Cake Equity Toolkit

Jason Atkins: Hey everyone, welcome to today's Startup Equity Matters, the podcast where we try and help you to better understand and manage your equity. Equity is something that every startup has to use–founder equity, founder splits, raising those early rounds, team and equity advisors. There's so many opportunities to use your equity, and we have to help you to just hack through it, get it done quicker and easier or cost less. And you can spend more time building your amazing companies, innovating and changing the world. Today, I'm doing this one solo. I'm going to run you through an equity toolkit.

So over the years, I've been learning building tools, educating, mentoring all around–like the world's best accelerators, incubators, and portfolios, and one thing I learned was education is important, but tools are also important because you can learn only so much in half an hour or an hour and then you actually have to go and do the things. And sometimes, you need a framework or a tool to execute that task. So over the years, in conjunction with other leaders from the industry and the Cake team, I've built an equity toolkit, which is on our website. It's on the Cake Equity website under resources. Just look for Equity Toolkit and these are all free. So in there, we have an investor CRM, a valuation tool, a capital raising tool, some tools on the legal agreements that you need when you're working with your equity, and free templates and guides and blogs and all sorts of awesome value. 

At Cake, we love to help startups save money, like it's hard to raise capital. We don't want to see you spending a lot of your money in the first couple of years. We want to see you allocating it as efficiently and effectively as possible so that you can get as far as you can. Bootstrapping or with those pre-seed rounds, we know how hard it is to raise. I've done it myself many times and I've worked with founders for years. So, we've got great free tools. Obviously, the Cake software has amazing stuff in it as well that's ultra helpful and saves you time and money, but I'm not going to go into that today. I might refer to it a little bit just whenever it's relevant, but I'm not here to sell Cake. This is a podcast about how to get more value from your equity, and one way to do that is to use tools, hack things, streamline and simplify things, and not reinvent the wheel, right? As stuff has happened before. And we don't want to see you going to accountants and lawyers and advisors and just wasting heaps of time, spending lots of money on things that can be done way more simply.  So I'm just going to actually share my screen this time, which is something I don't normally do when it comes to the pod. But for those of you that are going to watch on YouTube, you can check that out there. You don't need to do that if you're listening. I'm going to talk it through as clearly as I can. I think I normally do a pretty good job of explaining things simply. I'll absolutely do my best to create tons of value for listeners today. But if you are watching on YouTube, you can actually see the toolkit as we go.

This is the Startup Equity Tool. I'm going to work through these in order. We're going to go for about 20 minutes or so just to give you an overview of what they are, how they work, and how you can get value from them. So as I said, there's an option planning template for your ESOP, so how to work out how much equity to give to your team and how to plan out your option pool so that you don't run out. There's an investor CRM template to help you work out how to build up enough investor support and qualify them well enough to help your round be successful. There's key legal templates for issuing equity, so for your employee equity and also for capital raising. We'll go through that. There's a valuation tool, and there's a capital raising tool which has some hacks and step-by-step guides for things like data rooms and pitch decks and all that kind of thing. 

So let's start with the option planning template. This tool is designed to help you allocate your option pool correctly, so we would all normally allocate about 10% initially in that pre-seed and seed stage, you make a 10% pool for your ESOP, and what this sheet does is… There's a page in the toolkit that explains what it is, and then there's a sheet that you can actually access, and then you can fill it in and budget out your option pool. So a pool, it's not like you create any separate shares, there's no trusts or anything weird like that. The pool is just a certain number of options that you create that are unallocated that you can then allocate via granting, via offer letter to your team. But you need to work out how much to give everyone and you don't want to spend all the pool too quickly or too slowly, so this sheet helps you work out your share price, which you can also work out. Cake will tell you that if you're using Cake or something like Cake, it'll calculate that for you. But, you need to, first of all, work out your share price and then you need to work out how many options each person is going to get, and you need to look forward, so you need to say, “Hey, what happens over the next two years?”, “How many people am I going to hire?”, “I might need a CTO, I might need some engineers, designers and sales and marketing.”, “I'm going to have some advisors. I might have some sweat equity.” And how many options are they going to get? And so you can calculate that by saying, for argument's sake, and this is the way the sheet works, “What are they going to earn?” So maybe $100,000 a year. And then, “How much on top of that are they going to get in equity? Maybe 20%?” So they're going to get $20,000 a year. And then how many options is that? Okay, great. So now, we know how many options there are. And then, we can start to plan out with all the people that we need to hire, and maybe have a few advisors and a bit of sweat equity. Let's make sure that our option pool is going to last until series A, for example, for two or three years or something like that. Yeah, so it's a really cool tool. It should be used in conjunction with some benchmarking. 

