Father and son team John and Tyler Richards — veteran entrepreneurs, venture investors, mentors, and educators — discuss all things entrepreneurship and venture capital.
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Father and son team John and Tyler Richards — veteran entrepreneurs, venture investors, mentors, and educators — discuss all things entrepreneurship and venture capital.
"This Is a DEAL KILLER": VC's Pre-Seed Due Diligence Checklist, Cap Table, Rule 83B, Founder Equity
Startup Ignition Podcast
1 hour 4 minutes
5 months ago
"This Is a DEAL KILLER": VC's Pre-Seed Due Diligence Checklist, Cap Table, Rule 83B, Founder Equity
In this episode of the Startup Ignition Podcast, hosts John and Tyler Richards dive deep into the world of pre-seed due diligence. They outline the critical checklist they use as venture capitalists to evaluate early-stage companies, providing invaluable insights for founders preparing to fundraise. The discussion covers essential legal and financial structures, including the importance of a C-corp for QSBS benefits, the deal-killing implications of messing up the Rule 83B election, and how to maintain a "clean" cap table. They reveal common red flags like 50/50 founder splits, undocumented equity promises, and misaligned deal terms. Beyond the paperwork, they emphasize the necessity of rigorous business model validation and a deep understanding of the competitive landscape, explaining why a lack of proof is an immediate deal-killer.
(00:00:00) The common mistakes that make a pre-seed company uninvestable (00:00:46) The Rule 83B test: How to know if you have the right startup attorney (00:01:00) Why raising too much money at too high a valuation is a nefarious problem (00:03:04) What's the one book every entrepreneur should read? (00:04:24) Favorite productivity tools and the rise of AI as a co-pilot (00:07:19) An OG take: Is AI making us lazy, or is it just the new calculator? (00:10:17) The most memorable pitch: One great example and one disastrous one (00:15:04) The one piece of advice John and Tyler would give their younger selves (00:16:48) Learning not to be intimidated by the "titans of industry" (00:18:29) What's next on the adventure bucket list? (00:20:13) A challenge: 100k followers and the team goes to the Masters (00:25:20) Breaking down the pre-seed due diligence process for investors and founders (00:27:31) Why a C-Corp and the Qualified Small Business Stock (QSBS) exemption are crucial (00:32:22) The critical importance of the Rule 83B election and founder vesting (00:38:54) What is a "messed up cap table" and what are the biggest red flags? (00:41:17) Why 50/50 founder splits are a deal-breaker for investors (00:43:29) The problem with non-operational shareholders on the cap table (00:45:33) Why debt must be handled before an equity investment (00:48:10) Proving your business model: Why validation efforts are non-negotiable (00:51:50) The #1 reason a deal gets killed: Lack of proof of validation (00:52:59) How to properly analyze and present your competitive landscape (00:55:28) How misaligned deal terms and valuation can kill an otherwise great deal (00:58:34) The dangers of raising too much money too early (01:02:43) Why alignment between founders and investors is the key to building a great business
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Father and son team John and Tyler Richards — veteran entrepreneurs, venture investors, mentors, and educators — discuss all things entrepreneurship and venture capital.
