Notesale: Turn your study into money

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New Venture Finance: Startup Funding for
Entrepreneurs
Monday, October 5, 2015

4:31 PM

Language

• Term sheet for investment:
○ Pre-money valuation
...

○ Form of investment
...

○ Term
...

• Pre-money valuation vs
...

○ Pre-money: Value before you receive money
...

• Convertible notes:
○ Delays the valuation of the early stage company
...

• Preferred stock:
○ Stock issued to investors who are given preferential treatment over comm
○ Series A, Series B, Series C preferred are the “class” of preferred stock issu
○ Each subsequent issuance (financing round) of preferred stock has prefere

he entrepreneur will give up in the

round
...

mal
...

owing rounds
...


mon in a liquidation (acquisition, etc
...

ence over the earlier classes of

•

•

•

•

•

•

□ Better for the entrepreneur but oddly found
...

Liquidation preferences:
○ Rights in the event of a “liquidity event” (sale, merger, bankruptcy)
...

○ Order of preference = creditors, preferred stock, common stock
...

Participating/Non-Participating Preferred:
○ Participating: 1X preference plus a pro-rata share of what remains
...

Pro-Rata rights:
○ Right (but not the obligation) of an investor to participate “pro-rata” in sub
percentage ownership
...

○ Avoid “super pro-rata rights”, essentially an option to acquire greater % ow
Voting rights:
○ Provides that all shares vote together as a single class on an “as-converted
○ Most important application is that no separate approval of preferred share
increase in authorized shares – majority of shares given
...

○ Directly impacts on valuation an your dilution
...


Business Plan

mon in a liquidation (acquisition, etc
...

ence over the earlier classes of

money before common stockholders
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wnership (if succesful)

d” basis
...


• Mistakes to avoid:
○ A plan cannot appeal to every audience
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○ A sprawling plan makes a bad first impression
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○ Put the executive summary on the first page
...

○ Don’t quote massive market sizes
...

○ Don’t repeat things
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○ Eliminate contradictions
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○ Don’t put too many perspectives
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Financial Statements

• “Pro forma” is standard
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• Cash flow is the most important one
...

§ Sales & marketing
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• Income statement:
○ Shows projected profit/loss
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...


§ Building/strengthening the team
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○ Feeds cash flow statement but timing of revenue collection and expense p
○ Years 1 and 2 need to be very detailed
...

• Cash flow statement:
○ Converts the income statement to cash basis
...

○ Impact capital formation options available
...

§ Need for management flexibility
...

○ Examples:
§ Unincorporated Sole Propietorship:
□ Exclusive control
□ Lower startup costs
□ No double taxation
□ Personal liability
□ Limits fund raising as no way to share equity
□ Failure could impact you and your family
§ General partnership:
□ Jointly owned by two or more parties
...

□ Generally used for service professions
...

® Avoids double taxation
...

® Limited fund-raising strategies
...

□ GP remains liable for all debts
...
(adv
® GP unlimited liability (disadvantage)
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capex)
...


dvantage)
...


□ Used to secure capital or spread risk
...

® LP limited liability, makes them more willing to invest
...

§ Corporations:
□ A legal entity (not individuals) owns assets and s liable for debt
□ Greatest flexibility in raising capital from venture investors
...
S
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® Limited liability
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® Centralized management
...

® Tax paying entity, resulting in “double taxation” when pro
® Subchapter S corporation:
◊ No more than 75 shareholders
...

◊ Avoids double taxation
...

□ Treated as partnership for Federal tax purposes
...

□ Management and structural flexibility for most funding strategie
□ Advantages:
® Protection from personal liability
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◊ Or state if structured properly
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® No formalities post-organization
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® No restriction on multiple stock classes
...

□ Disadvantages:
® Death or withdrawal of members triggers dissolution
...

® Certain states don’t allow state tax credits or sales/proper

Sources of capital

dvantage)
...


ofits are distributed as dividends
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lf-employment income, subject to

rty tax exemptions
...

• Private investors and institutional investors
...
: they spiked in 1Q of 2014 to nearly 3 Bill
○ Also overseas investors
...

○ Mergers & acquisitions
...

• Bootstrapping:
○ Acts as a substitute for early stage capital
...

○ “What would I do with the money and are there other ways to btain those
○ Don’t delay, focus on cash flow, be frugal not cheap
...
accelerators
...

• Angel investors:

rty tax exemptions
...


resources?"

