Having a weak team makes it harder to fundraise. We created a guide to help you understand what VCs look for in top startup leaders and strong startup teams. The third installment in our series is designed to help you prep your team so that they can shine during DD and help you close your funding round.
Most startups wait too long to assess and uplevel their team, and don’t know what VCs look for when doing their team due diligence. You can’t hire and build a great team overnight. And even if you have a great team, if your team is not prepared to talk to VCs during DD, they might not show how awesome they really are, leading to lower offers, or sometimes no offers at all.
We do this pre-DD exercise with Magma portfolio companies to help them identify weak spots in their team and prepare them for DD conversations with VCs. You can use this same template with your team. If you plan on raising $10M+ in the next 12-18 months, we recommend starting these exercises to help you understand how VCs will evaluate your company and team, give them the practice they need, and give yourself time to make important team decisions before it's too late.
Before talking to your team, VCs will likely want to get a lay of the land by checking out your org chart. They might even want to review your people and HR processes. During this exercise, we ask for:
Your org chart: a team snapshot and a guide for who VCs might want to talk to
VCs will check if your org chart makes sense for your business model and that roles and responsibilities are clearly defined. As serial entrepreneur and former XPO Logistics CEO Brad Jacobs says, your org chart should be pretty, simple, and symmetrical. Make sure your org chart is updated and accurate and includes the tenure of each team member in the top 3 layers of your company (CEO, C suite, and their direct reports). This information helps VCs see who you’ve hired recently and who has been with you the longest. Substance is more important than style here: focus on having the right data, rather than making it pretty. It’s ok if your org chart isn’t perfect, VCs don’t expect perfection.
Employee Stock Options Plan (ESOP) overview
VCs want to know if you have an ESOP, how much you’ve awarded and how much you’ll need for future new hires. Does the company need to refresh grants for the team or founders? As the round advances, most investors do a sanity check after speaking with your team to see if equity grants match the value that each leader adds.
In addition to your org chart and ESOP, some funds might also ask for:
Salary schedule for all employees
VCs might ask for a team member salary overview to check for any leaders who are being drastically overpaid or underpaid. You want to show you have a compensation philosophy where senior roles earn more, and salaries aren't random. At Series A, you don’t have to have everything perfect, and there can be some outliers, but you should have salaries and comp that make sense and that you can explain if asked.
Standard offer letter you send to candidates:
Some VCs ask to review the standard offer letter you send to candidates during the hiring process to check how you are selling the role and the company. VCs will ask themselves “would I want to work at your company or recommend someone to work with you based on the offer letter?” Your offer letter also helps investors understand how developed your HR processes are.
Most VCs probably won’t ask for this, but it's worth having a good offer letter anyway, so be sure to spend the time to check that your offer letters are competitive and compelling.
We also ask founders:
Depending on the answers to these questions, we prioritize the 5-10 non-founder leaders to meet with. We schedule meetings with these leaders as close together as possible, ideally over 1-3 days.
Below are potential questions VCs may ask to find the answers to what they look for when assessing the individual leader and the collective team. This list of questions is not exhaustive but representative of what VCs will ask your team.
Always answer honestly and clearly. Generally shorter, to-the-point answers are better. Give the investor time and space to ask follow-up questions so they can build conviction to invest in you and your team.
The pre-due diligence exercise will make clear:
You work with your leadership team every day, so it’s hard to evaluate your team the same way VCs will. But this pre-DD exercise helps you zoom out and see your team the same way potential investors will. Try to get your team comfortable months ahead of when they’ll need to talk to investors during the next fundraise. Make answering these questions part of their weekly or monthly processes and part of your team’s culture. Make it fun, low pressure, and help them craft better answers to highlight the best things they do. Many times, team members hide the awesome things they do in a misguided attempt to be humble, especially in Latin America.
You can’t hire and build a great team overnight, so you need to start early. If you plan on raising a big round in the next 12-18 months, start paying off your people debt and make a hiring roadmap: prioritize the most important 3-5 key hires, and run a best-in-class hiring process to find the right people for those roles. For roles that you don’t know well, you may want to work with executive search firms.
Start early; don’t wait until you are fundraising to start hiring. It’s impossible to onboard 5 senior hires well at the same time. Recruiting them will take a couple of months, and most new hires need 3 months to get up to speed. From the moment you decide to recruit for a role, it often takes over 5 months for a senior role to show real results in your business.
Use this pre-due diligence exercise to evaluate how your team will do during conversations with VCs. Identify your team's strengths and weaknesses, and use the insights from this exercise to build a stronger team and help your team practice these conversations before fundraising.
