Sept. 15, 2020

Stock buyback - how does it work in a startup? By Mike Preuss.

Stock buyback - how does it work in a startup? By Mike Preuss.

Mike Preuss, Co-Founder and CEO at Visible.vc explains how he managed to raise the first rounds of funding and how later on his company bought back some of the equity it sold to its investors. We also discussed the importance of following up with current investors and how it should be done.

Connect to investors (completely free) here: https://connect.visible.vc/

Follow up with investors here: https://visible.vc/

If you are too early for VC (and even Angel) funding, apply here: https://form.typeform.com/to/vT8gVQDG


Transcript

And today as a guest speaker, we have Mike proofs Co, founder and CEO at visible that funding. And then it brought back some of their equity. 

So, today we'll talk about the process called stock buyback and how it works in the startup world. So, Mike, let's kick off by you giving us some background on yourself and on feasible. We see. Awesome. 

Appreciate you have any on the show looking forward to chatting. So, yeah, in short I started visible back in two thousand and fourteen. Really? 

With the goal of I'm helping founders and giving them a better chance of success and at our core, 

we help founders produce investor updates that get sent to all of their investors and potential investors and more recently launched a tool for investors to monitor their portfolio help with their founders, 

and give the companies a better chance of success as well in terms of my background. 

I grew up in the Midwest, so I grew up and in Chicago stayed in school there, but ultimately joined a, a startup called the form spring, which was originally based in Indianapolis, but moved out to the Bay area. 

Once we raise some, some venture capital for that business. So I spent the beginning of my career at form spring in San Francisco. 

And then, from there, that's where I kind of fell in love with, with startups with venture and decided to start visible back in two thousand and fourteen. 

So first question that I want to start with is, when did you decide that it's time to go and raise that VC money to when was that point? You know, do you have some corrections already? 

And you're, like, okay, we need to scale our business up or do you just have some sort of prototype and you've decided that, you know, to get some traction we need some BC funding or what was that moment when you're like, okay, yeah. Now, we need to go out and raise some money. Yeah. 

So I started visible, you know, back in two thousand and fourteen. I think it was kind of a unconventional. 

I I started it with venture studio to be interested is actually, so one, which is, which is now high alpha in Indianapolis and one in sprout box called Dropbox. 

And so we, 

you know, 

I think it was from the first people that kind of pioneered that the venture studio model and, 

so the we built the prototype, 

and then use that to go raise a little bit of of early stage capital to to really take the business to market, 

so we had a prototype and and wanted to use that to go and take the business to market. So for us it was I'm more of a I need to. 

Bring the business to market more than anything else. So, a lot of people I've seen raising my one of their major issues while fundraising is that they have no traction whatsoever. And how do you think 
you've got over that barrier? 
So, what do you see, helps you most trace that initial round of money? Yeah, that's a that's a great question when I do this for a living with a lot of our customers. 

And so I think when when you don't have traction or really the core metrics that you're sharing with investors, then the investors are really buy into two things. 

They're buying into the story and they're buying into the team and for us at. 

Visible our team was investors, so we kind of had some pedigree around the table in terms of who was incubating and starting this business. 

And then we had myself who the first time founder, but definitely had a lot of experience with some of the domain expertise. We were doing visible, which is around and and that's the reporting board manage and things like that. 

So we had a good story around the team and then just our story in general is really around. This idea of there should be more startups and ever more investors. 

And ever, and that's all I need to continue to grow because companies are staying private longer than ever. And so I think the story, right as the other really core piece of any early stage fundraise before you have traction, which is, how big is this market? 

How many companies are in this market and why do you need venture capital? 

So yeah, for for us, you know, I think when when you are calling Pre traction, it really comes down to the story into the team. 

Absolutely, that's completely true. And let's talk about one more aspect of this early fundraising that's still kinda debatable, even for me. I have no idea of what's the right answer? 

I think there's just no right answer, but for you, do you have the exit strategy from very first day of fundraising, or did you do actually pull in on that? Yeah, we, we do not. 

And when that question gets asked to me, whether that's from a potential employee or an investor, or, you know, I'm just doing a podcast. I was kind of break it down into a couple parts. 

I say if we build a company that people love to work for first and foremost, so you're taking care of our team and work at visible and we take care of our customers making sure we're building a great a great product experience. 

Something, that's easy to use easy to buy easy to cancel and for us, most importantly easy to get support with. And I think then it's like, yes, then the economics of of an acquisition will take care of itself. 

Naturally, if we can, if we can build a company that people love to work for and a product experience, people love to buy. Then we'll have a great outcome. No matter what. And so we really think about an exit or an exit plan or or acquisitions. 

