So you know a bit about the market you will (hopefully) soon be serving and you require some initial capital to start pulling resources to flesh things out. It is now time to write your business plan, right? Wrong. You simply can't know how to design and validate a full business plan at this stage. You should be able to communicate a flexible longer term strategy, and probably focus on a shorter term operational plan with a narrower scope of work. And there is a more important piece of the jigsaw to focus on first- the capital model. Not having, and understanding , a capital strategy can, from the outset, irreversibly undo your chances of ultimate success; whereas you can almost always recover from a flawed early business plan.

First time entrepreneurs tend to overinflate their valuations and can sound pretty silly. Your business may indeed be worth £100m in a few years if you execute well (and have the right capital strategy) but it is not, initially, worth the sum of its promises. You need to start by raising enough money to get to a point when you'll need more money, but by which time you will have removed some risks from the equation - and nudged up the valuation for all shareholders.

Your initial investment will probably come from business angels. Pre-product, pre business plan angels are taking a seriously high level of concentrated risk, with relatively low volumes of capital. In essence they are backing the entrepreneur to pull it together and put their capital to good use, not carelessly fritter their money away. But (most) angels know you can't take their £100k and deliver £100m back - they know that there will be further rounds - and so should you.

As a broad rule of thumb, plan to be selling a third of your business at each of these rounds, and raising 3 times the quantum raised previously. For example, say your business needs £12m of capital: Aim to lift £100k, then £300k, then £900k, then £2.7m, then £8m. If you set out to sell a third of your business for £12m you are looking at a £36m+ (post money) valuation. Perhaps your business does not need more of the £12m earlier; you could probably write a coherent business plan that appears to make use of it. But no-one is going to give you a valuation like that straight out of the blocks when none of the key risks have been eliminated by the earlier rounds. Getting the cash you need, when you need it, from the right type of value adding investors, at the appropriate valuation is going to require a robust capital strategy.

Be especially wary of overpricing the early rounds just to maximise retained ownership for angels with concerns about dilution and to protect your own dilution. The last thing you want is to force a later down round (where the share price goes down instead of up), which is likely to be interpreted by potential investors as a signal that management is not performing, rather than that investors messed up their earlier valuation. Down rounds do happen. They often lead to friction and can end badly for early shareholders and management.

One final tip: it helps if you can get some experienced early stage lawyers to draw up a simple shareholder agreement and help you devise some mutual protections. Too much complexity at this stage costs too much and will almost certainly get unwound in later rounds. In Money Dashboard we utilised a deferred founder share scheme. It worked really well, giving the shareholders some key rights and controls to manage their concentrated risk, whilst it allowed me to rebuild my ownership of ordinary shares on achieving improving valuation.

http://www.facebook.com/moneydashboard

http://www.moneydashboard.com/

http://twitter.com/#!/moneydashboard

http://twitter.com/#!/moneyexperts

Follow miiCard:

http://www.miicard.com/

http://twitter.com/#!/miicard