The video discusses various fundraising options for startups, including common stock, preferred stock, and convertible securities, with a focus on the importance of effective communication and negotiating valuation to secure financing without incurring unnecessary legal fees.

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  00:00

  Startups can sell common stock to raise money, but preferred stock and convertible securities are more expensive options for fundraising.

  • The speaker discusses changes in modern startup financing, particularly in the way financing is done through YC, and highlights the use of closing volumes in the past.
  • To raise money for your startup, you can sell a part of your company by buying common stock, but you cannot raise a significant amount of money by doing so.
  • Preferred stock is a more expensive type of stock sold during fundraising rounds, while convertible securities are the right to get stock in the future.
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  03:13

  Series A fundraising is crucial for startups to establish their valuation and secure preferred stock financing from investors through effective communication.

  • The structure, access, and focus of early stage fundraising have changed over the years, but preferred stock financings, valuation, and dilution remain important factors.
  • Valuation is the value of your enterprise and dilution occurs when selling a percentage of your company to investors.
  • Communication with investors is crucial for building a successful relationship and turning their investment into a profitable business.
  • Series A financing is the first fundraising round for startups where the valuation of the company is divided by the number of outstanding shares to get a price per share, which is then sold to investors who negotiate the terms of the preferred stock.
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  07:49

  Starting a company can cost up to $100k in legal fees, but with the decrease in startup costs for software and e-commerce companies, expensive financings are unnecessary, and bridge loans offer a flexible and cost-saving alternative.

  • The process of starting a company can cost up to $100k in legal fees and is inflexible, but with the decrease in startup costs for software and e-commerce companies, the need for expensive financings has become unnecessary.
  • Bridge loans are a stopgap measure between financings that involve a convertible promissory note, no purchase agreement, and sometimes common stock warrants.
  • Convertible promissory notes became a popular way to fund companies as a standalone document for first fundraising events, offering flexibility and cost savings compared to traditional financing.
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  11:28

  YC created the SAFE, a modernized convertible security that simplifies fundraising for startups by eliminating the need for lawyers and debt.

  • YC created a modernized convertible security called the safe, which is a simple agreement for future equity and eliminates the need for lawyers, and is not considered debt.
  • Convertible promissory notes were not ideal for startups and angel investors, so the Simple Agreement for Future Equity (SAFE) was created to remove the debt aspect while retaining convenience.
  • Priced rounds are still the primary way for startups to raise money, but most often they will do their first fundraising on a safe convertible promissory note and then do a priced round afterward.
  • Early stage financing has evolved from priced rounds to convertible securities, but dilution remains a concern.
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  15:10

  Convertible securities can be challenging to manage and result in a large number of investors, but can also lead to smaller investments and faster fundraising for startups.

  • Convertible securities can make it difficult to keep track of ownership and can lead to a large number of investors, making administrative tasks challenging.
  • Convertible rounds can result in smaller investments and less involvement from investors, which can be both helpful and detrimental for startups.
  • Focus on fast fundraising to get back to building your company, as it tends to happen later and is not as time-consuming as negotiating documents, especially for this crowd.
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  18:08

  Convertible securities are flexible and fast for fundraising, but education is needed for investors unfamiliar with this approach, while equity crowdfunding is not recommended.

  • Convertible securities are recommended for fundraising due to their flexibility and speed, but education may be necessary for investors unfamiliar with this approach outside of Silicon Valley.
  • Raising money from angels and taking small checks shows focus on fast iteration and reaching milestones, but equity crowdfunding is not recommended.
  • The SEC changed the rules to allow companies to be crowdfunded where strangers can buy equity, but it is still in the testing phase with many regulations and no personal experience from YC companies.
  • The Safe is a simple investment option that does not capture every corner case, but it is rare for a company to never need to raise more money or go public.
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  22:51

  Companies should focus on negotiating the valuation when raising funds, and consider using a safe instrument without a valuation to avoid legal fees.

  • Companies need more money to grow, so if a VC wants to give you five million dollars as your very first fund raise, do it, otherwise, consider other options.
  • When raising funds, focus on what you're comfortable with and track dilution, regardless of the amount being raised on convertible securities.
  • The key term to negotiate in a safe is the valuation, which determines the target valuation and affects the conversion math and dilution, and there is a version of the safe without a valuation that can be used without lawyers.
  • Convertible promissory notes with term sheets attached can automatically convert on negotiated terms at maturity, but the safe instrument is not ideal for giving equity for services rendered.
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  27:28

  The speaker suggests finding alternative ways to get cheap founder likes instead of using the safe and will provide more ideas during an upcoming AMA.