funding for innovative startups - part 5 of 5

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  1. 1. SESSION FIVE: ADVANCED FUNDING & WRAP-UP Benno Groosman MScBA Athens, June 7, 2016
  3. 3. MASTERCLASS SCHEDULE Session 1: Introduction to funding language + business planning; Session 2: Determining funding need + milestone-based funding; Session 3: Building your financial investment plan; Session 4: Investor readiness; Session 5: Advanced funding and wrap-up. FUNDING MASTERCLASS
  4. 4. INTHIS PRESENTATION Scope More term sheet (economic & control) What investors look for Negotiation Summary & wrap-up Other resources FUNDING MASTERCLASS
  5. 5. SCOPE Funding needs focus You cant try to raise money or do it in your free time Make an investment strategy, stick to the strategy and dedicate time for finding investors and closing the deal Know the investment terminology and process FUNDING MASTERCLASS
  6. 6. TERM SHEET In a term sheet the startup and investor agree on economics and define legal control over the company. See also session 4 for many of these terms: ng-for-innovative-startups-part-4-of-5 FUNDING MASTERCLASS
  7. 7. TERM SHEET (ECONOMIC) PRICE PER SHARE Technically an investor buys shares in your startup with his investment The valuation can be postmoney or premoney: ask! Postmoney: 1M investment at 4M valuation gives investor 25% equity 1 / 4 = 0.25 = 25% Premoney: 1M investment at 4M valuation gives investor 2o% equity 1 / (1 + 4) = 0.2 = 20% FUNDING MASTERCLASS
  8. 8. TERM SHEET (ECONOMIC) OPTION POOL The startup can make an option pool, to reward employees or advisors (typically 5-20% equity) Its important to determine if this pool will be allocated before or after the investment and how the founders/investor will dilute their equity in future occasions FUNDING MASTERCLASS
  9. 9. TERM SHEET (ECONOMIC) LIQUIDATION PREFERENCE (1) In the case of liquidation the proceeds can be divided between the founders and investors in different ways. Liquidation can be: merger, acquisition, sale of voting control, sale of almost all the assets, etc. This is being defined in this part of the termsheet FUNDING MASTERCLASS
  10. 10. TERM SHEET (ECONOMIC) LIQUIDATION PREFERENCE (2) Many investors will claim the nominal value of the shares + dividend to start. Extra participation rights apply too: Full participation Capped participation No participation FUNDING MASTERCLASS
  11. 11. TERM SHEET (ECONOMIC) LIQUIDATION PREFERENCE (3) Assume the purchase price of the venture is 10M and theres only one investor who invested 1M at a 3M postmoney valuation. Full participating: investor will get first his 1M and then 1/3 of the remaining 9M = 4M in total. Nonparticipating: investor will get 1/3 of 10M = 31/3M Capped participation (preference): in case of for example a 3x cap the investor will get maximum 3x 1M = 3M FUNDING MASTERCLASS
  12. 12. TERM SHEET (ECONOMIC) VESTING Vested stock will only be fully transferred to a founder after he or she stayed in the company for a few years (typically 4). In case of 4 years, this can be done for example with 25% of your equity after completing the first year (cliff) and pro rato on a montly basis for 36 the months after. What happens in case of an early merger? FUNDING MASTERCLASS
  13. 13. TERM SHEET (ECONOMIC) VESTING (MERGER) Single-trigger acceleration: Automated accelerated vesting upon a merger (founder/employee will vest his shares) Double-trigger acceleration: Extra on the single-trigger, the second trigger is the founder/employee to be fired (for example) in order to vest accelerated.The buying party hereby has more security the key people will stay with the company (which can increase the valuation for the other shareholders too) FUNDING MASTERCLASS
  14. 14. TERM SHEET (ECONOMIC) ANTI DILUTION Antidilution protects the investor for a lower future valuation.This lower future valuation could otherwise give a new investor a bigger part of the equity, at a lower price (and thereby diluting the shares of the previous investor). If the price is lower, in the case of an anti dilution term, all the share distribution will take place as if it was at the stock price of the first investment. FUNDING MASTERCLASS
  15. 15. TERM SHEET (CONTROL) Board of directors: investor can appoint members of the board Protective provisions: veto on decisions or with large majority (>70% voting rights) FUNDING MASTERCLASS
  16. 16. TERM SHEET (CONTROL) Drag-along: obligation for other shareholders to sell their shares when other shareholders sell, so they can be dragged in a complete sell of the company Tag-along: right to join other shareholders when they are selling their shares, the other shareholder can tag-along on the success of the other FUNDING MASTERCLASS
  17. 17. TERM SHEET (OTHER) Redemption rights: investor can sell his shares back to the company to protect downside risk Dividend Information rights: time frames and standards for the startup to deliver future (financial) information to the investor Right of first refusal: shareholder first has to try to sell to other shareholders Voting rights Founders activities/time: usually 100% of professional time founder has to go to the startup FUNDING MASTERCLASS
  18. 18. WHAT INVESTORS ASSESS ON Team (experience, expertise, complementarity) Product/market fit Intellectual Property Traction Revenues Match with fund Manageable risks Stage FUNDING MASTERCLASS
  19. 19. NEGOTIATION First, you negotiate for your company! Some personal goals can conflict with whats best for your venture. The best result is getting a balanced and fair deal that you understand, while maintaining a good relationship with the investor. FUNDING MASTERCLASS
  20. 20. NEGOTIATION Prepare the necessary documentation (business plan and more), the right support (experienced people), and know what you want to achieve. Have a plan B. Many (if not most) deals never happen. Realize that in a new round, youll negotiate new terms (triggered by the new investor). FUNDING MASTERCLASS
  21. 21. NEGOTIATION FUNDING MASTERCLASS negotiation-frank-chen
  23. 23. OTHER RESOURCES ON FUNDING Online: / Books: Venture deals (be smarter than your lawyer and venture capitalist), Brad Feld & Jason Mendelson * The Art of Startup Fundraising: Pitching Investors, Negotiating the Deal, and Everything Else Entrepreneurs Need to Know, Alejandro Cremades * this 5th Masterclass was partly inspired on this book FUNDING MASTERCLASS
  24. 24. SUMMARY MASTERCLASS Session 1: Introduction to funding language + business planning; Session 2: Determining funding need + milestone- based funding; Session 3: Building your financial investment plan; Session 4: Investor readiness; Session 5: Advanced funding and wrap-up. FUNDING MASTERCLASS
  25. 25. FOLLOW ME Benno Groosman MScBA Experienced startup entrepreneur FUNDING MASTERCLASS