SBDC – Now what? June 24th, 2014

Welcome Entrepreneurs, Investors and Guests!

Agenda

Types of Funding Types of Investors

Investor Fit Term Sheet Overview

Typical Investment Process

Starting Vocabulary Entity Structure – LLC and C-Corp Security – Loan or Stock Convertible Note – initial loan structure which converts to equity in the future Stock – Common and Preferred Dilution – the loss of some founder ownership due to investments taken Crowdfunding – the use of an-online portal rather than face to face investor engagement Accredited Investor – SEC requirement for certain types of transactions Bootstrapping – Self funding by the founder team

What is the most advantageous funding for the founders?

What is the most advantageous funding for the founders?

OPM Funding Types Ownership 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 Types EQUITY (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

Crowdfunding Equity/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

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 years Return 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 Legal

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

Questions & Discussion