Gm! Who else gon’ devour the new Isaacson Elon Musk bio this weekend?
[Welcome to Issue Number 39 of The House Brazeryen, where we break down the latest #startup, #biotech, and #ScientistCEO-related news for you fortnightly, in roughly 5 minutes. Brought to you by Brazen Capital and brainsurgerydropout.]
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Y Combinator S23 Demo Day Recap
Garry Tan, CEO of Y Combinator, kicked off the S23 virtual Demo Day last week with exciting stats and news which I live-tweeted during the pitches:
But our favorite part of Garry’s address was his “Three Commandments” [our words] to investors:
Do no harm
Make decisions quickly
Act like long-term owners/Be helpful
The first two are most obvious (and most often violated), but the last one is really on point. Many are the stories of founders getting screwed by investors blinded by impatience. For perspective, Garry revealed that of those YC 2016 startups who eventually raised a Series A financing, fully HALF didn’t do so until at least THREE YEARS after their batch ended! Sobering.
YC Bio
So, is Brazen Capital investing in any of the YC Bio S23 startups? Maybe.
Again, there were ZERO therapeutics startups (which is probably our primary jam). However, our team discussed our favorites from the batch and landed on about five total that seemed “provocative”. One of our Junior Fellows reached out to these startups a week prior to Demo Day and at least one had already closed their round! Yoink!
Given there is typically so much information released on each new batch before Demo Day (some public, some not), there is usually very little extra information to be gleaned from a 1 minute, 1 slide pitch based on the standard YC script delivered via Zoom. This time was absolutely no different. Stay tuned tho…
BRAZEN BREAKDOWN
Don’t worry if you didn’t have access to the Demo Day Zoom, Garry posted a written version of his address in a blog post: "Meet the YC Summer 2023 Batch".
VC CORNER: Negotiating Options
by Scott Alpizar, PhD — I think we’re finally ready! You’ve got that term sheet in hand, refreshed yourself on the key terms, and are equipped with your strategy. Before you take a seat at the table (or wherever you take Zoom calls from these days), we’re going to work through some of those terms that you could consider negotiating—and what those negotiations may mean for your company (or yourself in some instances).
We’ll start with some ways to approach leveraging your option pool. As a refresher, the option pool is the percentage of the post-closing, fully-diluted capitalization available for future issuances.
When thinking about this, you should know that most investors require the pool’s percentage be calculated as part of the pre-closing capitalization. This is so that it only dilutes existing holders, not the new shares. Also, most investors usually have a standard pool size (usually 10-20%) they like to see when investing.
BRAZEN BREAKDOWN
I’ve come across two differing strategies for leveraging the option pool during negotiations:
Lower Your Pre-Money Valuation. As I mentioned above, VCs usually include the option pool shares in the pre-money calculation. But why, when the option pool comes into play after the investment? It comes down to math. If the shares are added after the fact, the math changes in terms of the VC’s ownership, something they DON’T like. Lowering your pre-money valuation slightly can produce the same math and give your VC something they DO like (Pillar VC breaks it down with examples here). This may lead them to be more likely to move on other terms later in the negotiation.
Build a budget. You could also just take what you know you need. This can keep more equity in the hands of the founders/current common stockholders (if you want more examples, Cooley breaks it down here). The problem? It can be difficult to know exactly what you need. If you guess wrong and have to issue more later, you’ll have to spend the time and money upping the option pool, which will likely dilute your VCs, which will likely make them NOT happy.
As always, how you approach this will depend on the context of your specific situation and company. There’s no reason you can’t do both! But if it’s me, I’d much rather have the extra available when I need it instead of needing to up the pool later because I didn’t predict the exact amount properly. The equity you may give up now could be issued to critical hires that will move your company (and valuation) forward so much that you won’t miss those few percentage points.
RE: Negotiating Options (re-visited)
by Shawn Carbonell, MD, PhD — Scott did a great job above setting the table with regards to the sensitive subject of the option pool.
For our Series A financing at my startup OncoSynergy this was a major item of contention. The original term sheet—besides being chock full of every malignant clause possible—called for the standard 10%. However, as CEO at the time I knew this was waaaay more than we needed.
First, this Series A was fairly late in the game for us as we were ready to jump into the clinic with our first therapeutic program (i.e., submit our first IND to FDA). Second, my cofounder and I both had backgrounds in clinical neurosurgery and had the requisite experience in preclinical and clinical development bolstered by a smattering of consultants. So, we knew for this round we wouldn’t need any options-rich executive-level hires. We primarily would focus on hiring support staff. So, it became my mission to try to shrink the options pool in negotiations.
BRAZEN BREAKDOWN
How did I approach this? We used Scott’s second strategy above: “Build a Budget.”
Our present investors (including myself) pushed back on lowering the pre-money valuation so I spent days building various scenarios and budgets to justify a lower number of options. This paid off.
Although my calculations showed I barely needed a 1% option pool, I found a creative middle ground and presented a single digit number to the new investors that I thought they could live with. I built in a generous buffer and presented all the scenarios to them and thankfully they accepted on the first pass.
So, how did things turn out after the funding closed? Other than three executives we looked at, but didn’t really need and were glad we didn’t hire… As projected, we only brought on two associates, three admins, and two interns and didn’t get anywhere close to 1%. The shareholders can thank me later. Boom.
😋 BRAZEN SNAX
💉 No shit Sherlock: not destroying the immune system improves immunotherapy
🤐 Secrets to publishing in luxury academic journals: Climate Change Edition
🦫 Beaver activity in the Arctic increases emission of greenhouse gases. Dam.
💀 Skull bone marrow may reveal underlying diseases in the brain
🧬 Simple swab technique reveals environmental DNA (eDNA) of 52 vertebrates
😂 Scientists cut and paste ChatGPT output verbatim into scientific publication
🍋 What to do when your PhD research gets scooped: make fucking lemonade
🦄 Will the uptick in unicorn and decacorn pharma acquisitions continue?
🛒 Instacart now delivering healthy foods (in some cities)!
⏰ TikTokCrak: Advanced tool use by the day gecko (Phelsuma laticauda)
🔪 CARVEOUT
Andrew Huberman on the Lex Fridman Podcast? Say less.
🙏🏽 A DOSE OF GRATITUDE
We are grateful for Darren Eng for his continued support of Brazen Capital. All three of our LA-based team are OOT this week(!), but we encourage you to check out his latest LAVA (Los Angeles Venture Association) event on Thursday: Meet the VC!
🙃 BRAZEN MEME
✍️ FEEDBACK
Feel free to tweet all thoughts, questions, and insults to us. Bring it. No, really. COME👏🏽AT👏🏽US👏🏽BRUH👏🏽
And let’s continue the conversation on LinkedIn: @brazencapital