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DAVE GILLESPIE Crash Course in Funding Vehicles “The MVP ‘s of Fundraising” @davegillespie

Fundraising MVPs -- CMH Startup Week

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Page 1: Fundraising MVPs --  CMH Startup Week

DAVE GILLESPIE

Crash Course in Funding Vehicles“The MVP ‘s of Fundraising”

@davegillespie

Page 2: Fundraising MVPs --  CMH Startup Week

Bertha 600,000 60%John 400,000 40%

1,000,000 100%

Initial Cap Table

How to Structure a Deal?

Page 3: Fundraising MVPs --  CMH Startup Week

Private Equity

IPO

Pre-Sales (i.e. Kickstarter)

Incubators/Accelerators

Revenue

Bank Loans

Venture Capital

Concept Startup Growth Late Stage

Friends and Family

Angels

Founder's Cash

Typical Sources of Growth Capital

Grants/Contests

Page 4: Fundraising MVPs --  CMH Startup Week

COMMON INVESTMENT VEHICLES

Preferred Equity

Warrants

Convertible Debt

Page 5: Fundraising MVPs --  CMH Startup Week

PREFERRED EQUITY

Equity with Preferential Financial Terms, Control, Information Rights

Page 6: Fundraising MVPs --  CMH Startup Week

PREFERRED EQUITY

Preferential Financial TermsLiquidation Preference -- Investor gets paid back first from any

liquidation or exit transactionDividends/Preferred Return -- Investor is entitled to additional return

similar to interest, i.e. 8% per year. • Scalable technology startups – these are not typically paid out

until an exit if ever• Food and Beverage Startups – often paid out of cash flow of

business

Page 7: Fundraising MVPs --  CMH Startup Week

PREFERRED EQUITY

Participation Rights

• Participating Preferred (aka “double dip”): Investors are repaid prior to other common stockholders, plus they will also “participate” as common stockholders and receive their pro rata share of what’s left.

• Nonparticipating preferred stock (aka “single dip”): With this option preferred stockholders can either take their liquidation preference (i.e. be paid out before common stockholders plus interest) or convert their preferred stock to common stock and take their pro rata share of total proceeds.

Page 8: Fundraising MVPs --  CMH Startup Week

PREFERRED EQUITY

Control and Voting Rights Pro Rata Rights to Participate in Next Rounds Consent Rights to many actions by the Company Rights to Board Seats, board observation and/or specific information Redemption Rights Anti-Dilution Provisions Registration Rights Drag-Along Rights

Page 9: Fundraising MVPs --  CMH Startup Week

WARRANTS Like an Option. Investor receives the right to purchase a certain

number of shares at a late date for a pre-determined price.

Economics Very Similar to Regular Equity. Especially when exercise Price is often nominal or $0.001 per share

Valuation Important. Pre-Money Valuation determines the number of shares the investor will have the right to purchase.

Less Investor Control. Investors are not treated as shareholders until the holder exercises their right to purchase the shares.

Inexpensive to document. Good for smaller dollar earlier rounds.

Page 10: Fundraising MVPs --  CMH Startup Week

CONVERTIBLE DEBT

Debt that converts to equity at a negotiated discount to the price paid by investors at the time of Next Financing.

Loan Terms. The investment is initially treated as loan with interest and a maturity date.

• Interest typically ranges from nominal to 12% although are pretty low in todays environment. • Loan term is typically from 1 to 5 years, with 3 being standard.

Page 11: Fundraising MVPs --  CMH Startup Week

CONVERTIBLE DEBT

Conversion at Next Financing • Conversion Discount. Discount is usually 10% to 50% - Higher Risk and Longer Time call for

bigger discount. • Valuation Cap. Conversion price is often subject to a maximum valuation (the “Cap”)

• I.e. “Maximum price determined by dividing $6,000,000 by the total number of outstanding shares (on a fully diluted basis) immediately prior to the Next Financing.”

