What to do about that first round of funding?

You are a co-founder. You and your team are committed to making it happen. Now you need money.

Your options: clear as…

What comes next has profound implications for your company. If you have some interested early stage investors lined up the critical question is: “How much of the company to we give up for $XX?” If these are friends and family, you’ll want to be fair (even generous) with them. Regardless of who they are, you shouldn’t cede more control of the company than is necessary or screw up the cap table (which will spook sophisticated investors down the road.)

So, what is the pre-money value of a good idea and a team that’s recently committed to making it happen? Reasonable people will disagree and you could spend a bunch of cycles on this without getting your product any closer to market.

You have two options: (1) price the deal and agree to a valuation at this early stage, or (2) kick the question down the road and structure your first round of capital as a convertible debt instrument. The former is clean and neat, but may hurt either management or the investors if later rounds prove your pricing was off. The latter costs some lawyer time, protects management’s stake, but could screw your early investors if your valuation has a large increase between funding rounds.

Here’s a link you to Mark Suster thoughtful post for a discussion on pricing your first round or taking convertible debt.