How to Create Luck: Understanding the Connection Between Luck Surface Area and Fundraising

How to Create Luck: Understanding the Connection Between Luck Surface Area and Fundraising

Luck is often seen as a random occurrence, something that happens by chance. However, there are ways to position yourself in a way that captures more luck. This concept is known as Luck Surface Area (LSA), coined by Jason Roberts and popularized by Patrick McKenzie. By expanding your LSA, you increase your chances of encountering positive random events. Let's explore how LSA connects with the world of fundraising and investors.

Growing your LSA requires a more active attitude towards life. Jason Roberts suggests doing more things and telling more people about it. This embodies a growth mindset towards luck, similar to the fixed vs growth mindset concept. The more proactive you are in creating opportunities, the more luck you can attract.

When it comes to fundraising, understanding the different mechanisms involved can also impact your LSA. One common fundraising instrument is the Simple Agreement for Future Equity (SAFE). SAFEs allow investors to put money into a company with the promise of converting it into shares when a priced equity round occurs. It's important to note that SAFEs are not debt.

The terms of SAFEs are often tied to the lead investor in the priced equity round. When the SAFEs convert into shares, they piggyback on the negotiated terms. There are different types of SAFEs, including uncapped SAFEs and those with a valuation cap. Uncapped SAFEs allow investors to get the same price as the priced round investors. On the other hand, SAFEs with a valuation cap limit the conversion price to a predetermined maximum.

Keeping track of how much has been sold on SAFEs is crucial. Usually, the option pool accounts for around 10% of the company, although it may increase to 15%. Having a clear understanding of your dilution and where the company is being sold is essential for making informed decisions during fundraising.

In a priced equity round where SAFEs have been raised, three things typically happen. First, the SAFEs convert into shares. Then, the option pool is either increased or created if it doesn't exist yet. Finally, new investors come in and invest. The price per share calculation for the new investors includes the shares from the conversion of SAFEs.

It's advisable to avoid combining SAFEs with convertible notes as it can complicate the calculations. If you start raising on debt, it's best to stick with it. However, using SAFEs from the beginning can make your life easier during fundraising.

As you navigate the fundraising process, it's important not to over-optimize for valuation caps. Fundraising is a means to an end, and focusing too much on maximizing valuation may not yield the desired results. Instead, prioritize understanding what you're selling with the company and keep track of your dilution.

When raising money on SAFEs, it's not always necessary to have a lead investor. However, at the priced round stage, a lead investor becomes crucial due to the complexities involved in negotiations. In a typical series A round, the lead investor usually aims for around 20% of the company, with a total amount sold of approximately 25%. The options pool typically accounts for around 10% of the post-money valuation.

In conclusion, to create more luck, expand your Luck Surface Area by being proactive and seeking opportunities. When it comes to fundraising, understanding the nuances of SAFEs and priced equity rounds is essential. Focus on maintaining a clear perspective on your company's valuation and dilution. Here are three actionable pieces of advice to enhance your luck:

1. Embrace a growth mindset: Actively seek out new experiences and share them with others. This increases your chances of encountering positive random events.

2. Prioritize understanding: Take the time to fully comprehend the terms and mechanisms of fundraising instruments like SAFEs. This knowledge will empower you to make informed decisions.

3. Don't over-optimize: While valuation is important, remember that fundraising is a means to an end. Avoid fixating on maximizing valuation and instead focus on the overall goals and objectives of your company.

By incorporating these strategies and insights into your journey, you can increase your luck and position yourself for greater success. Remember, luck is not purely random; it can be influenced by your actions and mindset.