As the economy becomes more uncertain by the day, investors are increasingly pulling their money back from early-stage companies to more stable investments. What creative fundraising strategies can founders employ to get money from these increasingly reluctant angels? Elliot Begoun tackles this topic with Chuck Cotter, a partner at Holland & Hart LLP. For many years, Chuck has been advising consumer products brands and investment funds in capital raising, exit, and acquisition transactions. In this episode, they focus on the different ways that you can make terms sweeter for angels and get that much needed money to kickstart your business.

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Getting Creative in Fundraising in Uncertain Times with Chuck Cotter

I’m going to introduce my buddy, Chuck Cotter. He is also known in this industry as my less attractive, not as bright or nearly as savvy brother. All of that is true, except he’s not my brother. Chuck is the guy I go to as it relates to all things legal especially, as it relates to what’s going on in the fundraising and M&A scene. What we thought we would do is have a conversation about what we’re seeing now in this madness and he’ll share a little bit about some of the mistakes and things that are becoming a little bit too visible and that all of you should be aware of. Before we start dialing into that, I’ll let Chuck introduce himself and we’ll go from there.

I’m Chuck. I am his less smart, less attractive brother, even though that’s already a very low bar. Hopefully, you still get something out of this. I lead the consumer, food and beverage group at a large law firm Holland & Hart. All we do is consumer. We represent over 100 brands, a lot of the top tier investment funds and a close call of 60% to 70% financing in M&A deals a year in this space.

Let’s talk a little bit about what’s going on in this space. When this all first started in early March 2020, we saw a lot of the fundraising, both Angels and funds roll up the carpet and retreat. They focus on deploying their capital to their existing portfolio to help them either survive or to help them fund what was at that moment in time in this crazy quick growth. A few months in, what are you seeing?

What we’re seeing, I’d call it different things for different buckets of the fundraising space and M&A space. Let me start with premier sexy brands. Brands that are still valuable. At the very top end of the space, we were closing deals where the valuations are still extremely healthy. There may be even higher than what I was seeing many years ago. There’s a ton of investor interest in those deals. You’ve got this sliver of the market, which is doing as well or better than ever.

You’ve got another sliver of the market, which I’ll call also venture deals because I was talking there about venture deals, series A and series B deals. Another sliver of the market where we’re doing series A and series B deals for companies that may not have a plan or may not have the buzz or the product margin or something else which differentiates them, which many years ago still would have relatively easily raised money at a decent valuation because of the overall health of our space and fundraising in our space.

We’re seeing some struggle there in either finding the investors or in valuations and other terms being far more investor favorable. The third sliver of the fundraising market is the Angel space. Raising money from Angels, which I think of as your pre-series A fundraising, although that’s not always how it breaks down. It’s always the hardest time to raise money and it always requires the most grind for your buck, but it’s gotten even harder. The reason is relatively simple. When you’re looking at venture funds who are leading series A and B deals, regardless of how I broke down the market between the haves and have-nots a little bit, there is captive capital managed by these funds. The people who manage those funds have a mandate to invest at all in our space and they only make carried interest if they do invest it.

There’s significant capital there and a significant incentive to continue investing through whatever is happening. When you look at the Angel space, it’s people’s money. You’re looking at relatively wealthy people or at least well-off people who are not like they have X dollars that are earmarked for food and beverage investments or consumer investments that they have to make within the next year or three. Instead, they can sit on their money because they’re scared. They can put it into safer investments. They can buy real estate because they think it’s going down in the markets they live in. They could do any number of things other than invest in early-stage food and beverage companies. We’re finding it both harder to find those people. The early-stage companies are often having to offer more investor favorable terms because the investors are saying, “Why you, rather than doing these other things with my cash?” That’s the investment market. We can talk more about the M&A market.