So in Cake, we have benchmarking. Depending on the stage of the company and the role and the seniority of the role, you can use a benchmarking tool like Cake has, and there's other benchmarking data out there. Then, you use some sort of a budgeting or planning tool like this to make sure that that works. The second tool I'm going to talk through now is the Investor CRM. The purpose of this tool is to help you qualify your investor CRM adequately and to mitigate the risk of a failed round. One of the biggest reasons founders don't raise is they don't know enough investors and they don't qualify the investors well enough. And when they go out and market their round, to ask for cash, ask for capital, ask for funding, ask for term sheets, they don't have enough demand. And therefore there isn't enough momentum in the round. There isn't enough interest and there is no FOMO. And therefore, it's much more difficult to have a successful round. This tool has a little video in it to explain how it works, and there's also a sheet. It's very simple. I would advocate not having anything fancy for your investor CRM. You don't need a proper CRM. CRMs are to be used by multiple people, so you're collaborating with multiple people and you're trying to share data so that you can always have the right information when you're communicating with whoever it is. But in 90% of these early rounds, there's only one or two people working together, and so a spreadsheet is absolutely adequate for managing that. And it takes a lot less time and a lot less effort to manage a sheet than it does a CRM.

So on the CRM tab in this sheet, the way this works is you put all the–you need to build the top of the funnel first. But the top of the funnel with a capital raise is like an enterprise sales process. You need to go out and you need to analyze the market and find out all the investors that could invest in you once you build awareness and trust and pitch and all that stuff, but that's a long process. So at the top of the funnel, you need to do your research. There's investor lists online depending on the country you're in that you can go to and many of them are quite well curated and are a good place to start. And then, you can obviously use LinkedIn and you can use investor events and you can use your network. Whatever method you are doing in the top of the funnel here, you want to list all the investors that can invest in you around. Then in column C, at the top of the funnel, you need to have 10 times the amount of capital available that you need to raise. So if you're raising a $1 million round, the top of your funnel needs to have $10 million worth of potential investment, and these investors have to invest in the stage that you're investing at. So if it's seed stage, they have to be seed stage investors, and they have to invest in your niche. So if it's health tech or B2B SaaS or deep tech or whatever, they have to invest in that niche–whatever niche you're in, and they have to be investing now, this year. And if that's the case, you can put them in the top of your funnel. Then over say, three to six month period, you need to qualify those investors and then they go in column D, and you need to have three times the amount you need to raise in column D qualified before you go and market your raise. So if you're raising a million, you need to have $3 million worth of qualified demand. And the reason for that is because there's lots of reasons why investors won't invest. Timing, they've just done a deal, they might have a conflict–there's lots of reasons why they won't invest.

So you have to have more demand than you need before you market your round to have a high chance of confidence of closing that round within a reasonable timeframe. So how you qualify them is you have to connect with them. You have to make them aware of you. You have to get some sort of dialogue going with them via meeting or coffee or email, and you have to get some indication from them that when you open your round, they're happy for you to pitch them. They want to see the deal and want to see the deck. They want to see the term so they can at least consider whether it's right for them. They have to give you an indication that they do invest in your niche and in your stage, and they are investing and they'd be happy to see your deal. So that's how you qualify it. Then you can go out and actually market your round. So that's the CRM.

