Business 16Stanford Department of Continuing EducationClass # 5, 10/26/09

Fundraising: Strategy, Termsheets, Dilution

When do I fundraise?o When I have a strategy

o When I understand the effectso When it makes sense for the company and for

new investorso When investors are likely to be interestedo When I have hit relevant milestoneso When I can answer “who cares?”

Fundraising Strategyo When do I ask?

o Who do I ask?o Do my current investors help or hurt?o Do my investors do my road show with me?o How much do I ask for?o Do I get it all at once, or in tranches?o How does this fundraising affect future

investment in my company?o How does this investment force me to raise

additional rounds, what milestones will I will need to hit to improve valuations?

o Will the increase in company value (or my share of company value) be greater than our dilution from this investment?

Fundraising Strategy

o You will need to fund to the next value inflection point

o At least 18 months of capitalo Less than that and you spend all of your

time fundraisingo More than that, and you are suffering

unnecessary dilution

o Calander timingo Expect at least a 6 month process

Fundraising Strategy

o Understand that as a founder/CEO, your main job is to raise money, so stop whining about how hard it is/how much time it takes/how you can’t manage the company and raise money/how investors are too stupid/risk averse/near-term oriented/etc.,etc.

o Welcome to the NFL

Fundraising Strategy

o You need to make each new round make sense for each new group of investorso You need to create enough value that every round can make a multiple on their money

o Series A needs 10x, Series B needs 5x, Series C needs 3x

o You need to answer “Why don’t I just wait until the next round?”

Fundraising: Effects

o Everybody will get dilutedo Investors protect themselves by putting

in their “pro-rata”o Employees don’to You will probably need to refresh the

employee poolo Watch the cost of those options

Fundraising: Effects

o Post-moneyo Savvy investors are obsessed with it

o If your last post money was too high for the milestones achieved, your investors are gonna get whacked

o Investor pain=Common shareholder pain

o Preferenceso Eat away at commono Price per share is not everything; understand everything that can affect your payout

Fundraising: Milestones

o Make them realo Significant risk reduction

o Sales, Management Hires, Reg. Approvals

o Don’t get trapped into raising money before you hit a big milestoneo Investors may just want to wait

o Don’t get trapped into setting a valuation just before you reach a liquidity evento New investors will not want to pay much more than your investors just did

Fundraising: Who Do I Ask?

o Look in www.nvca.com under NVCA memberso Not firms that have funded competitive

dealso Ask explicitly

o Make sure they invest amounts and at stages and in technology that matches your company’s needs

o Talk to decision makerso Get your attorney or any of your

advisors to make introductions

Fundraising: Bridge financing

o Useful, crippling or necessary, depending on circumstanceso Useful when you don’t want to set a price that

is too high or too lowo Punts the pricing decision to the next round

investorso Crippling when no outsider is interested

o Terms can get tougho Necessary when you have to hit a milestone and

were not smart enough to raise enough moneyo Be careful of what the terms imply to new

investorso Tough terms imply investors think there is a

lot of risko Investors may not understand what they are really

gaining