We’re seeing the same thing. You and I have this conversation quite often and we’re involved in these quite a bit, but that earlier money is continually getting harder. You need to have a more creative approach to it. You have to recognize that if that money is going to be a hard one, that your investors need to make money. If you can represent to them the better opportunity to make the money, that’s important because to what you were saying, these are people that have a high net worth. They’re going to do something with that money. What they’re trying to determine is what is the best thing to do with that money? You have to think from that perspective and begin to make a case. You and I have both seen some interesting new terms and concepts. What of those have you seen that interest or intrigued you that you think might stick?

The early-stage Angels are sophisticated about the way these fundraisings work in a cascade fashion. It could be this financing, then A and B. Maybe one more, maybe an exit. What they’re often trying to do is line themselves up for some additional advantage at the future fundraising rounds. “I’ve given you some money. I could be doing something else with it. Without my money and some other people’s money, you’re never going to get to your series A or B. Here are some extra things I want to have happened in series A or B.” They could be as simple as, “I want a pro-rata right or a super pro-rata right.” It’s the ability to require the company to allow you to participate in the series A or B round, but it’s at the same price as everyone else.

We’re also seeing more creative things like, “Not only do I get an opportunity to participate in a future round, but I get a slight discount to the future round.” When you think of it, it doubles down on their investment. They make a convertible note investment. That’s going to be at a discount to the future round, but they’re additionally saying, “If I give you more money at the series A or B round, that may be at a discount.” We’re seeing some things like that which we had never seen in the prior 3 or 4 or 5 years.

Have you’ve seen those in the form of pro-rata or are you seeing those also in the form of warrant coverage?

All of those things are on the table right now as the company tries to sweeten the investment for Angels. In a sense, this is what I try to say to brands, “If you give someone a 15% discount at the series A round, you are getting less money for the equity you’re selling at that time.” If that’s what you need to get over the hurdle to get money now and they still have to give you more money later to get that future discount at the series A or B round, it can still very much be worth it. It’s incremental dilution for money now and guaranteed money later if they want to participate at that discount.

One of the things that are sometimes missed by founders and we’re going to spend some time talking about common mistakes that are made, but this one is not so much a mistake as it’s a missed opportunity. They look at the current money that they’re raising. Everything they’re thinking about from dilution, from all of that is around the money that they’re raising now. I always recommend that you have at least a five-year capital strategy, a five-year horizon to that.

What you have to think about is if I’m giving up a little bit more here and that gives me the runway and the opportunity to prove and get further for the next bigger chunk of money. If I’m able to raise at a better valuation for that bigger chunk of money, then it will more than offset what little dilution I sacrifice in these earlier rounds to get there. What happens is that too frequently, it’s too narrow a vision, “I’m focused on this particular round.” You don’t think about things like warrant coverage, pro-rata rights, discounts to feature and all of those things or even the valuation cap to close the money that you need now to get you to that next bigger chunk.

If you even want an opportunity to get there, you’ve got to raise the money now. That’s the hard part, which is not me counseling entrepreneurs to do stupid things when it’s early. Here’s the best way I can say it. Sometimes entrepreneurs will come and say, “Is that a market or a fair deal?” If you’re asking me in a vacuum based on other deals I see, it’s investor favorable. On the other hand, if it’s the only deal in front of you, it is the market for you because the alternative is nothing. It’s the same thing here. If this is what you have to do to get the money in the door so that you can get to your series A, then you’ve got to do it and then maximize the value of your series A and to your point, maybe you make up for the dilution. Other things flow into this that people don’t necessarily always think about your product margin. The better your product margin, the less money you have to raise to increase your revenue but people don’t often think of their product margin as impacting how much dilution they’re going to experience.

I think not only product margin, but I talk about this a lot is in general capital efficiency. If you look at it go from product margin and waterfall it down all the other things, trade spend, etc., you come down to the contribution margin. You need to understand what your contribution margin is by transaction and by the channel that you’re doing business. In many cases, what you’re doing in an earlier stage, I’m talking about pre-series A, but sometimes even post-series A is that you’re making investment every bit of growth, new customers, new distribution and growth online. It’s an investment because there’s not enough contribution margin being created to offset your fixed costs and other expenses in the business.

