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DAVE GILLESPIE
Crash Course in Funding Vehicles“The MVP ‘s of Fundraising”
@davegillespie
Bertha 600,000 60%John 400,000 40%
1,000,000 100%
Initial Cap Table
How to Structure a Deal?
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
COMMON INVESTMENT VEHICLES
Preferred Equity
Warrants
Convertible Debt
PREFERRED EQUITY
Equity with Preferential Financial Terms, Control, Information Rights
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
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.
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
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.
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.
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 $6,000,000 by the total number of outstanding shares (on a fully diluted basis) immediately prior to the Next Financing.”
• Watch out for the “Cap Trap” - If used, the Cap must be set higher than current attainable pre-money valuation or it’s a deep discount deal for investor and will cause heavy dilution.
Which Vehicle is Best?
STRUCTURING AN EQUITY DEAL
Primary Drivers in Negotiations
1. How much money will the Investor Invest?
2. How much of the Company will the Investor own?
MilestonesGet legalOpen first brewpub
Sell some beer.
Founders Cash 20,000.00$ 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?
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?”
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.
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
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
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$
“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
DEFINING THE MVPWhat is the Minimum
Viable Product for Fundraising?
The minimum set of terms that will enable a buying decision by
an investor.
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
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
CONTACT INFORMATION
Dave Gillespie
614-344-4842
@davegillespie