spectrum: the art of the deal (consolidated deck)
DESCRIPTION
You made your pitch and investors are interested! Now what? It doesn't matter if the interested party is an angel, venture capital group or private investor, you need to understand the process and how to manage the relationship. Our Spectrum session on June 24, 2014 was held at the Austin Chamber and included an in-depth discussion of business valuation, term sheets, dilutive and non-dilutive funding, Shark vs Partner relationships, communications, assumptions and setting the right expectations. The session closed with a true insider's perspective as Light Bohrd CEO Chris Forgey shared his own recent story, including "the ask," negotiations and the "gotchas."TRANSCRIPT
Kevin CastelloDirector
Baylor Angel Network
Bill HulseyIP Attorney
Hulsey-Calhoun
Chris ForgeyCEO
LightBohrd &
CTO OEM Group
SBDC – Now what?June 24th, 2014
Welcome Entrepreneurs, Investors and Guests!
Agenda
Types of FundingTypes of Investors
Investor FitTerm Sheet Overview
Typical Investment Process
Starting VocabularyEntity Structure – LLC and C-CorpSecurity – Loan or StockConvertible Note – initial loan structure which converts to equity in the futureStock – Common and PreferredDilution – the loss of some founder ownership due to investments takenCrowdfunding – the use of an-online portal rather than face to face investor engagementAccredited Investor – SEC requirement for certain types of transactionsBootstrapping – Self funding by the founder team
What is the most advantageous funding for the founders?
What is the most advantageous funding for the founders?
REVENUE!
OPM Funding TypesOwnership Dilutive
• Convertible Notes• Stock Sale – Common or Preferred• Membership Unit Sale including
preferred• Some Corporate• Crowdfunding – Investment
ANY Sale of Equity is Dilutive
Non or Minimally Dilutive
• Grants• Loans• Revenue Based Funding• Some Corporate• Crowdfunding – Reward or Loan
Most non-dilutive money must be repaid on a set schedule
Investor TypesEQUITY (Think Exit)
• Friends & Family• Accelerators/Incubators• Angel Investors• Angel Networks• Venture Capital• Private Equity
DEBT
• Credit Cards• Private loans• SBA• Banks• Factoring• Revenue or Royalty
Financing is a hybrid
F & F Angels VC PE
Sophistication Low Moderate to High High High
Stage Early Early Early Growth Major Growth
Typical Round Size
< $100K $200K - $2mm $5mm+ $25mm+
Expected Returns What’s that? 60-100% annually
40-100% annually
20-40% annually
Valuations Ditto Average $2.5mm Average $7mm Average $114mm
Security Varies Conv. Notes or Preferred Stock
Preferred Stock Complex Instruments
CrowdfundingEquity/Debt• Accredited Investors
– Can do equity or loans– General Solicitation won’t apply for
portals
• Non-accredited Investors– Not legal in many states– Not legal interstate– JOBS Act rules STILL in process– Texas Intrastate rule expected in
August
Rewards
• Provides something of value for a donation
• Does not provide any ownership or dividends
• Evaluate portals for traffic and fee structures
Revenue Based Financing
• Investment is paid as a % of revenue• Can be loan or stock based• Non-dilutive in long term• Payments vary with revenue• Typically 3-10% of revenue to a 2 to 5X+ multiple
Process of an Investment• Finding and contacting investors• Early evaluation – interest and screening• Formal evaluation – screening and maybe fees• Pitch Presentation to Investors• Due Diligence if interest• Term Sheet• Closing Docs and Funding
3-9+ month process!
Definition of 'Due Diligence - DD'1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Read More: http://www.investopedia.com/terms/d/duediligence.asp#ixzz24qNuxEE3
Practical DD Definition
Whatever the investor does prior to making an investment decision.
In general, the more sophisticated the investor the more in-depth the due diligence.
Does DD make a difference?
Kaufmann Foundation 2007 Study “Return to Angel Investors in Groups” by Dr. Rob Wiltbank
Return multiple for DD < 20 hours 1.1x in 3.4 yearsReturn multiple for DD >20 hours 5.9x in 4.1 years
DD Process Overview
• Quantitative Analysis• Qualitative Analysis• Management Team Analysis• Additional “Deep Dive” Analysis• Term sheet negotiation if applicable
Quantitative Analysis
• Documentation review that supports the authenticity of the startup
• Expect general solicitation questions• Duration: days to weeks mainly dependent upon
entrepreneur responsiveness• Deliverable: Completed comprehensive checklist
Qualitative Analysis• Angels and subject matter experts to gather more details
of the business through a question and answer session with the company’s management team, customers, suppliers, distributors, and others.
• Duration: days to weeks• Deliverable: Report of findings and opinions of a subject
matter expert
Management Team Analysis• Discovering the strengths and weaknesses of the
management team and begin building an Advisory Board or Board of Directors as applicable
• Duration: days to weeks• Deliverable: Background check reports and report of other
findings and recommendations • Bad Actor Rule is now active
Deep Dive Analysis
• Fact finding or research if the Angels feel that additional information is necessary to validate the investment
• Duration: days to weeks• Deliverable: Report with findings and
recommendations
Term Sheets
Term sheets define Control
Economics& General Legal
Term Sheets
Term sheets define Control
Economics& General Legal51% does NOT = Control
Major Term Sheet Items
• Valuation• Preferences – Dividends, Liquidation,
Conversion Rights, Redemption Rights, & Voting Rights
• Board of Directors
Valuation Only Focus
Valuation Only Focus
Valuation Myths
• Valuations are:– Objective– Should be done by independent accounting firm– Same in every ______ (location, industry, stage,
etc.)– The only term that matters
Major Term Sheet Items
• Valuation• Preferences – Dividends, Liquidation, Conversion
Rights, Redemption Rights, & Voting Rights• Anti-Dilution• Board of Directors
ECONOMICS & CONTROL
Major Term Sheet Items
• Valuation• Preferences – Dividends, Liquidation, Conversion
Rights, Redemption Rights, & Voting Rights• Anti-Dilution• Board of Directors
ECONOMICS & CONTROL
51% does NOT = Control
RESOURCES & UPCOMING EVENTS
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