If you know that it’s going to be hard to raise money or if you’re going to raise money, it’s going to be at less favorable terms, staying smaller, proving traction and doing those things to demonstrate the stickiness and the value of your brand and your product without spending as much is critical. Amy has a question here, “Do you recommend offering both warranty coverage and pro-rata rights? Is that common now? They have an Angel asking for both.”

It’s still not common if by common you mean more than the majority of the rounds. If someone’s going to ask for warrant coverage, they are also almost always going to ask for pro-rata rights. I rarely see warrant coverage without pro-rata rights. When it comes to warrant coverage, depending on the terms of the warrants, you can also think of it as if it effectively makes it significantly more discounted note. As far as whether you should offer it, it sounds like in your case, the investor is asking for it. My advice about, “No, I wouldn’t offer that upfront. It’s not super helpful.” If the investor is asking for it, should you do it? It depends on what your alternatives are and what the terms of the warrant are. Is the warrant providing them a slight bit more upside and is it requiring them to put in meaningfully more capital?

Let me explain what I mean. Is it a warrant where a penny warrant where they get to take a bunch more equity for virtually no cost or is it a warrant where they have to put in real money to acquire a greater stake? That’s still a great lottery ticket for an investor, but it’s a lot better than a penny warrant, which gets you no money when they exercise the warrants. I would like Amy to be as helpful as possible if you have a follow-up, but absent knowing the details of the warrant and the details of the note, I can’t say, “Is that warrant and note so bad, you shouldn’t even consider it, even if you need the money?” Instead, I’ll focus on the general answer, “Which is what’s your alternative?”

If you do not have an alternative, then you’ve got to negotiate the best deal that you can with this investor, which may be giving them a warrant and a pro-rata right. If I’m giving a warrant, here’s my preference if I’m company side. I’ll give you a warrant to buy series A stock at the series A price when we do the series A round and that covers some percentage. I’ll make something up. If you invest $100,000 in a note now, when we do our series A round, we will issue you $200,000 or 50% of your investment. A $200,000 warrant for the purchase of series A stock at the series A price. That’s at least balancing interest a little bit better where they’re still going to get a little something of a lottery ticket. You’re juicing their potential return a little bit, but they’re going to have to pay to get those extra shares and pay what everyone else is paying.

Amy did follow up and it’s 25% warrant coverage at the series A price for up to two years post-series A.

That wouldn’t trouble me that much. It’s not as good as not having to give that.

My overall philosophy is it comes back to empathy. Most Angels follow simple pieces. I’m not talking about people that you bring in one-off, but people who Angel investors either professionally or semi-professionally and are active. Their typical investment basis is they put money in a few companies each year. The ones that have traction, they want to come back in. They want to double down on and either minimize their dilution, stay and etc. To encourage that or to accept that as a reality and build that into your offer to differentiate from all of the other offers that they see, it’s not such a bad thing now, in my opinion, as long as you do it in a smart way.

What you’re saying to them are two things. One is, “I have a pathway for you, should you want to come back in and stay active in this.” It does require them to put more money in. Secondly, it communicates a bit of swagger that you’re going to be that brand that they’re going to choose to double down on. The key is doing it smartly in a way that’s effective. Something like this works. Matt Perry’s question is, “With venture funding and Angels getting more hesitant, are there more or any good venture debt or interesting vehicles like venture debt gaining traction in the space?”

