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Fundraising MVPs -- CMH Startup Week

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The Gillespie Law Group, Ltd.
The Gillespie Law Group, Ltd.

Crash Course in Startup Fundraising Terms. Introduces Minimum Viable Product approach to help get done smarter, faster, and easier.

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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 Terms Liquidation Preference -- Investor gets paid back first from any liquidation or exit transaction Dividends/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 whats 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 $6,000,000 by the total number of outstanding shares (on a fully diluted basis) immediately prior to the Next Financing. Watch out for the Cap Trap - If used, the Cap must be set higher than current attainable pre-money valuation or its a deep discount deal for investor and will cause heavy dilution.
Which Vehicle is Best?
STRUCTURING AN EQUITY DEAL Primary Drivers in Negotiations 1. How much money will the Investor Invest? 2. How much of the Company will the Investor own?
Milestones Get legal Open first brewpub Sell some beer. Founders Cash 20,000.00$ 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. VCs 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 Valuation Value of your company including new investment.
Pre-Money Valuation Investment Amount Post-Money Valuation Investmen t Amount $250,000 Pre- Money Valuation Post Money Valuation $250,000 $?????? + Investment Amount = X% of Post-Money Valuation X = Investors Ownership
Pre-Money Valuation Investment Amount Post-Money Valuation Investmen t Amount $250,000 Pre- Money Valuation Post Money Valuation $1,000,000 $250,000 25% $750,000 75% + Investment Amount = X% of Post-Money Valuation X = Investors Ownership Whats 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 / $0.75 = 333,333 CALCULATING SHARE PRICE Shares Ownership Bertha 600,000 45% John 400,000 30% Investor 333,333 25% Totals: 1,333,333 100% Investment Amount 250,000.00$ 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 MVP What is the Minimum Viable Product for Fundraising? The minimum set of terms that will enable a buying decision by an investor.
Equity MVP Would 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% FUNDRAISING MVPS
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 dgillespie@kgmlaw.com 614-344-4842 @davegillespie

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Fundraising MVPs -- CMH Startup Week

  • 1. DAVE GILLESPIE Crash Course in Funding Vehicles The MVP s of Fundraising @davegillespie
  • 2. Bertha 600,000 60% John 400,000 40% 1,000,000 100% Initial Cap Table How to Structure a Deal?
  • 3. 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
  • 4. COMMON INVESTMENT VEHICLES Preferred Equity Warrants Convertible Debt
  • 5. PREFERRED EQUITY Equity with Preferential Financial Terms, Control, Information Rights
  • 6. PREFERRED EQUITY Preferential Financial Terms Liquidation Preference -- Investor gets paid back first from any liquidation or exit transaction Dividends/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
  • 7. 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 whats 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.
  • 8. 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
  • 9. 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.
  • 10. 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.
  • 11. 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 $6,000,000 by the total number of outstanding shares (on a fully diluted basis) immediately prior to the Next Financing. Watch out for the Cap Trap - If used, the Cap must be set higher than current attainable pre-money valuation or its a deep discount deal for investor and will cause heavy dilution.
  • 13. STRUCTURING AN EQUITY DEAL Primary Drivers in Negotiations 1. How much money will the Investor Invest? 2. How much of the Company will the Investor own?
  • 14. Milestones Get legal Open first brewpub Sell some beer. Founders Cash 20,000.00$ 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?
  • 15. How much of the Company will the Investor Own? Professional Investors. VCs 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?
  • 16. HOW MUCH IS MY COMPANY WORTH Pre-Money Valuation Negotiated value of your company prior new investment. Post-Money Valuation Value of your company including new investment.
  • 17. Pre-Money Valuation Investment Amount Post-Money Valuation Investmen t Amount $250,000 Pre- Money Valuation Post Money Valuation $250,000 $?????? + Investment Amount = X% of Post-Money Valuation X = Investors Ownership
  • 18. Pre-Money Valuation Investment Amount Post-Money Valuation Investmen t Amount $250,000 Pre- Money Valuation Post Money Valuation $1,000,000 $250,000 25% $750,000 75% + Investment Amount = X% of Post-Money Valuation X = Investors Ownership Whats the Deal? $250,000 for 25% of the Company
  • 19. 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 / $0.75 = 333,333 CALCULATING SHARE PRICE Shares Ownership Bertha 600,000 45% John 400,000 30% Investor 333,333 25% Totals: 1,333,333 100% Investment Amount 250,000.00$ Pre-Money Valuation 750,000.00$ Share Price 0.75$
  • 20. 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
  • 21. DEFINING THE MVP What is the Minimum Viable Product for Fundraising? The minimum set of terms that will enable a buying decision by an investor.
  • 22. Equity MVP Would 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% FUNDRAISING MVPS
  • 23. 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

Editor's Notes

  • #2: Thank you, Brian. And thanks for your efforts in putting this panel together. Wow! What a fantastic week! Id like to get an idea of who is in the Crowd. Please raise your hand if youre a professional investor or have ever invested in a Startup Company. Youve been successful in Raising Capital for a Startup. Youve tried unsuccessfully to Raise Capital for a Startup. Great. Thank you for coming. I think we should have something for everyone today. Easier Faster Smater If you have questions, please save them for the end. But if youre not sure of the meaning of a word I say, please raise your hand and Ill make sure to quickly define that word and move on.
  • #21: Jeff Wilkins - Best customer data comes only when customers have to make a buying decision.