And, and that's certainly hasn't been in any of our. 

Kind of fundraising materials where we talked about the business and something interesting that actually I saw online, I think was circulating this weekend. Hunter walk from homebrew. Who's kind of a fairly prominent I would say early stage investor. Definitely active on Twitter. 
I said that overall the pitches he's ever receiving of tens of thousands at this point. I don't think they've 
ever back to company that had eggs and slide in it. 
And so I think that's kind of proof enough. I think the only people and then I saw someone else about this actually say this tweet as well. But, you know, I think the only people that would ask you for an exit slide are probably people you don't want on your cap table. 

I think those are like, the Super old school investors that are investing and some sort of angel club, right? Where they're like, oh, we want to know what is being protected and has an extra slide but those are I would call those unsophisticated investors. 

So I agree. I don't know there's a right or wrong answer, but I think it's definitely a football. If you have an exit slide on on your your pitch deck. 

Right, yeah, that's Super to build out a topic and to be honest, I would recommend, you know, not to include because the more asked this question the more I hear negativity about this. 

Yeah, so just don't risk getting, you know, if people ask you about the exit strategy, just tell them, but to not include it in your pitch deck. So, next question is about our preach recall. 

So, there you mentioned that you also actively help founders do fundraising. Sometimes not actively. Sorry how exactly do you do this? 

Yeah, 

so with with visible for the longest time, 

we, 

we really just focus on investor updates and the one thing we preach and you continue to talk about with fundraising, 

is that one is yes. 

And something that you need a manager process, and it's probably the most similar to a B to B, enterprise task funnel. 

So you have, you know, you're, you're identifying prospects you are then getting them into some sort of hopefully marketing cadence right? 

Where they're considered, quote, unquote, marketing, qualified leads, like, hey, these are people that are probably would be interested or ideal customers of of my product. Then I have become a buying decision, which would be my fundraise itself. 

And then I have the customer success function, which is my current investors. Right? How do I engage and retain money? My investors. 

And we always considered ourselves to be in that customer success function of the funnel, which is an incredibly important piece. Right? 

Which is how do I make sure that the investors currently in my business will invest again or invest more in future rounds because of that's a really negative signal right? 

If I said, hey, concert, I want, I would love to have you invest you invest and then I asked you, hey, let's participate in the next round and you say no, that's a big red flag because a lot of investors are gonna say, well, hey, you have the most contacts and most history of this business. 
So something must be wrong with it. And so we get, you know, meet we'd consider ourselves. Would 
that investor updates these? I'd consider that to be your customer success function. But now we're helping founders in both kind of the middle of the funnel, the top of the funnel. 

So at the top of the funnel, we, we just launched invisible connect. So,
if you're good to connect that visible that BC,
you'll see, 

that's it's a free open tool very similar to punch base or or a pitch book, 

but a tool that we've built, 

that helps you kind of filter and find the right investors for your business that you're targeting, 

or thinking about the right people so that could be by stage doing a seed stage MSAs business. 

Maybe in the eastern seaboard and doing prop tech, for example, will let you filter by all those and hopefully expose folks that you may maybe don't even know. That'd be great fit for your business. 

And so we provide that, but then the really interesting twist we take on it is that that actually integrates with a little lightweight fundraising siren. 

We've built directly with well, and click you can add any of those people to your fundraising pipeline within visible and manage that. 

And then, 

from there, 

send those folks, 

you know, 

investor updates overtime, 

because a lot of customers will send a potential investor update or two to what they call friendlies maybe once a quarter, 

which looks like a version of your update the meeting has some things redacted like cash or other sensitive information, 

but can include a lot of great high level things about your company. 

Because we think, like, hey, you're nurturing above these investors that might be in your upcoming round, then you're gonna have a faster fundraising cycle, more competitive terms and you'll remove a lot of that getting to know you relationship building. 

Because at the end of day, it is relationship building so hopefully, this just makes the process more efficient. So just to kind of play that back. 

Yeah, we help with finding the right investors getting them and managing the process within the fundraising pipeline we have, and then using updates to nurture them whether you're currently in a fundraising cycle or even office fundraising cycle. 
But people that might be a good fit for for your business and upcoming rounds. Perfect answer. 
And by the way, I took a look at, looks really simple to use and by the way increases stage section, a lot of investors with a check size of between twenty five thousand two. 

Four hundred thousand, so, based on my knowledge, a lot of you guys who, and girls or at least into this spot. Yes. A lot of you are looking for that kind of money. So I'll definitely make sure to leave a link in those groups in this episode. So that you can take a look at. Great. 

