raising money from venture capitalists -

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Visit us at marsdd.com

What do VC’s want?

Michelle McBane @michellemcbane

Investment Director

Investment Accelerator Fund @MaRSIAF

iaf.marsdd.com

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Investment Accelerator Fund (IAF) - Purpose

•  Seed stage funding is critical for job creation and a vibrant VC infrastructure •  IAF provides seed investment to promising, emerging technology companies

throughout Ontario •  Provides technology companies with the resources, skills and networks to

validate their ideas and bring products and services to market •  Bridges the funding gap between new technology companies and the wider

investment community

•  For more info go to: iaf.marsdd.com

Bridging the Funding Gap for Seed Stage Companies in Ontario

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Who can raise venture funding?

•  Venture capital is a very specific thing. •  It’s not what all technology businesses should think of when they

need capital.

•  It only really works for businesses with: •  High potenUal for escape velocity •  A large potenUal market

•  A team capable of building a large company

h)p://www.startupcfo.ca/2012/08/top-‐10-‐signs-‐your-‐business-‐is-‐not-‐vc-‐fundable/

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Deal killers

•  Services, not product •  You are a sole founder •  You don’t know any VCs •  You have no tracUon •  You have outsourced development •  You serve a niche market •  You don’t know the market •  You are disorganized •  You move slowly •  You lack that founder magic

h)p://www.startupcfo.ca/2012/08/top-‐10-‐signs-‐your-‐business-‐is-‐not-‐vc-‐fundable/

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Goal

•  VC moUvaUons –  Driven by their model

–  Impacts their terms and expectaUons

•  Most companies aren’t VC’able –  Just don’t fit the “Big Money” model

–  May be good companies and businesses

•  But if you are then you’ll be be]er equipped than most because of tonight

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Its all about the frogs

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The Numbers

•  1,000 companies •  10 investments

–  2 may be widely successful (usually 1)

–  6 “land of the living dead” –  2 fail horribly

•  Winners to offset my losers

•  Start ups 10-‐12x return in 5-‐7 years •  ExisUng companies 5-‐7x in 4-‐5 years

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What does that mean for you?

•  A company that doubles isn’t enough… •  Every opportunity has to have the potenUal to be a home run

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You Tube & Sequoia

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Deal Stats

•  You Tube sold to Google for $1.65 Billion •  Sequoia invested $11.5M received $495M

–  30% of the company

•  43x return •  Great deal!

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ExpectaUons

•  6-‐9 months to raise capital •  Several meeUngs

–  Want to get to know you

–  Assess your “Say/Do” factor –  Close to truth

•  Builds confidence

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ExpectaUons

•  Personal RecommendaUon: –  Get to know the VC

•  Process (who makes the decision, when & how oren)

•  Where are they in their fund life cycle

•  What was their last deal

•  Talk to their exisUng CEO •  Cash available to invest/reserves

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ExpectaUons

•  Personal RecommendaUon: –  Rise above the noise –  Remember the frogs

•  1,000’s of deals

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Fit

Have to be able to live with them … “Dl exit do you part”

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Ni]y Gri]y…

•  The term sheet…

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What is a Term Sheet

•  Non-‐binding offer to invest •  Outlines the general terms and condiUons of investment

–  Which may change

•  Not the definiUve agreement simply a place to start •  Everyone uses it

–  Understand WHEN a fund issues a term sheet in their process

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Basic Terms

•  Non-‐heart ache –  Company name

–  Investors –  How much

–  Date

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ValuaUon is an Art

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Company’s Growth Forecast

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RaUonalized Forecast

On average it takes about 6 years for a so7ware company to get to $10 million revenue. Far more realis?c to get to $50M in 10 years (50% growth rate from years 6 to 10).

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Long Term Financing Strategy

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Build Value

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Typical Seed Stage Investment Structure

•  ConverUble Debenture •  Common Shares

•  Preferred Shares

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What is a converUble note?

•  Short-‐term debt that converts into equity •  For seed financing typically converts upon a larger financing •  Why use it?

–  Defer the valuaUon discussion (think Dragon’s Den) –  Can be faster, simpler and cheaper to paper

–  May or may not contain protecUve provisions

•  Key Features –  Conversion discount –  ValuaUon Cap –  Interest Rate

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ConverUble notes

•  Key features:

–  Conversion Discount •  Usually 10-‐30% -‐ average is 20%

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ConverUble notes

•  Key Features:

–  Conversion ValuaUon Cap:

•  A ceiling on the value of the start-‐up to determine the conversion price

2015-‐05-‐06

If a note includes a discount and a cap – conversion price is the lower of…….

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How do cap and discount work togehter

•  If a note includes a discount and a cap – conversion price is the lower of…….

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Preferred Shares

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Dividends

•  Accrue •  Price + dividend convert

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LiquidaUon Preference

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AnU-‐diluUon

•  Protects an investor from down round –  As if their investment had been done at the current lower price

–  Keeps the investor whole in bad Umes

–  Full-‐ratchet –  Weighted average

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RedempUon

•  VC can ask to have the company buy back shares –  Life of the fund –  Investors in funds want their money back

•  Outcome: –  Forces a sale –  Get minimum investment back (P+dividends)

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Approvals

•  60-‐66 2/3% –  Change nature of the business (acquire/divest) –  Change capital structure/arUcles

•  Default approval over future financing –  Approve business plan/operaUng plan –  Change in key employees (defined term)

–  CreaUon of ESOP –  Unbudgeted expenditure in excess of $5,000 –  Non-‐arms length transacUons

–  ….

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InformaUon Rights

•  Monthly prepared financial provided –  20-‐30 days from month end

•  Quarterly financials –  Analysis vs. budgets

•  Board material

•  Yearly operaUng plan –  (30 days prior to beginning of fiscal year)

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Share RestricUons

•  Founder restricUons •  Drag Along

–  VCs need exit •  Tag Along

–  I can sell a porUon if you can

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Board

•  Friends and family •  Move to 5

–  2 investor –  2 founder –  1 independent –  Expect material in advance of meeUng

–  Only a meeUng if the VC is there •  Defer once

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IP Assignment

•  Founders •  Employees

•  Consultants •  Students/universiUes/research organizaUons etc •  Avoid convoluted IP structures

–  Only going to be unwound

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Key Employee Agreements

•  Non-‐compeUUon •  Non-‐solicitaUon

–  Customers

–  Employees

•  IP Assignment

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ESOP

•  Ensure one common moUvator •  Need to a]ract talent •  15%-‐20% (low as 10%) •  New CEO •  New execuUves •  Board members

–  Non-‐VC •  Pre-‐$

–  DiluUve to you

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Other Rights and Privileges

•  Power of “OPM” –  Get to know your VC –  Won’t ma]er in good Umes

–  Can’t tell you what to do but prevent you from doing things

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Non-‐Binding Except for…

•  Acceptance & Exclusivity –  Deadline for acceptance –  Use the Ume to negoUate with other parUes

–  No “shop”

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Series Seed

Non-‐parUcipaUng preferred liquidaUon preference: The investor receives their money back and the remainder goes to the common.

Limited protecUve provisions: Among other things, the company can’t be sold without consent of a majority of the Series Seed.

Future rights. If new investors get be]er rights in a future equity financings (such as registraUon rights, price-‐based anU-‐diluUon, redempUon rights, etc.), then the holders of the Series Seed get these be]er rights.

Right of first offer on future financings: Self-‐explanatory.

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Take Away

Be careful what you ask for …don’t send the wrong message

raising money from venture capitalists -

Business