Obviously, when you go to use the toolkit, you can ask us, hit us up if you need help and support, but it's a free tool. All these things are free and available for you, so I'm just going to quickly now go on to the Startup Valuation Tool. Often I see founders spending too much money and time on valuations with accounting firms and stuff, or just really having no idea or no way to value themselves. There are actually pretty simple ways to value a startup. There's quite good publicly available data now that even though it's from a private sector and it's not perfect, there's good quality data sets available online that you can access. Plus, the valuation methods are reasonably straightforward as well.

So there's four valuation methods in this tool. There's the revenue multiplier method, which is the one you sort of hear about, 10 times revenue, whatever, 10 times ARR, six times, 10 times, 20 times, depending on the niche and the demand and whatever. So that's a very tried and tested valuation method, at least at a high level before you dig into the details, and it's normally a series A class method, but it can sometimes be applied at seed stage as well. Then there's also the valuation by stage. So in pre-seed and seed, largely, you're going to be valued in this way. So an investor is going to hear your pitch, they're going to know your niche and your stage, and they're going to look at your numbers and sort of sense how strong they think you are. They're going to know if you're a second time founder, a third time founder, if you had an exit, how good's your network, all these things, how much demand is there going to be, and they're going to be able to give a valuation very quickly. So there's the idea stage, MVP, live in revenue, growing revenue and high revenue. So there's roughly all these stages and they're going to put a rough valuation on you very quickly and you can do the same thing, which helps you to go out and have meaningful and professional discussions with investors when you're raising. Another time when you need to do these valuations is when you're issuing, just say you haven't done a round, and you don't have a price that you can use if you're doing sweat equity or for your ESOP. So sometimes, you can use these methods to come up with a reasonable valuation for things like advisor equity, sweat equity, the first few hires, and things like that.

The next method is the future valuation method, so you're looking forward to say two or maybe two or three years into the future, you wouldn't want to go too far because how long is a piece of string. But if you can go a couple of years in the future and you say, “Look, my company is likely to be worth X in two years because I have a really strong pipeline into revenue.” Then, you can discount that back to today's value with a reasonable discount rate. So that's a method that's pretty widely accepted, and that's largely how I sort of think about things. If this company gets to 1 million in ARR, let's apply an eight times or ten times on that for the long-term benchmark. And so just say that's worth eight or ten million then, what is it currently worth? And is there enough return in this for me based on the current valve versus when are they gonna get to 1 million or 2 million or 5 million or depending on where the stage is like, what's the likelihood they're gonna get there and what's the current valve and what's the risk and does that stack up? So I think investors quite often think like that and that's very reasonable.

And then the last one, which is really like an idea or an accelerator stage evaluation is the Berkus method, B-E-R-K-U-S. So this is where you give yourself a score between one and ten on five factors. So it's the idea, prototype or MVP, the management team, strategic relationships and initial traction. Give yourself a score between one and ten for each of those five things. You multiply that score out by 500,000 and you add it all up and you end up with a valuation between one and two and a half million. Tzhat's the Berkus method. The valuation by stage and the Berkus method both have a country multiplier where some countries’ valuations are higher. So for example, in the US, UK, Singapore, countries like that, you can definitely achieve a higher valuation, so you do need to look at those sorts of adjustments. So there's four methods there that you can quite quickly and easily do, and there's a sheet that we give you in the toolkit so you can do one or two of those valuation methods and you can create a weighted average from those methods. Then you should discuss that with your advisors and investors and just check that you've been reasonable in the way you've approached it. And then, in a matter of an hour or two of your time and an hour or two of your advisor's time, you've got quite a good idea of how to value yourself, and when you're raising or using sweat equity, you can go with more confidence and use your equity more wisely, and you can mitigate the risk of spending tons of money on something that doesn't really work, building a huge discounted cash flow model when your pre-seed or seed stage company is normally a bit of a waste of time and a bit defunct, so it gives you a lot of confidence to tackle equity issues really well.

