UzCombinator
UZ
EN
Startup School
Curriculum0/19
Module 1
Idea and problem
  1. 1What a startup is, and how it differs from a small business4 min
  2. 2Finding a real problem4 min
  3. 3Judging an idea: market, timing and team4 min
  4. 4Co-founders and the team4 min
Module 2
Customers and validation
  1. 5How to run a customer interview5 min
  2. 6Who your first users are4 min
  3. 7Testing demand cheaply5 min
Module 3
Building the MVP
  1. 8What an MVP is, and what it is not4 min
  2. 9Building fast: code, no-code and ready-made tools4 min
  3. 10Launching and collecting feedback4 min
  4. 11Signs of product-market fit4 min
Module 4
Growth and metrics
  1. 12Choosing the metric that matters4 min
  2. 13Unit economics: CAC, LTV and margin4 min
  3. 14Your first growth channels4 min
  4. 15Keeping your users4 min
Module 5
Fundraising and pitching
  1. 16Do you need funding? Stages and sources4 min
  2. 17Building a pitch deck4 min
  3. 18Meeting investors4 min
  4. 19Terms and valuation basics4 min
Module 5Lesson 194 min

Terms and valuation basics

Fundraising and pitching
SAFEs, convertible notes and priced rounds; how valuation and dilution are worked out.
Once an investor says yes, the conversation about terms begins. There are many terms at this stage, and they feel unfamiliar at first. The aim of this lesson is to know the basic ideas well enough to talk comfortably with a lawyer and an investor. Before signing any document, always go through it with an experienced lawyer.

Three main instruments

  • A priced round. The investor puts in money and receives a specific share of the company in return. The company's valuation and the price of one share are set in this round. It is the clearest path, but it takes the most paperwork and time.
  • A SAFE. A simple agreement for the right to future shares. The investor pays now and receives shares in the next priced round. There is usually a valuation cap or a discount, which ensures the early investor gets shares at a better price than investors in the next round. The SAFE was created by Y Combinator, and its standard documents are published openly on their website.
  • A convertible note. Similar to a SAFE, but formally a loan: it has an interest rate and a maturity date. It converts into shares in the next round.
Whether and in what form these instruments can be used in Uzbekistan depends on your company's legal form and on current law. Some founders set up a holding company in another country for investment. That is a major legal and tax decision; make it only together with a lawyer and an accountant.

Valuation and dilution

Two terms: the valuation before the investment (pre-money) and after it (post-money). The difference between them is the money invested.
A simple example, with made-up numbers. The company's pre-money valuation is 4 million dollars. An investor puts in 1 million dollars. The post-money valuation is 5 million dollars. The investor's share: 1 divided by 5, which is 20 percent.
Dilution works like this: because new shares are issued, existing owners' percentages shrink. If two founders each owned 50 percent before the round, after the round above each is left with 40 percent. The percentage went down, but the company is worth more, so the value of the stake may well have gone up.
Every round dilutes you, so take future rounds into account too. An equity pool for employees (options) also dilutes the founders; include it in your calculations.

Other important terms

  • Liquidation preference. The investor's right to get their money back first when the company is sold or wound up. Its terms have a big effect on how much the founders receive.
  • Pro rata rights. The investor's right to invest more in later rounds to keep their percentage.
  • A board seat. Whether the investor gets a vote on the company's important decisions.
  • Information rights. Which reports the investor receives, and how often.
  • Founder vesting. Investors often require founders' shares to be earned over time. This was covered in the first module.

Do not look only at the valuation

The highest valuation is not always the best offer. A valuation that is too high can make the next round harder: if the company does not grow as expected, the next round happens at a lower valuation. Simple, fair terms, an investor who really helps you and enough money to reach the next stage often matter more than a few percent more on the valuation.

What a term sheet is

Before the final documents, an investor usually offers a term sheet: a short list of the main terms. It covers the amount, the valuation, the type of instrument and the other terms listed above. Most of a term sheet is not binding, but some clauses can be, for example confidentiality or not talking to other investors for a set period. So review it with a lawyer before signing too. The terms in the term sheet become the basis for the final documents, and they are hard to change later.

Try this

Write down your company's current ownership in a table. Then add two hypothetical rounds and calculate each owner's percentage after each one. Go through the calculation with a lawyer or an experienced founder, and list every term you did not understand.

Resources