Raising funds for your business is difficult, especially for early brands. Here to offer great insight on the matter is Elliot Begoun’s brother from another mother, Chuck Cotter. He again joins us for an insightful episode dedicated to helping business owners. In this episode, the two chat about how you get that first money in fundraising and the ways you can attract investors. Chuck and Elliot also explain and illustrate different comp structures to help you manage equity when hiring executive roles for your business’ growth. They dive deep into how and when to give up equity that will not lead to loss. Don’t miss out on expert business advice and get practical tips you can start implementing for your brand.

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How To Attract Investors And Gain Funding For Your Business With Chuck Cotter

This is one of those episodes, the Brothers From Another Mother episode. This is where low-energy Chuck is joining us. I was already forewarned. We’re going to dig in and take your questions. I know a lot of you have already sent things through our community and we’ll dig into those. Some of the topics are getting that first money in on fundraising, team building team, and particularly, what are some of the comp structures and even more specifically, when and how to give up equity.

A couple of other questions we’ll dig through are around boards and advisors and all of those kinds of things, and then we’ll talk about what we’re seeing out there. Any other questions that you guys want to throw at us, you do it, as you all know how to do, and we’ll tackle them. Usually, he drinks out a little dainty demitasse cup, but on this podcast, for whatever reason, he wants to show himself chugging it. What’s going on?

All the things. It’s still a busy market, which is still insane to me. On the personal side, I am taking that sabbatical, so I’m psyched about that. I got back from Disney with the girls, which was also cool.

My calendar for your sabbatical may have opened a little bit because I don’t think we’re doing the Grand Canyon, so we’ll talk about that. Everything’s good. We got a lot going on. I’m excited about a lot of things that we’re doing workwise. We’ll talk a little bit and give folks an update on the advisory collective. We’ve been getting a lot of questions on that, as well as the rolling fund that we’re doing. We’ll give a little bit of chatter on that at the end.

Let’s dig in. Let’s start with the first question that came in, which is all-around getting that first money in. For those not clued into what I mean by that, there’s this bizarre phenomenon that I see, especially for early money for early brands. This is true. I’ve seen it across all different stages of raise. It’s that first money in, that first investor willing to write a check in or out. Once that happens, then it seems like it opens the floodgates and money starts to come in, at least comes in at a more reasonable cadence.

It’s like somebody needs to get validated or give permission to the other investors to join. There are a lot of reasons for that, some of which are more psychological or more like, “I don’t want to be the one that was first and be totally wrong and have to live with that.” That type of mindset. This is the point that I want to make to founders who are asking this question. The other reason, and the bigger reason, is that let’s say you’re doing a convertible note round and you’re raising $1.5 million. There’s an investor willing to come in for $200,000. That’s great.

If that person is that first money in and she writes a check to you, wires you the money for $200,000, and you are unable to get the remaining $1.3 million for that round, that $200,000 does little for you and almost inevitably means that it’s money that investor lost. To give you that $200,000 when you don’t get the rest of the round, you don’t have the money that you need to do the things that you need to do. You don’t have the runway that you do, but you already have taken that money.

That’s when a lot of people will say, “If you can get some more, if you could do this, if you could do that, if you have other investors that come in first, I’ll come in after.” More times than not, it becomes a conundrum because you’re looking for somebody to blink first. If you understand that, if you get it, and you realize that’s one of the reasons why then you can maybe be more creative in how you approach them in terms of getting them over that hump. Your thoughts on it?

If you can close in an early-stage round without giving anyone any sweeteners, great. If people do that, wonderful. I would focus folks on, it’s always about risk-reward and the tie between those two things. The greater perceived risk. If an entrepreneur comes to me and says, “I need $500,000 to execute the first stage of my plan,” and my $200,000 is the only $200,000 that ever goes in, then there’s probably not going to be a full execution of that plan. If I’m the first $200,000, I’m taking a risk. The case is that the other $300,000 is not going to come in.

It’s a little bit of a game of chicken or egg because once that $200,000 is in, the other $300,000 will be easier to raise. It’s not insane that the first $200,000, my risk, notwithstanding that you may get the other $300,000 three weeks from now, is greater because I’m taking the risk. You don’t get the other $30,000. They’re not taking the risk with respect to the first $200,000. Therefore, greater risk, greater reward and it gives me a greater potential upside.