Now I'm going to go into the legal templates that are normally applicable to your equity, just to have a quick run through of what they are so you can have more of an understanding and just not get too bogged down. So when it comes to issuing, say, employee equity, ESOP, things like that, the first thing is a resolution. So depending on your company, you'll need to normally do shareholders or stockholders resolution to implement your employee equity. So that you can either get that resolution online, there's probably some templates from your lawyer, or Cake provides these for you in the system as part of the subscription. And if you're very early, that could even be free. Then you've got the plan rules. So the plan rules are like the shareholders’ agreement for the ESOP, for the employee equity. So it's just like the legal agreement that governs the team equity. It's got the good leavers and bad leavers, drag alongs and tag alongs and all the clauses that you would expect in a legal agreement.

It needs to protect the company, so it needs to have all the stuff the company needs to handle corporate matters and people that leave and bad leavers and stuff like that. But it also needs to be friendly enough for your team, because if not, they're going to be like, “Hey, I don't even respect or rate this because the clauses in the plan rules are so company friendly, and they can kind of take my equity off me at any time and it just feels a bit punitive.” You gotta balance that, but that's the plan rules.

And then the offer letter is the letter that the company sends to the team member that has divesting rules and the exercise price and some of that detail in it, and that's the official kind of agreement between the company and the team member that locks it in and it refers to the plan rules and the shareholders agreement and the constitution–those documents to make sure that it all ties up nicely and that you've got a properly functioning agreement between the company and the team member. So obviously, none of this is legal advice. This is just a general discussion of what the documents are. Those documents would all be provided for you in Cake as high quality templates. They're editable or you can bring your own. But yeah, you can get them online, most of them, and you can get them from lawyers, but you can also get them in Cake and they're pretty awesome. And if you want to use the Cake ones, you can even edit them yourself or with your lawyer.

All right, now the legal agreements for–hang on a sec. The legal agreements for capital raising are… The subscription agreement… Let's start with that. So if you're doing a share round or a stock round, you need a subscription agreement. That is the legal contract that is signed by the investor coming in. It'll set out things like how many shares they're getting, the share price, the payment terms, the share class, all that kind of stuff. That's the legal agreement for a round that's happening by shares or stock. Then, you have a SAFE or SAFE note as it's sometimes called. I don't know why, but SAFE is the simple agreement for future equity. That's the document that is signed in a SAFE round. You send that out, it's signed by the investor, signed by the company, and then, the payment occurs. That's the document that's used in a SAFE round. Convertible note, I think, is very similar to a SAFE note. I won't get into the exact details, but that's the legal agreement that's signed by the investor in the company when you're doing a convertible note round. Again, all these documents are provided for you in CAIC as part of your subscription, but you can get them from your lawyer or probably find templates online. If you're going to use online templates, just bear in mind that these are pretty complicated and long documents, so just make sure you understand what you're doing.
And if you have a shareholder's agreement, just be a bit careful and it's not fit for purpose. By utilising Cake templates or a lawyer, you're going to be a bit safer. But yeah, some of the more standardized notes and SAFEs are fine as well.

The next document I'm going to talk through is a shareholders’ agreement. So most startups will have a shareholders’ agreement. If you're very early on, you might not have one. If you have a small number of investors, you might not have one. But normally, once you've done a round or two, you would have a shareholders’ agreement. It then supersedes the company constitution or articles of association and adds more rules and adds more terms and just helps the company know how to govern itself in relation to all the different investors and share classes and stuff like that. So if you get a term sheet–let's talk about term sheets quickly. So a term sheet is one of the key documents when you're running around. Not every round has a term sheet. If you have a party round, if you don't get a strong lead investor or a real professional investor, say for a pre-seed round or bridging round, you might not necessarily have a term sheet, but a lot of rounds do. So the term sheet is like a heads of agreement. It's not necessarily a binding legal document. It's like an agreement to have an agreement. And it sets out all the terms that everyone agrees and wants to move ahead with. Most term sheets are preceded with–it's quite rare that they're not, but they can. It's not like 100% agreement that must proceed. So it's an agreement to do a proper legal agreement, and it'll set out things like the round size and the preference terms and investor rights and all these sorts of things. And then once that's signed, all those agreements have to then go into the shareholders’ agreement so that they're actually built into the company structure. So the term shapes an agreement to do the real agreement. The real agreement is the shareholders’ agreement and the subscription agreement, because those are the official company documents that put everything in the term sheet into stone. So the shareholders’ agreement will house all that really high quality company governance information and make sure that the deal that you do in your term sheet is properly reflected in the shareholders’ agreement. The last document I'm gonna talk about is the vesting agreement. If you don't have a shareholders’ agreement and you need to have some of your shares or stock vesting, you can have a separate vesting agreement. This is normally done by founders. Or if you're not using your ESOP or your team equity for a particular person, you can have a separate vesting agreement for them. So that's that one. So hopefully that was helpful.  There's information about all this on our website, on the Cake website. The majority of those documents are provided for you in Cake, and all the sending and signing of those documents is highly automated, so I do advocate using that, but this isn't a Cake sales pitch at all. Even though we've spent years building an awesome product, we understand many of you are doing things other ways, and that's totally cool. We just need to help you get value from your equity.