Yeah, I think that just a quick note. Yeah. Thanks for doing that. And preceded see, I think, is where we have a lot of value, so anyone that has feedback, it is a product we literally just launch and also shoot us a note. We'd love to hear from you. Perfect. Perfect. 

Yeah, 

I'll make sure that that link in this group, 

and if this episode align with the itself next question, 

that's I don't get asked as frequently as I wish to be asked the question that I personally have is, 

like, 

how often should you, 

you know, 

get in touch with your old investors or with prospect investors then update them on the course of the company. 

Yeah, that's a good question. And something. We've put a lot of thought and time and research into and have our own data set now and really at the end of the day, I would say monthly is the best cadence. 

When you think about a startup on a weekly basis, it's that's just a lot of overhead to probably manage an investor update on a weekly basis. And maybe things aren't changing that frequently week to week. 

But if you think about quarterly in extrapolate ninety days, so much can happen in the business within ninety days, then you're probably too much is happening. 

And you're gonna have to write some long winded email update, and just too much times gone between. So, I think for almost all businesses, monthly is a great cadence. 

It allows you to kind of reflect in the past thirty days, which is my favorite part. Holy C*** we've accomplished so much in the past thirty days. What did we do? Well, what did we do poorly? Maybe what are the things we should start doing. 

So, I think thirty days is as a great cadence for really any stage business, and then on top of that. 

I think it's great for both, you know, investors and potential investors because at the end of the day, your goal is to stay top of mind. 

For either your current investors or potential runs right? 

Just just by the nature of the business there's so much happening and investors portfolio companies are fundraising hiring, doing BT deals, and investors are sourcing new deals. Right? 
So, there's a lot of noise that's happening in. So, you just wanna make sure you're just top of mind because if you're hiring and looking for a customer or fundraising, and investor is talking to someone, they're immediately gonna think of you if you're if you're being constant with that. 

So, I would say a quick answer is is is monthly per lot of businesses. That's a weekly. I will see that with accelerators. 

You know, if I'm going through an accelerator, it's a three month program, I might send a very quick weekly update to advisors and mentors and potential investors. 

And then, maybe you get later stage growth type companies where it is quarterly, because we don't have a more formal process and closing of the books and things like that. But I would say, you know, call it preceded series. B, a monthly cadence is perfect. 

Great answer a great answer justify that. Just perfect. I totally agree with it next question that I get pretty frequently. Pretty frequently is, how much time should a founder basically dedicate to the fundraising pros? 

So, what's the adequate time frame of fundraising from the very beginning where, you know, they're just trying to get in touch with investors getting to know each other establishing that relationship until the round is closed. 

Yeah, I'm with pretend the founder doesn't have any network. L. yeah, that's that's perfect. There is that very weird company right? That's like the hardest thing. 

The founders were successful in the previous venture and doing something new, and has a built in network. 

You know, you hear of those deals happening in weeks, but I think the reality for call in ninety percent of companies, if not more is that it is a month, long process sorry months, long process. And I don't have great data on this. 

I'll be curious to hear your thoughts, but I, you know, I would say, call you're raising a preceed or seed round from start to finish. It will take you at least three to four months. 

And I always say,
like,
whatever you think is going to be like,
your guest double it at least right I mean,
keep in mind that,
even just from the day you get a term sheet one of them is wire bank. 

That's a month right there. That's typically thirty days that happened in that process. So you're talking to thirty days from a term sheet so you've got to back yourself up from a term sheet. Okay so I'm gonna have, you know, maybe call it two weeks. 

Finalized kind of partner meetings so, okay, now we're at six weeks back myself up from there. I'm doing intro meetings with with folks and maybe some like, diligence that might be a month of work. 

Probably where a lot of a lot of time spent is just finding the right investors and getting that initial momentum built. 
So, I'd be curious here when you think, but I would say it's call it a month, long process, and typically anywhere from, you know, call it three to six months, just depending on how you're running your process. 

Right? I see. That's my estimate. If you don't have any work, that might take even longer. So, if you, you know, just a tiny bit of network that should take you. 

I would say, like, six months probably so, four months versus those relationships and then and preparing all the slides all the information. 

That investors will ask you and then two months, I mean, one month actively reaching out to the investors, you found, you've actually should prepare the big list of investors you'll reach out to and then one more month for that. No. Final closing thing. 

Yeah. Six months. I would say, in my opinion, that's the timeframe for fundraising process for initial fundraising process, by the way. But let's talk about the fast round that you've seen. 

You've mentioned routes that have happened in weeks right? Is that what's the name of mail defenses around? You've ever seen your life. 

