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Pre-Seed and Seed stage founders are so focused on just closing their first set of paying customers at any cost that they often give up their leverage in sales negotiations, which then harms their ability to raise the Pre-Seed or Seed round.
As soon as you have 5-10 paying customers, the top 20 funds & angels will start to analyze expansion and churn. If you have a leaky bucket, by default, you are un-fundable.The other problem is that you are giving up potential cash flow that could increase your runway and therefore increase your valuation as you raise.
So how do you solve this?
- Make 12 months your default contract length for the first 1-3 customers.
- Make the full contract paid upfront net 30 days.
- Offer a 10% discount for a two-year commitment and a 20% discount for a three-year commitment.
- Offer an additional lucrative discount for years two and three to be paid upfront net 30 days. - As you close the first 3 customers, make the next 3 customers 24-month contracts, by default.
- Then start to offer four- and five-year commitment options, with additional lucrative discounts.
if you do this right, you will have more runway, zero churn, zero risk of churn, higher chances of expansion, and much greater chances of raising at a higher valuation.
You will be proactive, not reactive, to what’s ahead of you.It usually takes founders 3-5 years to learn how to do this with the help of a VP of Sales. If you can do this from day one, you'll be much further ahead of others by proving to investors that you have what it takes to build a large, enduring company.