Yes, and they are accompanied by a bunch of sharks. You have to differentiate between the good and bad lenders, those who will provide relative simplicity and those who provide a ton of complexity. By that, I mean, if someone is going to give you a loan with interest and maybe some more coverage, that’s the simplest version. The second simplest version is, are they going to give you a loan with interest and more coverage secured by your A/R and inventory, but all the A/R and inventory is still titled in your name? It’s slightly more complex but can still work. Do you effectively sign over all of your A/R to someone who gave you a loan, they get to receive it directly and will make credits against what you owe them? People do that all the time, but it’s a little more complicated.

There’s a whole category of total sharks. One of the main things to look for is what type of covenants will they require? It is the legal word for a promise because we like to come up with a second word to mean the same thing in the legal profession. They need to be very covenant-lite. You should be able to still raise convertible debt, do other fundraisings, do effectively everything that you would want to do otherwise, except if they have secured assets, not sellers’ assets. Some of the people who are getting in the space who are not as familiar with venture lending as compared to much later stage lending are trying to apply a lot of the covenants to venture lending which venture stage companies can accidentally breach all the time. For example, covenants to maintain a certain amount of cash or covenants to maintain a certain debt.

They go to EBITDA.

You’ve got to watch out for all those.

This is one that you have to be careful that you’re not getting involved with a shark. One of the ones that I would encourage anyone to do. Venture debt is different from other debt because by putting the word venture, there are two explicit realities. One is a belief of a higher return and a belief of more perceived or accepted risk, a higher risk tolerance. If you’re dealing with somebody who claims to be offering you events or debt instrument and they’re asking you for personal guarantees, they’re doing things along those lines, then that’s not a venture-debt relationship in my opinion. Chuck was mentioning attaching to assets like A/R and inventory.

If you’re getting to that stage, looking through more traditional asset-based lenders is another option as well. That is not necessarily venture debt, that is more traditional lending in the space. I’m a believer in the benefit of debt for early-stage businesses if you can service that debt if it doesn’t become such a heavyweight on your shoulders. Even if you’re paying significantly higher interest than you would ordinarily, at the end of the day, if you’re using it to fund things like inventory, A/R and other things along those lines, it’s going to cost you less long-term than giving up equity. I’m seeing more hybridized versions of venture debt. Chuck, I’m going to have you explain this to the people reading. When you say warrant, a lot of venture debt providers will say, “I’ll lend you $300,000 and I’ll charge you 6% to 7% interest. A typical term note is 36 months or whatever the term of the note is, but I want warrants.” Explain what that usually looks like and means.

Warrants, you can think of as juicing the upside for venture lenders. Venture lenders are taking more risks to lend to you than to a far more established company. In order to make up all of their risks through interest, the interest might be extremely high. Not only does that take back a lot of entrepreneurs, but it can also be prohibited from a cashflow perspective. Venture lenders often want warrant coverage to try to create a win-win where warrants meaning the right to purchase some equity in your company. In which they will exercise if and when these things are in the money and they’re going to get some liquidity from them and make some money, which juices their return to account for the risk.

One way for those of you who are familiar with convertible notes, it’s not apples to apples, but to think about it. With a convertible note, you take all the principles that they invested. You add on top of it the interest that accrued and you convert it all into equity the discount. If your convertible note instead said something like, “The principal and the interest you’re going to pay us back in eighteen months, but then whatever it would have represented the discount is some equity that we’re getting to juice our upside for lending the money.” It’s a different way to think about it. It’s like if I had a convertible note where I repaid all the principal and interest, but they got some upside in the discount.

It’s a cool way to explain it. The way I typically do is, if you get a $300,000 note from venture debt, they may ask for $50,000 or $100,000 worth of warrants that are going to convert into equity. What does that debt wind up costing you? That’s what you have to think through. It could be the difference of being able to get to that next stage by giving up that smaller bit of equity and servicing the debt. It’s more affordable and approachable. You shouldn’t rule anything out. The key and I’m not saying this to plug Chuck at all, because that goes against every fiber of my being, but you need to have an expert and guidance around all of this stuff.

