#150 - Startup School Week 9 Recap - Carolynn Levy on Modern Startup Financing and Jared Friedman’s Advice for Hard-tech and Biotech Founders

**Craig Cannon** (0:00)
Hey, how's it going? This is Craig Cannon, and you're listening to Y Combinator's podcast. Today's episode is a recap of the ninth week of Startup School. I've cut down the ninth week of lectures to be even shorter and combined them into one podcast.
First, we'll have a lecture from Carolynn Levy. Carolynn's a partner at YC. Her lecture covers modern startup financing. Then we'll have a lecture from Jared Friedman. Jared's also a partner at YC. His lecture focuses on advice for hard tech and biotech founders.
All right, here we go.

**Carolynn Levy** (0:33)
I, like Kevin said, I'm going to talk about modern startup financing. I have only been practicing law for 21 years, so what's old and what's new only spans that time frame for me. But I've seen a lot of changes to the startup ecosystem. YC's been a big part of a lot of the changes to the startup ecosystem in the way that financing is done. So I picked this picture. These are called closing volumes, and every corporate lawyer who does private company or public company financing has a lot of these if they have been doing it for long enough.
The legal teams used to get these bound volumes with all of the financing documents in them. They have our names on them and the date, so this doesn't happen anymore. But I just thought this was, I saved some of mine. I thought this was a good picture for this.
So, a lot of you are gonna already know what I'm about to talk about, but since this is startup school, I just want to give some basics. So you have a company idea, and the first thing you're gonna do is form a corporation because it's a separate legal entity and it protects the founders from personal liability. Right, we all know this.
You can probably bootstrap it. You and your co-founders can bootstrap it for a little while, but eventually you're going to want to hire or grow, and you need money to do that. How do you do that? You can go ask your relatives for money. You can go to a bank and ask for a loan. Or what most startups do is they sell a part of their company to raise money. So when you, as founders, you guys will buy common stock. That's how you become owners of your corporation. And typically, you will buy common stock for a fraction of a penny. You may contribute some intellectual property as part of that purchase. But basically, you're going to be buying your stock and own 100% of it for nothing.
You cannot raise a meaningful amount of money by selling common stock. So your option is to sell to investors a completely different class of stock called preferred stock. Preferred stock is more expensive.
Before another kind of basic thing, I never know what kind of terminology people know. So I thought it would be really helpful to take a look at this. These terms right here, so first of all, financing and round, they mean exactly the same thing. Preferred equity financing, preferred stock round, preferred stock financing, series A financing, series seed financing, these things all basically mean the same thing. It's fundraising by selling preferred stock at a calculated specific price per share. These terms, convertible round, note round, safe financing, we're going to talk about what the safe is, early stage round, early stage financing, these are all ways to describe a fundraising event where you're not selling preferred stock or common stock, you're selling convertible securities. Convertible securities are the right to get stock in the future. It's a thing that, it's not itself stock, it converts into stock later.
So I think that there are about three things that have changed a lot over the years. And the first one is structure, and by that I just mean that the actual document that we use for early stage fundraising has changed, and I'm gonna talk about that more in a few slides. The other thing that is hugely different from the old days is access, because nowadays you can find fundraising documents online. And they come with annotations and e-signatures, and it's just incredibly easy to get documents. Back in the olden days, the only way you could fundraise was by hiring a lawyer, because there was no way to get the documents you actually needed to sell your preferred stock.
And the other thing that I think has changed a lot over the years is focus. I just remember... I don't ever remember anybody ever noticing how much time it took to do these financings in the past and how much focus it took away from founders building their company. Like, I don't remember an investor or a founder ever saying, like, gosh, this is taking a month and a half. I'd so much rather be building my company. I think today people notice and have figured out that it's not in anyone's best interest for people to be spending a lot of time fundraising. So it's much faster. So what hasn't changed? Preferred stock financings are no longer the way that companies raise their first, do their first fundraising, but that process and those documents themselves really haven't changed over the years. And I'll talk about that a little bit more in a second, but that's pretty much the same. It's just the when that's changed. The other thing that hasn't really changed is I think there are two things that are super important to investors and to founders when they're fundraising, and those two things are valuation and dilution. So valuation is just the value of your enterprise, and dilution is stock, like how much of your company have you sold. So if you are selling investors a percentage of your company, you previously owned a hundred percent of it. After you sell some, you're not going to own a hundred percent of it. That's dilution. And then the last thing I just really wanted to add in here because I think it's really important to get this point across to people who are starting startups. Communication with investors has always been important because this is fundamentally about a relationship, right? Investors are giving you money, and you are being expected to take their money and turn it into a billion dollar business. Whether or not you are succeeding or failing at that endeavor is so critical to communicate with your investors about that.