Yeah, it's hard obviously for this is just from personal experience. I'm sure there's been rounds closed and in in short and timeframe, but I can't speak to. 

So, when I was working at form spring, back in two thousand and ten, I wanna say our seed round was completed in two and a half weeks. So it was pretty quick to give you an idea. 

The type of company form spring was we went from zero to a million users in forty five days, and then to ten million dollar sorry? In five months. 

So it had hypergrowth behind it. And we are fortunate to get introduced a couple prominent investors in the Valley. So that, that definitely helps. 

So, yeah, I think it was two and a half weeks was the past as I've seen, but that is by far, I would say an outlier in terms of fundraising timeframes. That's really interesting and extremely, extremely fast. So that's worth there. 

So, now, let's move on to kind of something that was supposed to be the major topic for the day, which is start buybacks on our printer. 

You, you've mentioned that, you know, by now, you've bought out some of the equity that you sold to the investors. Basically, can you elaborate on that process a little bit? 

Yeah, I won't get into just specific just for, you know, to just to keep it all rather confidential in terms of the mechanics of the mat. I'm happy to just speak to that. 

So when we first started the company, 

we raised some venture funding for the business and so this is back in two thousand fourteen where we started visible and so late in twenty, 

nineteen we had an offer for the business and decided not to sell. 

But through, that can just uncovered, hey, who was willing to maybe sell their position invisible and it would be happy with with, you know, any type of return as we uncovered that through that process. And then that led to a process of okay. 
Well, if this investor is going to sell their portion of equity investment, then we have to make that offer available to all current investors. And so you kinda go through this waterfall of who is able to buy the stock and adequate terms. 

But we were able to uncover, hey, this investor is willing to share sorry willing to sell some of their shares. And so we went through that process. It is definitely you're juggling a lot of B*** in here at one time. 

And it's something that, you know, obviously took a long time. This is I think it's important to remember that. 

We didn't raise capital a year ago and in two thousand and nineteen or eighteen, right? This is kind of equity from be raising the beginning. So, I think for these particular investors, hey, we're happy to get out now and get a little bit of return. 

I think it would be harder, right to buy certain investors within, like, a shorter time period for us. 

So, yeah, we were able to uncover it work with all the investors in the cap table and move about, but definitely time consuming and difficult to manage. 

Right, right, absolutely.
And a real question is that I had in my mind, 

I've only heard about stock buybacks in large established companies where those companies had those huge multimillion by stock buyback plans in place from the very beginning. 

How does it? Workforce start? Yeah, for us, I will throw the caveat on that. I'm I'm not a lawyer,
but there,
I can't recall the exact term off the top of my head, 

but there was basically an offer a letter that was produced by the investor sends a letter that says, hey,
I'm willing to,
to, 

to sell these shares.
And they send that letter to me, business cases, electronic emails. So, emails fine. 

I didn't send that letter out to all shareholders saying a oh, and then there's kind of like, depending on again, this kind of depends on on how your company is up in bylaws and all the other kind of documentation for the corporation. 

But for us, it's a, hey, the company has the right to buy these areas from the investor if they want. 

And if we decline as a company, then we can, we provide notice to all investors saying, hey, you have thirty days to write us and say. 
Hey, you have the ability to buy your permitted share within the next thirty days, or you can decline and 
then from there, there's probably also what's called Co sale right? 
So that investor might also say, hey, wait, if investor a, is selling their shares then I should be able to sell my shares as well because that's not fair. Because, you know, we own the same type of security. 

So they're able to also then say, hey, I will offer my my shares of sorry can we actually recap the sparks? 

Let's let's pretend that you didn't give me an answer yet. So let's just start over. It works. Cool. Awesome. Yeah, I'll record it and try to make it a little bit better. 

Do you want to record from the moment when you asked for the very first question we asked you to elaborate or from the point where ask you how it work compared to, you know, I know how it works at bigger companies. But how does it work in a startup? 

Yeah, I'll I'll just share how it works with the startup. That's fine. Sounds good. Sounds good. Alright and just keep talking. Okay cool. Yeah, so for us and visible in our startup, I will throw the caveat on here at that. 

Well, I'm not a lawyer, so obviously consult your lawyer here. It also probably is dependent on your corporation Docs and how it's all set up from, from a legal standpoint. But I think ours is probably pretty standard. 

So here's what happened the investor can wrote me a letter, as he said, hey, Mike, we're willing to sell a price and then receive that letter. And then a couple of things happen. 

One is the first available purchasers, the company in this case. So, we have the right as a company to buy the shares back from the investor. And then, in the case, we would want to decline. 