It is because what can seem innocuous or not even apparent in a way an agreement is written could be the thing that stops you from being able to raise any money down the road or changes the whole relationship. Don’t solve this by yourself. Make sure that you’re asking the appropriate people, both from a business standpoint and from a legal standpoint, so that you know what you’re entering into before you enter into it. Both Chuck and I have seen far too many deals that we would come back and say are predatory. Even giving some of those investors/lenders the benefit of the doubt, they may not have even understood how predatory it was. They were trying to reduce risk. Some of it is overt, purposeful and predatory behavior and some of it is an investor is trying to do everything they possibly can to think through where they could limit risk.

Let me tie the venture debt and Angel questions together. We’ve done some deals with Angels where they say something like, “I like you. I like what you’re building, but you want $400,000. The valuation you’re asking for, to me, it doesn’t make sense for where you are. I’m more risk-averse as an investor. Here’s what I’ll do. I will loan $400,000. You’re going to start paying me back in six months with monthly payments and you’re going to give me profits, interests or warrants to give me some upside, but nowhere near as much equity as I think I should get if it was an actual equity investment.” The point being is it’s not just the, “I’m a venture debt provider of people with whom you can negotiate these things.” Angels are open to it also.

One of the things that I would encourage anyone reading who’s actively raising with Angels is to think about what options they can ask or what options you can offer an Angel. If an Angel has a reason to say no, you have a different avenue to make them say yes. One of them is to have a potential venture debt term sheet that you structure that you want to flow to them. A lot of times, especially the less sophisticated. I don’t mean that Chuck is less sophisticated. I mean, from a less sophisticated or savvy investor in this space, they may not understand the various options or know what’s out there and you are helping them by providing a different term sheet or some creative terms can be the difference between getting a yes or a no. I want to come back to one of Amy’s comments in response, she thought the comment that market, what’s available to us was important. Jared had a question here, “Have you seen growth in Angel or fund awareness and belief in digital D2C channels as a primary track for growth versus retail and emerging brands? Have you seen more interest on either the fund side of the Angel side?

Yes. One of the premier sexy non-Elliot type of brand that I said we did around and everyone wanted to get on the round with a digitally native purely eCommerce food business. There’s an appetite for that. It comes down to being able to pitch and explain the efficiency of different metrics than at retail like, “What are your digital ads spent? What’s your customer acquisition costs?” It’s like average basket size, except for your products. “What are they ordering when they come to your website?” and all that stuff. There are tons of interested funds and Angel in that space, but you still have to prove that you can be efficient with the capital and build a real business.

I’ve seen rapid growth in interest in that, but I’m also seeing a want of a whole new set of dashboard items in terms of KPIs to Chuck’s point. We’re seeing things like for awhile it was raw as and things like that, but what they want to know is average order size, lifetime value adjusted, margin adjusted, payback, your acquisition cost and how many orders does it take to pay back and repeat? You have to build a strong case for it. There’s more focus on capital efficiency now than there was before in D2C for the most part, which supports a more capital efficient strategy for lots of reasons. One of the biggest is that the cash conversion cycle is much shorter. You’re going to convert your inventory from the time you produce your inventory to the time it turns into dollars is much shorter in D2C. Tanya has a question here, “If we don’t have the experience or a wide breadth of understanding of the vernacular, should I include a lawyer to participate in conversations with the interested Angel?”

I wouldn’t include a lawyer in the conversation. For the most part, that means you’re spending money at every conversation, which you shouldn’t be spending. More importantly, most lawyers, even ones who buzzed their hair and wear hoodies create a sense of barrier the second they enter a conversation as among the other parties. There are some exceptions, but if I were to join, for example, in every conversation someone had with an Angel, I think the Angels would be off-put. They will be a little bit more on their guard and less likely to build a connection with you, which is an exceptionally important factor of why Angels make investments beyond the economic criteria is whether they feel a connection with the founder.