There are various ways you could do that. It doesn’t even always have to be economic. It could be REITs. You’re effectively rewarding people for the greater perceived risk. The danger is, let’s say, Elliot, you are the person writing that $200,000 check and I’m coming in next. What I say, the second person is, “I want the same deal as Elliot. I don’t want to wear steel in Elliot. We’re in the same round.” You’re going to have to be willing to have and win the discussion, which explains why Elliot got more because he was the first money.

It’s also a way potentially to bait that when you can play investors off each other to be that first money. If you approach 2 or 3, I used to say, “Whoever writes the first check gets advisory shares or gets rights or warrants or so forth.” Where I see mistakes made is that entrepreneurs are all so innovative and creative but when it comes to things like this, you’re not. You think that there’s only one way you can’t be creative.

I’m doing something with Chuck right now around this advisory collective, which I don’t know if anyone’s done before. I came to him and said, “Here’s what I want to accomplish. As an attorney, help me figure it out.” It’s okay to go to your attorney and say, “I don’t want to just do my rounds. I want to try this.”

Hopefully, your attorney says, “Here’s the trade-off if you do this. Here’s the risk if you do this. Here’s why you can’t do this legally.” Be creative. Be a solution finder. If you look differently and put an empathic lens on it to that first investor, it could be REIT, economic, or a sign term sheet that has a requirement before the money is wired. You have another sign term sheet of at least X number of dollars committed. That could be escrow. Be creative.

On a lateral point, also be ready to have the conversation with the first investor about why their investment is not just a total loss if you aren’t doing the rest of the round. What can you execute using that example of raising $200,000? If you raised $200,000 instead of $500,000, what can you execute? How far can you get? Why does it mean that you won’t be able to grow and get to the next step? Be ready for those conversations. I know people need to eat, live, and all these things. Including being willing to say, “If I only raised the first $200,000, I’m going to take less money for myself in a salary for a while until we raise the rest so that I’d keep achieving some of these business goals.”

All good points. You have to be preemptive in this conversation. I don’t know how you feel, but that’s probably the bigger motivator, especially in early money. Speaking specifically to that seed-stage convertible note stage, if your round size is so large in the minds of an early investor, let’s say you’re a company doing less than $3 million in trailing 12 and you’re raising a $2 million convertible note. You’re talking to investors whose average check sizes are $100,000 to $300,000. That’s where this problem is going to be harder and it’s going to be more pronounced.

Writing a check for a couple of hundred thousand when you say that you need $2 million to effectuate your plan renders that first investment relatively insignificant. You may be better off raising the first round of $500,000 to do a smaller number of things and then 3 or 6 months later, raise another you no note. Be mindful of that. I don’t want to spend this whole time talking about this stuff. It’s things that are important to note.

I hear this more than not. It’s absolutely anecdotal. In my experience, and Chuck, I think you feel the same, once those first couple of checks come in around, it starts to gain momentum. If you know that, it’s about being preemptive and creative or innovative in that. Make sure you have an attorney or an advisor or somebody or both alongside you who’s helping you understand what the tradeoffs or the potential impact on future investment look like. Anything to add there before we move on?

There is always a multitude of variables, options, and possibilities. You have to be able to work with them all fluidly. Does it look good to have a small round that gets oversubscribed, as opposed to you saying you’re going to go out for a ton of money and you can’t get halfway there? Of course, but doing a bigger raise often means you can get a larger cap, which is better for you. You have to constantly juggle and manage all of these variables in a way that’s going to be best for you to grow your brand and not screw yourself with silly dilution.

Recognize that your first round is going to be your most expensive round. A question came in via text, which is an interesting question. We were close around self-compensation, what you pay yourself. Chuck, I’ll come to you with this first. This is from a founder that says, “I’ve been doing this thing now for a couple of years, bootstrapping it. I want to know what my options are or how it would be perceived if I wanted to take a little money off the table. I’d sell some of my own shares and take it out of the company to give myself a little liquidity so I can pay some bills and pay some personal debt and so forth.” What are your thoughts on that?

