By Allison Williams, Director of NVP Labs

“How do I secure a lead investors?” asked an audience member of a panel at which I recently spoke.

I provided a thoughtful answer at the moment, but the question continued to linger with me. As I stood on it for some time, I realized that the answer is much less straightforward than many think.

As the Director of Newark Venture Partners’ accelerator program called NVP Labs, I have screened nearly 2,000 companies for our program. Additionally, I have previously founded a company and held senior startup roles. All of this experience has helped me understand that the answer to this question depends on what stage you are at.

For companies raising an angel or pre-seed round, you don’t need a traditional “lead”:
If you’re raising your angel or pre-seed round, which is often (but not always) less than $1M of new capital — you will most likely be raising on a convertible note (or maybe a SAFE or KISS). Regardless, money that you raise will likely come in on a rolling basis (vs a single close), and may be raised over months or even quarters. In this case, you do not need a lead to price you.

What I would recommend is that you pick a cap and discount that is “market.” You may want to even raise slightly below market. Why? You want interested investors to focus on the upside you offer rather than an aggressive valuation that you are demanding. In these early stages, your business is at its most vulnerable to going bankrupt — this is not the time to fight for a certain valuation.

“Non-blinkable” terms for an angel/pre-seed investor are $2-3M cap with a 20% discount. To understand what your ownership as a founder will look like over time, mess around with this model (available for download). In this hypothetical model, with an exit that occurs after a Series C round, and the founders walk away with 26% of a billion dollar exit (aka, $250M).

So, when an angel investor asks, “what are you raising on?” Don’t say “I’m waiting for a lead.” Say confidently, “I’m raising on a convertible note at a $3M valuation.”

For companies raising seed and beyond, having a lead comes into play:
As a general rule of thumb, for any round of financing, you are going to give up at least 25% of your company, post-money, per round. Why? This is the stake a venture firm needs in order to see the returns required. So, if you want/can raise $2M, you’re looking at $8M post / $6M pre. If you want to raise $4M, you’re looking at $16M post / $12M pre. You can see in the above model that with each new round, ~25% stake is taken from that round’s investors.

Where you fall in the range of standard depends on a few factors. But at the end of the day, the valuation will land at whatever the market will bear. For companies raising Seed and beyond, my personal recommendation is to not approach investors with an assumed price tag.

As an investor myself, I think it shows sophistication when a founder says, “I’m waiting to hear from the market what kind of value makes sense.” Also, negotiations best practice it is to wait for an initial offer and then counter . And while it may be best to have prospectors start the valuation negotiation, be prepared to with a desired valuation and a minimum valuation you could accept and a rationale for those two figures.

My final thought: Don’t spend all of your time trying to perfect the fundraising process.
The best way to attract investors is to show growth and market traction. Do this, and you’ll find that leads will seek you out. Looking for guidance and seeking mentorship is a great way to develop your network and build relationships that can turn into lead investors.

Founding a startup is not an easy process, and for questions like these, there isn’t always one right answer. As a new cohort of founders begin the NVP Labs program this week, I look forward to exploring a new set of challenges and tackling them with fresh ideas – and bringing them to NVP’s blog to share with all of you.

NVP is currently reviewing applications for our Spring NVP Labs cohort. This is a 12-week program that provides personalized execution support in Sales, Marketing, Finance and Strategy. We are looking for visionary entrepreneurs building B2B technology with $10 – $50k in monthly recurring revenue. Learn more about our program or submit your application here.