What I would suggest is you pre-talk with your lawyer or Elliot or some advisor that you have who understands these things in and out, who can explain them to you in relatively plain English, because if they can’t explain it to you in plain English, they don’t understand it well enough. That doesn’t mean that when you’re having the conversations with the Angel, you’re going to know everything the Angel is saying or the impact of everything the Angel saying. You have to be informed enough that you can have a general dialogue and then say to the Angel something like, “You’ve raised some interesting ideas. Let me think about this and get back to you,” and you go talk to your advisor and see what they think.

First of all, it’s my hope for these types of things. These podcasts, things that we’re doing to demystify it because it bugs the shit out of me that we create this lexicon, this vernacular, that its whole premise is to make this a scarier thing than it needs to be. Some of that, quite frankly, the investor speaking back, especially Angels is their way of trying to fake it until they may get a bit as well. They don’t understand it. I see that all the time with the confusion around the difference between a value cap on a convertible note and a valuation. That conversation comes up all the time.

What I would say is the more you can become proficient, the more you can become an educated consumer of how to raise money because you’re all building these awesome race cars and these brands that have potential. The capital is the fuel for them. To not understand all the ingredients that go into the fuel and how the fuel interacts with the engine, it takes away some of your power and some of your ability to be choiceful and make good determinations and good decisions for your business.

The way to do that is to be vulnerable and to ask questions and ask for clarifications of things you don’t know. To Chuck’s point, you should do that prior to a call with an investor. If an investor or an Angel says something to you and you don’t understand the vernacular or the term that you’re using, you need to ask them to explain it to you. If they’re not willing to do that for you and have that conversation with you, they’re not likely the investor you want on the team because it’s like a relationship. Asking them and then saying, “Thank you. I need to bring that back to some advisors and get some coaching myself.” It’s fine and I would encourage you to do that.

Don’t be shy with your advisers when they’ve explained something to say, “I don’t understand. Explain it again.” Don’t be fearful of feeling stupid because you have to ask this question. You are not stupid because you have to ask this question. This is not your expertise. Your expertise is building a company and a product. Even though there are some terms that we have to use sometimes because they have specific meanings and then you can explain it, I hate the purposeful barrier that is created between entrepreneur and advisor, by the use of too many languages. If you keep asking your advisors to explain it and you still don’t get it, then they don’t get it.

It’s the veneer that unfortunately too many uses and that is they speak back in the language because they can’t explain it in real terms. That’s how you out it. The other source is to collaborate with each other. For every one of you who are raising an Angel round, there are our founders who are now raising their series A. Those founders are a font of knowledge for you to go to and ask and have a conversation around what they experienced and explain it to you as it is as well. The other thing I would say is that by listening to some interesting Angel investing podcasts. There are some good books around Angel investing.

Educate yourself and become a student of this, even if it’s not something that is exciting to you. Knowledge is power. It helps to put you in a position where you are much better prepared to make the difficult decisions that you’re going to need for your business. Chuck, I want to change the topic a little bit and talk about common mistakes. Things that you’re seeing that founders are either agreeing to or asking for or misinterpreting.

We’re talking about this from fundraising thus far, but your guidance and your suite of services around a brand go much further than the money that they’re raising. It has a lot to do with how they’re structuring everything from their operating agreements to the way they’re bringing on employees or sharing equity with employees. I try to make this show useful so that when people leave reading, that they have some things that they can explore, do and act. I don’t want them to leave this episode for the recognition of how much smarter and more articulate I am than you. I want to try to give them something deeper than that if possible.

The mistakes we see founders make when they raise money. I will start with things that’ll turn Angels off which beyond all the hard stuff, like product margin, category, etc. Some of the soft stuff that turns Angels off. One is, you’re a know it all. You should be confident, have a point of view and humble enough to know that you don’t know it all. A large part of why Angels make early-stage investments and this may speak to their own ego, but it’s because they want to feel like they’re helping you. If you give them the impression that they’ve got nothing to offer you besides their money, you will not get their money. That’s number one. Be confident, but humble.