It’s not an odd request. It makes total logical sense. The context is, how much money are you raising? In other words, is there a little extra there that you could take off the table while still being able to execute the plan that you’re raising for? How far along are you? Which is related to the first part. How much do you want to take off the table? It needs to be a relatively small amount percentage-wise because folks want to know you still have meaningful skin in the game.

By ways of example, we frequently have founders take $500,000 to $1 million off the table at what I’ll call their 1st or 2nd institutional round, Series A, Series B. If you can claw your way to a Series A, Series B where you’re raising millions of dollars and you have a high valuation, it’s a totally reasonable ask. In fact, the investors understand that there is a benefit to them because you are going to be less stressed and able to focus on the business if your finances are stable and you’re a little bit more comfortable. It’s hard if it’s in the early stage. If someone’s doing less than $1 million in sales and wants to do a convertible note round of $1 million but wants to take $400,000 of that for themselves, I’m not telling you it’s impossible but that’s a tough sell.

The mindset of those early investors, they want that money to be used for growth. Make sure it becomes part of the conversation early in your discussions with an investor. Don’t surprise them and don’t miss the opportunity to do it in a round if it’s something that you need. Chuck’s point, as much as it pains me to admit, is spot on. The fact that most investors, the good investors, the investors who see things, fully understand that it’s in their best interest to have you show up every day, locked in, focused, able to be committed to the business and to work on the business. Instead of being freaked out about making a mortgage payment, a car payment, etc.

Some pattern recognition of some companies that start to do well don’t all end well with big exits. I often counsel our entrepreneurs once they’re getting to a certain stage. Even if they didn’t bring it up, you should think about taking $500,000 to $1 million. Maybe when you get to a hypothetical giant exit, you’re now on 22% instead of 26%, but if your worst-case scenario was to put $1 million in your pocket, less long-term capital gains, I would do that. I get that lawyers are more conservative, but once you guys are getting to these bigger rounds, you should definitely consider it. You can hypothetically pay off your house. If your worst-case scenario of launching your ventures is you paid off your house, that doesn’t suck.

Take a little bit of the risk-off. Take a little bit of the potential upside off, too. What’s your thought about founder compensation, especially relatively early, pre-Series A, founders paying themselves a salary?

I’m not allergic at all and I don’t think most investors are to them taking a salary. Let me take two extreme examples, and then we’ll narrow in from there. On one end of the spectrum, founders who don’t pay themselves for a while can be attractive to investors because it shows commitment and all the cash is going to grow, and so on. A lot of people aren’t in that situation and investors know a lot of people aren’t in that situation.

On the other end of the extreme, I’ve seen Angel-stage companies where the founder says, “I’d pay myself $200,000? Why? Because I was making $200,000 at my job before I founded this company.” That will turn investors off significantly. By the way, there are plenty of our clients who pay themselves $200,000 or more once they’re in a later stage.

Where do we narrow in from there? If there’s a science part to it, it’s the amount that won’t harm the company, will allow it to grow, and aligns with your ability to pay your rent and eat. Lots of founders at the early stages pay themselves $70,000 to $80,000. That’s what I see a lot. Once they do their first meaningful round, they bump themselves over $100,000. Once they’re farther, closer, or above $200,000, that’s usually what I see.

First of all, I got to burden the business with some wage if you need a wage because you’re artificially unburdening the business if you’re not. The reality is, as an entrepreneur, you’re signing up for the upside. That’s where it is. The delta between what you can pay yourself and what you could have been paid out there is another form of your own investment in that upside.

I always say living wage. Take a good hard look at what you need in order to not have additional stressors placed on you. That’s enough to pay your rent, pay your car payment, buy groceries, and go out for dinner every once in a while. Live a meager frugal existence, but not be in trouble from a personal finance side. Determine what that number is. If you can articulate that to an investor and it’s reasonable, then that’s the right approach.

It’s not going on a two-week vacation of Hawaii money. No investor wants you to be having to moonlight in order to pay your bills because then you’re not concentrating on the company. When you’re farther along, I can take a two-week vacation in Hawaii money. You’ll get there.

Maybe eventually, you can be like Chuck and take a sabbatical. That’s usually called an exit. One of the other questions that came in was around key hires, team, and comp, and what’s out there, how to think through how much to pay versus how much equity to give up, and how to structure it. I know this is something that you see regularly and deal with. What would your coaching be around that?