○ “What would I do with the money and are there other ways to btain those
○ Don’t delay, focus on cash flow, be frugal not cheap
...
accelerators
...

• Angel investors:
○ Types:
§ Checkbook angels: 5K - 25K (passive)
§ Capital A angels: 50K - 250K (active) who may want advisory role
...

○ Investments:
§ Enthusiasts: 10K - 100K
...
Like “making the deal”
§ Proffesionals: 35K - 100K
...
Main goal, incr
§ Micromanagers: 100K - 1M
...
L
seat
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Former senior managers at Fortune 500 cos
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More willing to take risks
...


Getting funded
• Due dilligence process:
○ Preparation and cooperation
...

○ Search and destroy mission
...

○ What are they looking for:

○ Is necessary and time-consumming
...

rease personal wealth
...
Profitabulity of investment
...


○ Is necessary and time-consumming
...

• Company valuation:
○ Traditional valuation methods are of no use
...

§ Ownership at exit to achieve desired ROI
...

○ Example of a software company valuation:

• Term sheets:
○ Be creative and leave ego out of the deal
...

○ Never bluff
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○ Look to the future, not the past
...

• Common stock:
○ Equity securities include common stock, preferred stock, warrants and opt
○ One share is equal to a fractional ownership of the company
...

○ Value is diminished when preferred stock is issued because of the prefere
○ Most junior of all securities
...


ences
...

Common is usually issued to founders, employees and consultants
...

Not convertible into other securities
...

Vesting schedules should be established
...

§ There are tax implications
...
0001)
○ May have preemptive rights:
§ The right to maintain their prorate share in the company, etc
...

○ Unsecured
...

○ Terms:
§ Maturity: date the note plus interest must be repaid in the absence o
months
...

§ Conversion discount: Rewards early investor for high risk nature of in
□ From 10% (low) to 35% (high)
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□ Nature of financing
...

○ Pros:
§ Less paperwork, reduced legal fees
...

§ Deferred pricing
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○ Cons:
§ Could crowd out investors in next round
...
priced round
...

○
○
○
○
○
○
○
○
○

tions
...


a defined event
...
12 to 36

nvestment,

ll convert
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§ Valuation caps/discounts
...

§ Too low cap dilutive vs
...

§ Forced conversion
...

○ Participate in distributions in liquidation
...

○ Convertible into common stock at the election of the stockholders
...

○ May include “pay to play” provisions
...

○ Anti-dilution protection:
§ Does protect the investment value if the company issues stock at a lo
“downround”
...


ower price in the future - aka

○ Preferred stock redemption rights
...

§ Votes as a class in certain circumstances:
□ Liquidating the company
...

□ Creating new class of preferred stock
...

○ There’s an investor’s right agreement
...

§ Information rights
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§ Protective provisions
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□ Parallel rights:

§ Registration rights: Register sale of investor’s restricted stock
...

enario
...


Pitching investors and closing the round
• What do investors want to see?
○ They invest in what they know
...

○ They care that:
§ You have an in-depth knowledge of your market
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§ You know why customers will buy your solution
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○ Never say “I have no competition”
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§ Well thought out assumptions
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§ Competent management
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○ Understand the risks
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• How to create the pitch deck?
○ There is no perfect pitch deck
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○ Set up the problem
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○ Introduce the team that will get it done
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○ Ten slides (maximum)
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Cover: contact info and tagline
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Opportunity: the problema and pain points
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Team
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Product: benefits and how it addresses the problem
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Market size: supported by research
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Business model: how you make money
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Opportunity: the problema and pain points
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Team
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Product: benefits and how it addresses the problem
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Market size: supported by research
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Business model: how you make money
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Competition: why you’re better
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3
...

4
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What you need: how much, how used
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sign)
...

○ If your business is complicated, focus on the problem you solve
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○ Project emotion and passion
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• Do’s and don’ts:
○ Don’ts:
§ Talk about projections without a plan
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§ Forecast “hockey stick” growth
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§ Focus only on positives
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§ Read your slides
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§ Not listen
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§ Try to answer a question you have no answer for
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○ Do’s:
§ Connect emotionally
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§ Highlight your prior success
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§ Demonstrate you understand the market
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Pull them up if asked (that’s good

ny
...

§ Give product demo
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§ Emphazise your team’s strengths
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§ Assume you will succeed on revenue projections
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§ Research your audience
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§ Leave time for questions
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§ Ask for adequate funding
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• How to close the round
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○ Provide investment options
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○ Stop selling
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○ Ask for the check

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