Be scrappy. I’ve said this in almost every one of your shows that we talk Angel fundraising because it’s important. If you tell an Angel from whom you’re going to raise $500,000 that your initial salary is going to be $170,000, because that’s what you were making at your corporate job, you’re done. They have other opportunities where the entrepreneurs prove their own belief in the idea by taking an early stage salary that’s well below what they could make it a corporate job. These are soft factors, but these are the things that I’ve seen sink entrepreneurs over and over in Angel conversations.

Not understanding some business basics that you may need coaching on before you have your conversations with Angels like product and contribution margin. Not having an idea of how you’re going to spend the money. Even the way I said idea, lacks the specificity you need. You should be able to tell people from whom you’re raising $500,000 how you’ll spend that $500,000. A common mistake is you had someone else build your model or your projections and you don’t understand them. When a potential investor says, “Explain to me the assumptions underlying the revenue growth between 20 and 21 or 21 and 22.” You should be able to say, “We assume we’re getting into 1,500 more stores. Here’s why we assume that.”

Those are the things you need to be able to say rather than, “I don’t know. I paid propellers to build my model and they’re smart.” You need to understand your own model. Those are all at the beginning mistakes about raising the money. The other mistakes we see are and there’s one that I’m always hesitant to say because if I don’t share it with you, I’m not giving you the full point of view. If I do share it with you, it sounds self-serving. You’re going to have to assume my integrity for a moment. I cannot tell you how many conversations we have with early-stage founders where I say, “I’m not expecting you to spend your money on the ten things I’d like you to do, but you should be spending money with a lawyer, for example, on your car manufacturing agreement, your trademarks and how you raise money.”

Those are three things that if you screw up, they will hurt you for a long time. We have seen people who have amazing brands that they ended up building great businesses around, enter into manufacturing agreements, because they didn’t get advice or something which literally cannot be terminated ever. You’ve now given a manufacturer who was the right manufacturer for your business when you were doing $500,000 of revenue in a year, the ability to hold you hostage as you grow or as someone acquires you. You think, “Chuck or Elliot gave me a form of a note.” “The investor added this other language over here which I don’t understand, but I don’t want to go to someone against that advice so I signed it.” It turns out it’s a huge roadblock in your series A round. Another huge mistake is not getting good advice around the most critical things.

It’s a shame the way most founders look at the legal expense and the way it’s set up so that oftentimes they’re coming to you when it’s too late, instead of being preemptive. I couldn’t agree more. It is not a shameless plug for Chuck but you need to come to your attorneys early as it relates to those three things more than anything else. Your co-man, money, financing, trademark, operating agreement, any employment agreements and things along those lines, it’s much better to have that conversation now than try to unwind for them or fix them.

First of all, it’s going to be a lot less expensive to do it proactively than reactively. Secondly, you’re going to be in a much better position, but I’ll also tell you that Chuck mentioned those three, your fundraising, and then he mentioned the co-man and trademark, but those latter two are often hurdles to raising money. When investors start doing their due diligence, if you don’t have a good co-man agreement or don’t even have one or your trademark isn’t clear and done, that’s often a no right then and there because you haven’t done those things.

Let me add one more mistake and this is the one that morally upsets me the most. It’s, “We’ll pick up a new client. Maybe they’ve done some early-stage financing and they are getting ready for their series A.” I look at their cap deal and I’m like, “Who are all these people who own equity? Did they give you money?” They are like, “No, but they promise to do X. They promise to do Y and Z.” There are a bunch of people out there who promise to do things for you for equity. At first, your answer should always be no unless you’re effectively getting to conserve some cash for some equity, but even that aside.

