Raising capital sucks. There are plenty of other things you could be doing with your time besides talking to new investors (like running the business), but unfortunately it’s a necessary evil. In some instances, it may be optimal to raise an inside round as opposed to going out to market to find new investors. The following scenarios are those best suited for an inside round:
-Time is of the essence. Talking to new investors and getting them up to speed can take months, and that doesn’t include the time it’s going to take for attorneys to haggle over legal documentation. For instance at DAN Fund, we can get to a ‘yes’ in 4 weeks which many have told me is fast, but then go ahead and budget another 4 to 6 weeks for legal. If time is an issue (perhaps there is a growth opportunity you need to take advantage of, you’re running out of cash, etc), then an inside round will be a better option than going out to market. If you’ve been doing a good job of keeping investors well informed, all it may take is a phone call and so long as you’re replicating the docs of the last round, legal will be done quickly.
-You don’t need all that much capital. If you’re raising a few hundred thousand to a million dollars and you’ve already got a group of investors that have put up a few million, in all likelihood they should have the appetite to throw in a little more cash, especially if you’re doing well.
-You’re forced to. In some cases you’ve gone out to market and failed or your performance hasn’t been very strong, so raising outside capital may be the only option for new cash. Investors may view this as throwing good money after bad, but in order to save their prior investment, they may be inclined to do an inside round. If this does happen to you, expect a renegotiation of terms.
Any time you do an inside round, always try and do two things: i) refill the option pool so that there is plenty of equity to go around. Even if you have enough options already, it doesn’t hurt to top up the pool. Be sure and remind the investor that they’re only dilutive if you actually issue them; and ii) try to keep the terms as close to you can as that of the last round in order to keep legal cost and time down.