These are two variables. The more you move equity, the lower you could move the set comp. There are some positions that demand higher compensation, whether it’s in cash and equity or one or the other. For example, a talented VP of sales is not cheap. A talented VP of ops, in particular, is also not cheap to find. Even for relatively early-stage companies, I find that to get someone talented, you’re going to have to pay a low six-figure salary of $125,000 and give them some equity. How much equity you give them depends on the stage of the company. The grant should be a little bigger early-stage versus a little smaller late-stage.

There are some things that are certainly outliers. Occasionally, a client will come to me and say, “I’m going to hire this VP of sales and they tell me that 5% equity is market.” I’m like, “It is absolutely not market. Unless there’s something else here, which there could be, which you can tell me as a game-changer about this person, not just that they’re a good VP of sales, 5% is too much.” What is the right number? 1%, 1.5%, 1.75%, depending on their background, how much they’re going to cover, and where you are.

Below the VP level, and rightfully so, there’s this sense of egalitarianism in our community that I love, which leads to, for some people, why wouldn’t I give a lot of my employee’s equity? The thing is, there are all sorts of employees who ascribe virtually no value to you, giving them equity. It is not going to change how much cash they want. It’s compensation. You need to suss out to whom equity is an important motivator and they will value it. Usually, that’s the VP level and above or the director level and above.

The other important thing around that is that equity is the gold reserves that you trade for the fuel that you need and all of those kinds of things. If you give it away too early, too much of it, then as you extend down the road of your growth, the place you’re going to be giving more and more of it away is yours. That’s not necessarily good for you and it’s definitely not necessarily good for the business either.

What I see is usually, it’s too rich on both ends but if I see a bigger mistake, it’s a bigger mistake made on equity, especially early on when you’re making your first couple of hires because it seems less expensive to give them more equity in lieu of cash. If the business has the opportunity, that potential that you believe it does, then in the long term, what you’re giving away is going to be of greater value.

Taking another extreme example to illustrate the point, we have some brands that get to Series A stage and they have funds interested in them because the product is doing great and the entrepreneur is talented. They made meaningful mistakes early on that caused them far too much dilution, throwing equity around and raising on bad terms. The funds who are willing to lead the Series A are like, “You guys got to fix this because it’s relatively uninvestable for us if the founder or CEO is going to own less than 20% after the Series A. That’s too little.” There can be long-term consequences from throwing too much equity around it.

I’ve had more than a few entrepreneurs of relatively early-stage businesses, sub $3 million in revenue, who come to me and say, “I want to hire a CEO or COO because I feel like I need that support.” The business can’t sustain an executive-level salary that isn’t transactional. I’m curious as to what you’ve seen there and your thoughts there.

It can be a lot richer in equity. We have some talented founders who have brought in someone who is almost like another founder. By that, I mean their willingness to own it, dig in, and do all sorts of things beyond just one silo of skills. They may end up building that person up to 4%, 5%, and 6% equity. In a vacuum, other than a new CEO or something, you shouldn’t be doing an equity grant that big to an employee. There are some people who feel that function as a cofounder and it can make sense. You should consider it as equity coming from you.

It is a cofounder mindset. Don’t just give. Make sure there’s some vesting schedule. What are your thoughts on that? Talk a bit about that.

The standard vesting schedule would be four years with a one-year cliff. That means, if you terminate them or they resign anytime within the first year, they don’t vest any equity. At the end of the first year, if you’re on a four-year schedule, they vest 0.25% of what you’ve given them. If you gave them 1%, they have now vested 0.25%, and then they vest monthly after that. That’s the baseline.

There are some times when you might have vesting based on performance metrics. Let’s take a VP of sales, for example. The only reason you’re willing to give them an outsize option grant is they’ve convinced you that they can move you from $3 million net revenue to $10 million in fifteen months. If the only justification for the outsize option grant is that, then the vesting criteria could be achieving that $10 million in net revenue. They have to put their money where their mouth is to earn their equity.

Totally off comp and off fundraising. More fun legal stuff here. Good question though, because we’re seeing more and more of these kinds of predatory lawsuits that are out there. These people that are out chasing wage an hour in California and Prop 65, ADA compliance on websites, and things like that. What do brands need to be aware of? What should they be doing? How do they protect themselves? How do they react?