The last main piece of the equity toolkit is the capital raising tool. This is a Notion tool that we built because as I said earlier, I'd be doing these webinars and workshops for accelerators and incubators and portfolios, and I'd just be thinking, “Wow, that was so much information.” There's really no way founders can understand all that in 40 minutes, so we decided that we would build a tool that founders could actually use. You can copy this and work through it yourself to help you raise, and the goal of this tool is to help you raise in half the time. Now, raising is obviously a hard thing to do. It takes months, especially the first couple of rounds when you don't know the process and you don't have the network and you're still learning. The goal of this is to help you learn faster and help you execute faster. In this tool, there's Raise Hacks, so this is all about simplifying things, minimizing risk, not reinventing the wheel, how to find great investors, why are you awesome, how to know when you're ready to raise, just be making sure you're in the bucket. Like you don't want to go out to raise when your valuation is totally wrong or the amount you want to raise is totally wrong. There is a market when you raise, investors are doing this all day, every day. You might be new to it, but the market exists. And so some of these hacks are to help you understand what does an investor actually want? How do I get in a market in a way that helps me minimize the amount of shitty meetings I have to have and get closer to good meetings where you're meeting the market as quickly as possible. Also in here is a raised checklist with a step-by-step guide. It has the three main phases. The investor readiness phase, the marketing phase, and the closing phase. It has all sorts of cool quality information in there, like how to prepare your cap table, the valuation tool that I've already talked about, how to do a simple financial model, pitching, so short pitch deck, long pitch deck, what is it, how is it, like how do you approach it? There's a data room checklist, there's the information about the legal contracts that I've already talked about, and how to build your investor CRM, all that stuff. There's a whole checklist on how to run the marketing campaign well, and then how to close it out as well. So making sure that you sign the documents correctly, you bank it correctly, you're issuing the share certificates you're getting, the compliance done and your balance sheet done and all that kind of thing. So yeah, there's a really nice capital raising tool there as well.

And on the bottom of the toolkit, we've chosen a selection of our best blogs and guides and stuff like that, so there's stuff on here on bare trusts and equity splits for founders, equity grants, advisory shares, like there's a whole bunch of stock options and ESOP and capital raising blogs and stuff there as well. It's a really awesome toolkit. I highly advocate anyone that's in pre-seed or say, seed, checking it out. Like there's absolutely no way you can't get value from it that you didn't have before. There's just no way based on my understanding of the content that's out there and the amount of effort we put into it and the feedback that we get when we present it.

Yeah, look, we're here to help. I'm here to help. Startup Equity Matters is all about getting you more value from your equity, and one of the best ways you can do that is just raise better, raise faster, spend less time on it and spend less time raising. Don't run out of money, and the quicker you can prepare and the better you can prepare, the less likely it is that you're going to get to the point where you're going to run out of money. If you're raising and you're running out of money, your stress levels are through the roof. you might have to let people go. Your momentum is cooked and investors know that you're under that stress and they push harder and they work you a bit harder because they know they can and it's going to help them maybe get better valuations and stuff like that, and we just don't want to see founders in that situation. So yeah, I think it's really cool. I really hope it's helpful. That's today's Startup Equity Matters. All the best out there.

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