We're able to decline and then offer that up to all of our investors and say, hey, investor a, selling their shares with any of you'd like to buy your pro rated. 

Allocation of those shares also then there's also what's called a, a CO sale agreement typically especially when you're dealing with preferred security like we are and they, they are able to say, hey, investor able to sell their shares. 

That's not fair. I should be able to sell my shares as well. So any other investors can also offer up to, to sell their, their appropriated versions as well to kind of juggling a couple of things. You're juggling. 

Who's willing to participate in the cell and I'm sorry the purchase of these shares and then you're also going to juggle who is going to be maybe interested in selling their shares and making that all work and, 

and the tricky part as well as so a lot of times investors, 

whether they're buying or selling might have certain kind of ownership targets in mind or allocation. 

And so if everyone decide I want my allocation, then a deal may not even happen. Right? Because invest was like, well, I wanted to buy or I wanted to. So twenty percent, and now I can only sell ten percent, for example. 

So you're, you're kind of also working with investors in that case. Explain hey, I really need the deal to get done this way because of this thing. And if not, then the, nobody's gonna get done and then maybe. 

Something we want to do from a strategic angle is not gonna work. So I think it's, it's always just being upfront about the communication involved working with all the investors and and sharing kind 
of what's happening throughout that whole process. 
So, yeah, you're kinda juggling all of those different variables at the same time. Right sounds pretty complicated to be honest, both from the strategic point of view, a legal point of view. 

So, let's not get into the technicalities of it and quick question that I forgot to ask you, personally, lab asking founders, it's could go back in time and change something in your fundraising process would be. 

So, maybe you would raise less money or in the country more money or were you raised from some other or other type of funding, or would be what would be. 

Yeah, 

I think from me, 

as a first time, 

founder, 

I looked back at our first capital raise and take the mistake we made was, 

how are we going to use this money or what do we need it for you know, 

it's kind of a first time a first time thunder you read all these articles about fundraising and seed rounds and and how much more raising and so you gotta oh, 

yeah, 

I need to go do that. 

And for us invisible, 

we were Fortunately we got a term sheet and have great investors and said yes, 

but I think I struggled with the CEO of how do I effectively deploy that capital especially kind of when we raise that money. 

I would say we didn't quite have product market that. Yeah. And so I think we made we made hires and maybe that we didn't need to make. And so I think for me, the biggest mistake was just what is the purpose of this capital? 

And I think that's maybe the biggest thing binders get caught up with right? Because when you're raising capital, it shouldn't be the subsidized burn, which I think is what we were doing. Right? It should be to accelerate growth. And those are two different things. 

And so, I think, you know, for me, it's, it's making sure early later on, as I became more experienced as an operator and a founder. I would say something along the lines of, like, hey, if someone gave me a two million dollar check today. 

I don't know where that gets us compared to a half million dollar check. I think that's important. Right? Because usually kind of raising capital is, is especially venture capital is the most expensive form of financing for your business. 

And so you better make sure you have a great idea of how you wanna spend that money because fundraising is time consuming and expensive and time, 
but it's very expensive in terms of the cost of capital that your you're providing. 
But it's, it's such a catch twenty two, right? Because then you could also say, if someone's off, if someone's willing to give you two million bucks in a million, should I take that too? In case? Something goes wrong. 

I don't know if they're, I don't think there is a right or wrong answer there by the way, but I understand where you could you can really run into just a lot of pain thinking through that, because everything has its pros and cons. 

Absolutely. That's the pain of being the SEO off this week. 

Those who agree with Mike that basically, one of the most expensive types of fines in the world, basically, you can go to fundraising dot com and there is a. 

Specific tab saying alternative sources of capital, which is basically everything, except for BC money. So, take a look at it ago. Curious. Yeah one last question. And then we'll wrap it up as a call to action. 

What's the one thing you want to do? As soon as the episode is over. 

Yeah, go to connect visible the see and check it out and send me an email. Just get visible. Obviously would love to hear your feedback. Maybe the types of investors you'd like to see in there. It's something. 

And, you know, we talked about a little bit on the episode. I think it's, it's perfect for the audience, given everything. I know about fundraising radio. So early stage founders, looking for funding. We built. This is a free resource for that. So, check it out. 

Would love your feedback it's something we have a full time person working on, and we're dedicated to building and growing it and making it better. That's awesome. That's that's so cool that you eventually take a hole person to work that full time. 

That's really nice. And I'll make sure that I include both links to visible BC and connect as well to see. And also I'll include the link where you can submit to your idea. 

And I'll personally review and maybe pass it on to my network of mentors and investors to definitely go to the description of this episode as usually it can be a ton of useful resources there for you 

and have a good day.