Because of the role I play, which is primarily representing brands and funds, I’m not a plaintiff’s attorney, I’m cynical and jaded by most of these virtually. Not all, but a significant amount of these attorneys are not crusading for people’s benefit. They are taking laws that were adopted because there are real problems and abusing them to extort people.

That editorial aside, here are the things you need to be aware of. Hiring an employee in California is going to subject you to a lot more of this than hiring employees anywhere else. Make sure you are aware of and comply with all the applicable laws because that at least mitigates the chances. There are wage and hour laws.

For example, if you terminate someone, even if they’ve been an asshole, you got to pay them their last paycheck. You can’t withhold it for some leverage in some other negotiation with them. Labels of your products give rise to a lot of these things. For example, it used to be that calling your product natural meant you’re going to get someone saying this one random ingredient is not natural and they’re going to extort money for you.

There are claims all over the place. A similar one now that’s popular is products like to advertise that there’s zero added sugar, but if that product is not a low-calorie food, it may be zero sugar but a high-calorie food. If you say zero sugar, you’re also supposed to say it’s not a low-calorie food. Why? Because the FDA says so. Put aside whether that makes any logic for human health.

If a plaintiff’s attorney sees that you don’t do that, they’re going to come knocking on your door and extort money. Here’s the sadness, depending on the size of the brand, you may settle some of these claims for $50,000, $100,000, or more if you’re bigger. The vast majority of that money goes to the lawyer who sent the threatening letter, not the purported plaintiffs that were allegedly harmed.

These are definitely out there. Almost none of our bigger brands have gotten away unscathed. If you do your homework by doing a label review, which costs $1,000, you mitigate the chances of having to pay someone $50,000 or $100,000. If you talk to an employment lawyer when you’re firing someone, that will mitigate the chances that you screwed something up then you’re having to pay triple damages or something.

When they do get one of those threatening letters, go right to your attorney before you respond, before you do anything.

There are some circumstances that the entrepreneur reaching out can solve, like receiving one of these letters. Those tend to be things like accidental trademark infringement or advertising infringement, or an entrepreneur can say to another entrepreneur, “I didn’t mean to do that. I will stop running that ad,” something like that. Those are the rare things that an entrepreneur may be able to solve by themselves.

When it comes to these plaintiffs’ letters, these lawyers are not there to solve it with you. They are not there to ask you to fix something. They’re there to get money from you because it is the easiest way for them to make money with minimal effort. Therefore, you should ask people to do it because they can tell you even something like, “We have some idea of what to market to settle these things,” which is absurd that even a market to settle them exists. It’s reality.

The reason there is that it’s still cheaper, in many cases, to settle than to litigate. You have a much better feel but right now, the most common is the website ADA compliance, which is crazy to me. Make sure that your website is compliant with the Americans with Disabilities Act. In case you don’t realize, that is a requirement. There are plugins that allow that.

The intent of these things was originally to solve real problems and make sure there was equity for those, which is wonderful. It’s not the intent that is being enforced. It’s the loophole or the opportunity. I know of probably a half dozen or more brands that have been served on that alone. Prop 65 is another one in California. What else? For those reading, are there right questions that they should be asking around certain things to try to mitigate as many of them as possible? You can’t eliminate all of these risks.

The website is a big one. Tons of brands are getting that and they’re getting it from the same couple of lawyers. The labeling is a big one. Any claims that you’re making, make sure you’ve run it by an attorney that does FDA so that they can tell you what else has to be in your label or else you’re inviting one of these lawsuits. Employment issues are a big one.

That’s the one that gets me riled up the most because it’s the one where, ethically, there’s so much need for laws like that because people have been discriminated against for so long for reasons they shouldn’t. Because of the desperate need for it, it gets me so upset when I see it being abused when those facts did not occur and people get a plaintiff’s lawyer and they extort money from you. That happens sadly. It’s not just labels. It’s that stuff, too.

Switching gears, I’m taking a little bit of host prerogative here. Let’s take off the attorney hat for a little while. Let those natural curls flow. What’s going on in the industry that you think is super cool right now? What excites you as a consumer, as somebody who’s been in this space forever? What do you see?

