Seed Fundraising — When and When Not to Use an Investor’s Name
Potential investors may ask who else is investing in the round, and — before you answer — you need to consider the potential consequences.
Seed fundraising places founders under significant pressure from a constant rush to close, to the slew of investor questions to secure their commitments.
Often times, potential investors will try to find out who else is investing in the round; and before you answer, consider the potential negative consequences.
Here’s when and when not to use an investor’s name:
When Not to Use Investor Names
Angel Soft Commitments
When an Angel investor expresses soft commitment interest that leads to a “reservation”, you cannot use their name. However, you can use their reservation amount in later discussions.
Why: Given this Angel is still a likely “No”, any other investor asking them about your company will likely receive a negative reference.
When in Discussions with a VC
You cannot use a VC’s name with other potential investors until after the VC has committed (same as with Angel investors). In addition, because VC check sizes are so much larger, you cannot use it as a soft commitment.
Why: You risk the round looking so full that other investors will not be able to invest the amount of capital they’d like, and thus, the opportunity is no longer interesting.
When You Receive a VC Term Sheet
When a VC commits they usually give you a term sheet. Do not be tempted to show the term sheet, or reveal their name to other VCs.
Why: VCs know one another and discuss deal flow often. This can result in negative collusion between the VCs, instead of competition. Alternatively, the VC who gave you the term sheet could be discouraged on the investment.
When You Can Use Investor Names
After the Money is Wired
When any Angel investor, or similar check size, has signed documents and wired the money to your account or escrow, you can use their name.
Why: This investor is now a great reference for you with potential investors. You can use their name to demonstrate momentum in the round and they may be willing to speak positively on your behalf to other potential investors.
After a Term Sheet is Signed
When you’ve signed a term sheet with a Seed Fund or larger VC who will lead your round; you can use their name with other potential smaller investors.
Why: Fundraising rounds often require more than a lead investor to be filled. Your signed term sheet will make it much easier to convince potential investors to participate because they know someone else is putting their (significant) capital behind your company.
The pressure of fundraising is intense. Prepare and practice your responses to hard questions, so you avoid the common pitfalls.
This article is part of a series on Seed Fundraising.
1. When to Raise Money
2. How to Build a Deck
3. VCs vs. Seed Funds vs. Angels
4. How to Get a Meeting
5. How to Request an Introduction
6. How to Get Early Momentum
7. How to make a Good Pitch Great
8. The 5 Most Common Pitch Mistakes
9. Meeting Requirements
10. The Basics of Meetings
11. How to Handle an Angel Investor Meeting
12. Know these Numbers for your VC Meeting
13. 4 Investor Gotcha Questions
14. How to Follow-Up After an Investor Meeting
15. How to Close the Lead Investor
16. The 4 Stages of a VC Process
17. How to Raise a $2 Million Seed Round
18. Go from Investor YES to Cash in Hand
19. When Investors Say Yes but Mean No
20. When and When Not to Use an Investors Name
21. Stop Making These Common Fundraising Mistakes
22. How to Avoid Bad Terms that Kill Startups
23. What to do After Receiving a Term Sheet
24. Term Sheet Problems Part 1 — Money Talks
25. Term Sheet Problems Part 2 — Boardroom Blues
26. Term Sheet Problems Part 3 — Side Letters
27. 10 Traits of Successful Founders
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: ash@sterlingroad.com
Thanks to Kaego Rust & Bethanye McKinney Blount for their help on this article.
Photo by Sai De Silva