• Watch out for the “Cap Trap” - If used, the Cap must be set higher than current attainable pre-money valuation or it’s a deep discount deal for investor and will cause heavy dilution.

Page 12: Fundraising MVPs --  CMH Startup Week

Which Vehicle is Best?

Page 13: Fundraising MVPs --  CMH Startup Week

STRUCTURING AN EQUITY DEAL

Primary Drivers in Negotiations

1. How much money will the Investor Invest?

2. How much of the Company will the Investor own?

Page 14: Fundraising MVPs --  CMH Startup Week

MilestonesGet legalOpen first brewpub

Sell some beer.

Founders Cash 20,000.00$ KickStarter 30,000.00$ Loan 100,000.00$ TOTAL 150,000.00$

Sources of Capital Capital Requirements

:

$250,000

How Much Should I Ask For?

Page 15: Fundraising MVPs --  CMH Startup Week

How much of the Company will the Investor Own?

• Professional Investors. VC’s and Angel Groups typically internal guidelines about how much of a company they want to own for funding a given round.

Typically 20% to 35%

• Others. The percentage can vary outside the typical range, but is almost always the primary driver of the conversation.

“How much equity does that get me?”

Page 16: Fundraising MVPs --  CMH Startup Week

HOW MUCH IS MY COMPANY WORTH

Pre-Money Valuation Negotiated “value” of your company prior new investment.

Post-Money ValuationValue of your company including new investment.

Page 17: Fundraising MVPs --  CMH Startup Week

Pre-Money ValuationInvestment Amount

Post-Money Valuation

Investment Amount

$250,000

Pre-Money Valuation

Post Money Valuation

$250,000

$??????

+

Investment Amount =

X% of Post-Money Valuation

X = Investor’s Ownership

Page 18: Fundraising MVPs --  CMH Startup Week

Pre-Money ValuationInvestment Amount

Post-Money Valuation Investment

Amount $250,000

Pre-Money Valuation

Post Money Valuation$1,000,000

$250,00025%

$750,00075%

+

Investment Amount =

X% of Post-Money Valuation

X = Investor’s Ownership

What’s the Deal? $250,000 for 25% of the

Company

Page 19: Fundraising MVPs --  CMH Startup Week

Formulas• Share Price = Pre-Money Valuation / Total

Outstanding Shares $750,000/1,000,000 = $0.75• Number of New Shares = Investment

Amount / Share Price$250,000 / $0.75 = 333,333

CALCULATING SHARE PRICE

Shares OwnershipBertha 600,000 45%John 400,000 30%Investor 333,333 25% Totals: 1,333,333 100%

Investment Amount 250,000.00$ Pre-Money Valuation 750,000.00$ Share Price 0.75$

Page 20: Fundraising MVPs --  CMH Startup Week

“The minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.”

-Eric Ries

MINIMUM VIABLE PRODUCT

Page 21: Fundraising MVPs --  CMH Startup Week

DEFINING THE MVPWhat is the Minimum

Viable Product for Fundraising?

The minimum set of terms that will enable a buying decision by

an investor.

Page 22: Fundraising MVPs --  CMH Startup Week

Equity MVPWould you invest $_____ to own x% of my

Company?

Convertible Debt MVP

Would you invest $x for a convertible note that converts to equity in the Next Round at a x% discount and has a Valuation Cap of $_______.

FUNDRAISING MVP’S

Page 23: Fundraising MVPs --  CMH Startup Week

Identify and use an MVP when Fundraising

1. facilitate quicker buying decisions with less effort 2. produce verifiable investor feedback 3. enable the founder to scrap or modify the

“product” to produce a better fit with the market.

Easier, Faster, Smarter

TAKE-AWAYS

Page 24: Fundraising MVPs --  CMH Startup Week

CONTACT INFORMATION

Dave Gillespie

[email protected]

614-344-4842

@davegillespie