It’s easy to say something like this and someone reading thinks we’re saying it because we think we should. The truth is, what’s exciting to me having been in this industry for a while, is going to Expo West and seeing diversity in dozens of different ways. The people speaking on panels, the type of products, the investors, the people receiving money, all of those things are exciting to me.

They will make the ecosystem better. It also enriches the consumer, who has so many more options. I find that more exciting than, for example, even though it’s cool, the transition to plant based. That’s great for our environment and it’s great ethically, in my opinion, but for whatever reason, it’s a little less exciting to me.

There are a lot of things about this business that continues to excite me. One of them is across the board, I had some concerns or some thoughts about what did the two years of pandemic do to innovation? Did it slow down innovation? Did it set us back as an industry at all and walk in the expo completely allayed any concerns I had? There’s a lot of innovation and cool shit going on, and that’s great.

As an industry, we continued to be unique. The fact that we don’t have the same competitiveness that so many other industries do, we’re competitor collaborators. Brands and entrepreneurs here are genuinely, for the most part, rooting for everybody to succeed, and understanding their space to do it is cool.

This sounds self-serving but it’s not meant that way. I honestly believe that this message that I try to continue to be a proselytizer for us, this tardigrade mindset, being willing to slow down the arc of growth, being a little bit more focused on being capital-efficient, and having good unit economics. Not just rushing out for distribution.

I’m starting to see more brands think that way, take that tact, and be a little bit more patient. I say, patiently impatient. They’re not just sitting there going, “This is okay. Being slow is fine.” It’s more like a recognition that it can be beneficial to make all your mistakes and mitigate as many risks as you can to get all your lessons done when you’re smaller and nimble. The cost of those fuckups is a lot less.

It’s more business sound. It feels like so much of our industry for so long was just, “Can you get funding? Can you exit?” Not, “Can the business survive without those things?” It was awesome to go to the expo and see some of these brands you’ve been talking to for a while. I’m sure you saw it. Take Somos Amigos for example. I’ve been talking to them and working with them. I go there and I see their booth, I see their products, and I’m like, “Holy shit, you guys executed the hell out of this.” Tia Lupita, similar category, I’m like, “You’ve executed the shit out of your Nopales chips.” You don’t see that when you’re on Zooms. It’s amazing to see after a few years.

The other thing I couldn’t believe was how many people were freakishly tall. Zoom does not show height well at all. I’m shocked. I would bump into people and I’m like, “I imagined you from Zoom as a much smaller human being.”

No one said that to me, strangely. I didn’t get that once.

It was cool for our two events. I remember thinking, “Are there going to be enough people that show up?” We’re doing surveys to see who’s going to come and who’s not going to come. That fear was quickly set aside as the people started showing up at both those events. Certainly, given the bar tabs, we know that drinking has not been reduced post-pandemic, so that’s a good thing. It was fun. We’ve done a little bit of the positive. What’s concerning you right now? What are you seeing out there macro and micro trend-wise, headwind-wise, that if you were sitting in front of a brand or a fund that you’re representing that you would say, “What are you guys doing about this?”

I would definitely have a plan that includes not being able to get funding. I’ve been Chicken Little and haven’t been right because there are so many deals happening, but I’m still convinced right around the corner is a meaningful downturn. We’re in an industry that’s insulated from that if you’re cash efficient, in the sense that people are still going to buy food and beverage products.

Even if you think of it as folks who borrow money, whether that’s strategics or PE funds who also acquire brands, if interest rates are dramatically higher, they’re going to borrow less money. They’ll borrow the money but what they’re going to be willing to pay for brands is going to be lower because of the interest they need to be able to pay on these funds. Venture capital funds, generally speaking, don’t borrow money. They just invest committed capital, which is good for us but I have to think there’s still some trickle-down effect if the capital markets get ugly for strategics or private equity funds, and so on.

Although there have been a lot of checks written and there’s been a lot of deals, the deals have been further upmarket.

That’s been the case for 15 to 18 months, don’t you think? It’s been harder for early-stage brands for about 1.5 years.

Yeah. Knowing that coming out of the gates, you have to be more focused on making every dollar return a dollar and recognize what that contribution is of every revenue dollar. In many cases, many of you reading forget that it is negative. You’re investing in business instead of growing the business, so think about it.

