The best way to get seed funding without equity dilution

Participate in every startup event / hackathon / pitching contest

I have found the success formula to winning startup competitions !!!

Not really. But here are some interesting facts to consider if you want that prize money desperately without diluting your equity.

1. Go for contests or startup events with cash awards already announced before the event — there is a lot of scope and it will be fun to participate
2. Select the events based on your best fit to the the theme or topics
3. Do not enter all contests randomly — there must be a specific reason — for example to network with fellow entrepreneurs in same domain
4. Elevator pitch contest is a waste of time — how much can you impress the judges with just a few sentences and 3 min time allotted
5. Business plan contest is the big deal — it will help you fine tune your business plan and develop it further — even if you don’t win it, it was well worth the time spent on it
6. If you get the chance to pitch on stage — only one speaker, do not try to squeeze all co-founders on stage, two people talking on stage is a recipe for disaster
7. Focus on the problem and your solution — don’t waste time on competitors, spend very little time on team details, a quick intro to every one in the team highlighting their unique set of skills should be enough
8. Be clear and concise, use short sentences with meaningful impact keywords
9. Practice the pitch 1000 times or even more — the more practice you get the better, you should be able to recite it even in your sleep :-)
10. Respect the judges and fellow contestants — lose your ego, we all are on the same boat

From idea to proof of concept

Most startups in developing countries like India are suffering from one common factor — how to get the seed funds you require desperately to get started.

Seed funding — was non existent in India 10 years ago due to the lack of seed investors and the market was dominated by VCs and Banks. Banks will not fund a startup unless it is 3 years old with all the required paperwork such as IT returns, P&L statements, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) etc. Getting a bank loan without collateral is very difficult. So most startups end up bootstrapping their financial needs. Another option is to raise seed funds from friends and family.

Finding the ideal Co-Founder is like sharing a cup of coffee

Co-Founders & Issues with Shareholding patterns

Most startups in IT sector normally have a technical guy (the Founder) and a MBA guy (the Co-Founder) to run the show. This is not the case in other domains such as healthcare where a single doctor (a docpreneur like me) wants to start a company but the law in India says that a Private Limited company should have a minimum of two Directors. I ended up giving away more than 10% of equity to my Co-Founder who had an Executive MBA degree from UC Berkeley and more than 15 years of business experience. Later I realized my mistake when people told me that 10% is too much for sweat equity. There are companies which offer only 2% as sweat equity to begin with and increase it every year. The longer you stay the higher your stakes in the company up to a maximum of 12.5%. This is called vested equity model. There are many variations to this model. In India many startups have no clue about this model of giving incremental equity to Co-Founders who are contributing to the business by working full time.

I have seen many startups make big mistakes in equity allocations. One of my friends in Bangalore started a Biotech Company with 8 Directors and all of them had equal stake (12.5%) in the company. So we need a consensus from all 8 Directors / Shareholders to make any executive decision. It just won’t work. Investors will run away when they see such ridiculous shareholding patterns. Someone responsible enough (like the Founder & CEO of the company) should have higher stakes so that they don’t have to call for board meeting for making everyday decisions.

After making a lot of mistakes, I found out that in order to be a Director in a company in India the only legal requirement is to apply and get a DIN number. There is no law that says every Director in a company should be issued shares. So technically I can have a Co-Founder who is a Director with no shares in the company. That way I own 100% of the company without giving away equity to people who may not stick around for a long time.

Takeaways from this life lesson

If you are an entrepreneur and about to incorporate your startup in India then please follow these guidelines for share allocations

1. Founder 75% and Co-Founder 25% — if both are full time and expecting an investment that will subsequently dilute 50% of the shares — post investment the shares will become Founder 37.5% and Co-Founder 12.5%
2. Not more than two directors in a startup — put everyone else as shareholders — do not give more than 5% for each shareholder
3. Need a tech guy and MBA guy — very attractive for investors
4. Do not bring 3rd party agencies in seed round — only validated Angel investors or Seed Fund agencies with good legal standing
5. Do not go for VCs in seed round if you don’t need all the cash right away
6. Participate in as many startup events as possible — prize money is without equity dilution but taxable as “income from other source”
7. Spend less money on travel and try to save money wherever possible — I always travel by bus for short distance, take public transportation, use taxi for urgent meetings, trains and planes for long distance, advance booking to save on tickets, avoid peak hours if possible, eat in good restaurants but not lavish, we need safe and hygienic food, cannot afford to get sick during travel
8. Take 50% of expected salary — being a startup means that you have to be hungry all the time. If you get a fat paycheck then you will forget hard work and start relaxing — less is more — just to pay your credit cards and recurring bills
9. Be debt free — debt will create a sense of helplessness — the sooner you are debt free the better you can focus on your business
10. Focus on the core business activity — last but not the least, let us not forget why we are here — to run a business

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