term sheet to preserve their current valuation.

VC Capital Calls

A capital call is the process that VC funds use to request that fund investors contribute their fund commitments. The VC fund’s general partners (GPs) make a capital call when the fund needs more money to make new investments. The fund’s investors (called limited partners or LPs) have agreed to invest in the venture capital fund, and the total amount that the LP agrees to provide is called “committed capital.” Normally LPs pay only a portion of their committed capital at the beginning of the agreement, called the “initial drawdown”. The amount the LPs have provided to the fund is called “paid-in capital,” and the amount remaining is called “uncalled capital.”

Why do VC limited partners hate capital calls when the market is down?

Investors in VC funds tend to be institutional investors, like endowments, foundations, and pension funds. Normally those types of investors keep their funds in vehicles that offer a better yield than simple savings accounts, such as stocks or bonds. That means that when a VC fund issues a capital call, those investors typically have to sell other securities to meet their capital call obligation. And if the market is down, they may have to sell at a lower price than they would like.

What’s the difference between primary and secondary shares?

There are normally two types of stock at a startup: primary and secondary shares. Primary shares are purchased directly from the startup company, and the company gets the funds from the sale. Secondary shares are those held by existing shareholders, like employees, former employees, or investors. When those people sell their shares, they get the money from the stock sale, not the startup company.

What accounting metrics do VCs want to see?

Venture capitalists look for specific accounting metrics when evaluating startups. Every VC has their own, unique set of metrics that they like to see - and most industries also have industry specific metrics as well. However, here are some of the most common accounting metrics VCs will analyze.

Accounting metrics VCs like

• Revenue - if you’ve got it!
• Revenue growth
• Cash, cash burn - and cash out date
• Sales & Marketing expenses
• R&D expenses