My other concern still comes around to the retail side. I hate this culture rant about drive-by submissions. The fact that for many retailers, you’re submitting a new item form or a one-pager and you’re waiting nine months to find out if you’re going to get in, and then if you don’t get in, you have to wait until the next review a year later.

That hurt our ability as an industry to bring our innovation to the consumers. The innovation is still happening by the entrepreneurs, but there’s a gatekeeper effect going on as well. What’s happening with the supply chain and with all of those things are constraints, but at the same time, I’m loving the innovation that’s coming out of it. I love seeing platforms like Fair, and now RangeMe direct, Pod Foods direct, and other things that disintermediate the process. Innovation is all around us. That funding side, especially the early funding side, and the potential slowdown is there.

While there’s still plenty of capital in our space, I’ve started hearing from multiple sources, not in a journalistic sense, just multiple people who are raising funds, that they are having far more difficulty raising money into funds than they were a few years ago. Of course, the less money coming into funds, the less dry powder there is to make investments into brands like we work with. We’ll have to keep an eye on that.

Especially on the early side, there are definitely categories where the Angels and the early investors are more cynical or more pessimistic than others. I’m putting it out there. If you’re an early-stage beverage brand, for example, it’s going to be hard for you to raise right now because the mindset is, “That’s an expensive space. It’s going to take a lot of capital. Get that right in there.” Be patient, be smart, prove your business in a smaller and more sustainable way, and understand that.

This happened a few times more recently than it used to. How cool is it when a brand comes to you and you’re talking about doing a seed or Series A in their 2nd or 3rd round? You ask about their future planning and they’re like, “We’re cashflow-positive. This is the last money we’re going to have to raise.” “We’re close to it and once we raise this and hit that sales, we don’t need to raise again. We could opportunistically raise, but we won’t have to.” That’s an awesome story for the entrepreneur, investor, and ecosystem. I love standing up.

Me, too. There’s also that mystique around the bootstrapper. Although sometimes, there’s a balance between how far to bootstrap and how not and when to use growth capital. On the positive side, there are more funding mechanisms coming in that are reaching further down the market in the earlier stage.

We’re seeing more growth around asset-based lending that’s accessible to the early stage. We see some hybridized things that are allowing almost a crowd marketing around inventory and production runs. We’re seeing more venture debt, which is something that a lot of brands don’t understand. They have opportunities there. There’s equity crowdfunding.

Where there are pain points, there are challenges. That’s a perfect dovetail to the questions that have come in about a couple of initiatives that are going on here. I will be the first to admit that I’ve spent a lot of ink and recordings lamenting this funding gap that’s growing for early-stage brands. What I’ve been challenged by many has been, “You can continue to do that or you could do something about it. You’re in a position to do something about it.”

We have committed to that and we are doing something different. To those who have been asking and have heard, we are going to be raising a fund. We’re going to be doing it somewhat differently in the form of a rolling fund, which is a unique position, where I believe it to be the first rolling fund in CPG that will be on the AngelList platform. What a rolling fund does is it allows LPs incredible flexibility. They subscribe to the fund on a quarterly basis and they can change their subscription level each quarter up, down, or even opt-out.

In times of uncertainty, the hope is that we can bring more LPs to participate because we give them that. From a fund perspective, it gives us known capital to deploy in that quarter. We’re doing some slight important differences and that’s going to be a non-solicitation fund. For those reading, we’re not going to take pitches. We’re going to bring that money to the brands in our community when and where they need it when we have good insight into it.

A lot more to come on it, I know there are a lot of questions about it. We’re in the process of all the administrative work. We’re in the process of building a team around us that is going to help. Some of those teammates will be known and some of them will be less known. The goal of it is to have earmarked dollars specific to initiatives. That can be the difference between a brand being able to leapfrog forward and leapfrog its way into being more prepared and more positioned to win investment at the institutional level. More to come on that.

What’s the fund called?

The fund is Tardigrade Ventures.

It’s a good name.

It will be part of TIG Brands. We’ll publicize it. The cool thing about doing a rolling fund and doing it on a platform like this is it’s a 5063, which means we can publicly raise and be a little bit more visible about it. There’s a lot more to come. For anyone reading who wants more specifics, feel free to ping me. The other question that I’ve been asked a lot about is this advisory collective. Chuck might be able to articulate a bit more about the mechanics of it.