Let them prove their belief in you and their value to you before you start giving them some advisory equity, because you would not believe how many times I’ve seen big outsize advisory grants. I say to the entrepreneur, “What did they do?” They’re like, “It turns out they didn’t do anything. I didn’t do much, but they promised me they are going to help me raise money or they’re going to introduce me and get me into Whole Foods or this, that or the other.” The number of times it turns out not to be true is distressing and depressing. Be very careful about giving out any equity in your company.

It seems like a cheap thing to do at the beginning because it doesn’t take cash, but it can come back and bite you. Another thing that I want to say is Chuck and I are both involved in a lot of pitch events. I know that there are people reading this who despise the idea of getting in front and going into a pitch contest. Let me change your thinking a little bit around that. One is that, as you think about pitching, it doesn’t matter if you win or even do well in the event. It’s the opportunity to find mentorship and counsel in those types of events and learn.

One of the reasons why investors talk to you sometimes in a way that makes you feel uncomfortable is because they’ve had many more of those conversations. They’ve had hundreds of founder to investor conversations. You’ve maybe had 5 or 6. The more you can do it, the more conversations you can have, the more times that you put yourself out there to try to pitch what you’re doing, feel the question, answer the questions and hopefully, make 1 or 2 good contacts that can teach you, the less frightening this whole thing becomes. Chuck is great at giving back that way. There are a lot of types of events. We finished the Hirshberg Institute. Food Bites is going on. Look for those opportunities.

One of the things that’s critical when you do choose somebody, especially on the legal side, they need to know this space and industry. If they don’t, that’s a big blindside. There are plenty of good attorneys out there. Many of them are extraordinarily capable, but if they don’t know the nuances of this business, if they’re not aware of what’s going on in the market, if they’re not in front of other deals, then you’re getting advice from somebody who isn’t playing in the same sandbox. It’s important in my experience that you stay in the industry to do that. It’s like picking a specialist for a doctor. You don’t go to a general practitioner for brain surgery if you want a good outcome. Chuck, are there any last pearls and nuggets of wisdom that you want to share? How can people reach you? I know there are few people that would like to know more about working with you.

You can reach me by emailing me. It’s CACotter@HollandHart.com. I feel like you and I could talk about any sub-topic in this area for hours. It would be, find people you can trust, you trust their advice, you trust they’re not taking advantage of you and rely on your tribe that way. Listen to them, learn from them, but remember, you’re the center of that tribe. It’s your company or if you have cofounders, it’s your company along with your cofounders. At the end of the day, I’m sounding less like a lawyer, more self-help but believe in yourself as long as you’ve been humble enough to hear other people’s ideas first.

There are a lot of things that Chuck can provide guidance on. I’m going to leave you all with a story to show you one of the things that Chuck should not provide you guidance on and it has to do with navigation. Let me paint you a picture. Visualize this. Chuck and I were together in Eastern Europe for sixteen days and we’re going to a small UNESCO World Heritage site called Český Krumlov. It is a medieval town. We were looking for the hotel that we’re staying. For those of you who know us well, the idea that we each rented rooms in a former monastery is laughable in and of itself. I was driving. We were driving a black SUV and Chuck was the navigator trying to get us to the hotel.

The navigation kept telling us where to go. I kept following Chuck’s lead. We wound up driving through a UNESCO World Heritage Site, which had not seen vehicle traffic since horse and buggy days with a huge sign saying, “No vehicles allowed” to the point we have to fold our mirrors in to get down the road. There’s nowhere to turn around and we’re doing this for half a mile. My only word is that, when you pick your people to come around you to give you guidance and give advice, make sure it’s in the subject lane that they’re experts in. You’re not asking them to guide you in things that they have no clue in because otherwise, you may wind up driving down a one-way road in a UNESCO World Heritage site with no way to turn. I’ll leave everyone with that. Chuck, thanks. It’s always fun to do this with you. I appreciate it. Thanks, everyone, for reading and have a good one.

Important Links

• Chuck Cotter

• Holland & Hart

• CACotter@HollandHart.com

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