Here’s what the premise of it is. It’s a two-prong approach. One is that we have a need in this industry to see more diversity on our boards and in our advisor groups. I’m broadly using the term diversity, seeing more women, minorities, LGBTQ, and all of those folks, but more broadly, diversity of thought, diversity of thinking. Entrepreneurs who are surrounded by people who think differently than they do and also represent the communities that are trying to serve our entrepreneurs who are going to be better prepared to make smart decisions. It’s that simple.

However, you don’t just wake up one day and go, “Shit, I’m an advisor and a board member.” There are skills involved in doing that, knowledge around governance and what fiduciary responsibility means when you move to a board level, and how to be an advisor. Knowing when you shouldn’t cross the line between doing and suggesting, and also when the guide in terms of getting professional feedback and so forth.

From an entrepreneurial standpoint, sadly, too many entrepreneurs get advisors and they think, “I want this person on my deck. If they are on my deck, it’s going to look impressive to investors,” but they’re not interacting with them. Even if they do, it’s more like a report out or an update. What we hope to do is bring education. We’re going to run workshops. We’re going to take these advisors and begin to help mold them and give them the skills and the knowledge that they need to grow into productive and effective board members.

At the same time, help the entrepreneurs become capable of extracting and leveraging the talents, wisdom, and benefit of having a good team of advisors. The way the process will work is that advisors will come into the collective and brands will opt into the collective. When they opt-in, they’ll issue advisory shares. The difference is instead of issuing those advisory shares to an advisor, they’ll issue those advisory shares to the collective and the collective will vest in those shares like any other advisor would, and then an advisory agreement would be signed.

The advisors would sign almost a similar agreement with the collective, saying that they’re going to be responsible for doing those things. They will vest into the collective, earning their shares of all of the aggregated shares in the collective. There are some mechanics that I, quite frankly, need to figure out yet, with Chuck’s help, in terms of when Advisor A has been in for two years and Advisor Z comes in later, how we manage all of those kinds of things.

The intent is that we have this incredible pool of advisors that cross all the different functional areas of this business, are subject matter experts, have been on the journey, and are learning how to be effective advisors and future board members. We have these great brands who are getting surrounded by these people who have access to all of this knowledge and wisdom. They’ll have 1 or 2 lead advisors, but they’ll have access to all the advisors in the network and those service force multipliers and difference-makers for them. That’s an update on that initiative. Anything you think I’m missing there, Chuck, or anything on the explanation of how it’s going to work?

No, you nailed it. Sometimes brands play a little bit of roulette by grabbing this advisor and that advisor and giving them both grants. They’re delivered. They don’t hear the ideas. You give one grant and it goes to a pool of advisers. It should give brands access to more people and a greater diversity of advice than they would otherwise be able to get with advisor shares.

Think about it as a Net Promoter Score for each advisor and for each brand. There’s 360-degree feedback, so advisors know how they’re being perceived in terms of working. Brands are also being given guidance in terms of how they’re being perceived. It’s going to be simple. The goal is this collective experience where, at the end of the day, as brands and advisors move further along, both are better prepared for the next step in it. I’m excited about the initiative. Jenny on our team is helping to spearhead that one and will be involved. That brings us to the top of the hour, Chuckles. What do we have left? Anything? Any last words of wisdom?

No, but thank you for inviting me. It’s always good to be here and I’ll see you soon. Maybe we’ll do a Brothers From Another Mother live from Israel.

We need to do something like that, a roadshow. Sounds like a good plan. We need to get those plans, especially now that I have that little calendar window opened up. Everyone, thanks for joining and we’ll see you next time. Take care.

Important Links

• Chuck Cotter

• Somos Amigos

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About Chuck Cotter

I advise consumer products brands and investment funds in capital raising, exit, and acquisition transactions. I’ve served as a mentor or judge in dozens of consumer-focused incubators and pitch competitions, including FoodBytes! by Rabobank, ExpoEast, and Naturally Boulder.

Our consumer team closed over sixty financing and M&A transactions in the consumer space in the prior year and represents over 100 brands and top-tier funds, where we also serve as outside general counsel. The absolute core of my, and my group’s, philosophy to the practice of law is that clients are not transactions, and we are not merely service providers. We specialize in the consumer space so that we can be more.

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