SESSION FOUR: INVESTOR READINESS

Benno Groosman MScBA – www.groosman.co – Athens, May 24, 2016 –

MASTERCLASS FUNDING FOR INNOVATIVE STARTUPS

Benno Groosman MScBA – www.groosman.co – Athens, May 24, 2016 –

THE SLIDES ARE ONLINE ALREADY!

www.slideshare.net/benno_groosman

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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.

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IN THIS PRESENTATION

ScopePreparationValuationThe process (with important clauses)After the investment

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SCOPE

This is not a presentation on negotiation tactics, but:

Preparation and understanding of the process will help you in the dealmaking and negotiation

You can only start negotiations if you meet the minimum requirements (the investor has to be interested, you have to be prepared)

The better you present your case, the better the deal you can get

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PREPARATION (1/2)

Business plan with financial plan http://

www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-1-of-5

http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-3-of-5

Know your funding need http://

www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-2-of-5

Presentation / pitch deckFUNDING MASTERCLASS

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PREPARATION (2/2)

Lawyer and accountant Build your relation before you have to review your contracts or guide the negotiations: this

will save time and improve qualityOther experienced entrepreneur

Before and during the investment process, find somebody with experience that can help you

Timeline When do you need the money? How do you want to go through the process? Take control!

Contact multiple investors Don’t bet on one horse More investors can share the risk and increase the funding Make sure they all have the same information and know the timeline

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VALUATION

Science, art or random?

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VALUATION

Valuation of startups is not just a numbers game. It’s more about expectations, feelings, investment limits etc.

But, start to quantify your value by:Discounted cash flow;Real option pricing;Comparing to other startups.

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VALUATIONDISCOUNTED CASHFLOW Take the total cashflow for each year In the 5 year prognosis at http://www.groosman.info/#!funding/cbvu this is €18.800; € 153.500; € 87.615; -€ 14.963 € 113.460 in year 1, 2, 3, 4 and 5

The discount rate is 0,15 (15 percent) =18800/1,15+153500/(1,15^2)+87615/(1,15^3)+(-14963)/(1,15^4)+113460/(1,15^5)

So, the DCF is €237.878 in 5 years This number is not totally fair, as it also includes the funding in these 5 years

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VALUATIONREAL OPTION PRICINGNPV = -1000 + 0.7*0.3*100 + 0.7*0.5*3000 + 0.7*0.2*6000 + 0.3*0 = 1471

investment

1000

succes

low1000

medium3000high

10000failure

0

0.7

0.3

0.5

0.20.3

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VALUATIONCOMPARING TO OTHER STARTUPSFind comparable startups (stage and market) and look for (public) data on the investments they made, talk with them or people in their circle. Check websites like www.crunchbase.com for this too

Valuation also depends on the investor’s previous investments, if you find that an investor takes 20-30% equity for €250k-350k this investor might look for valuations from €833k to €1.75M

Serial entrepreneur: look at your previous comparable startups (stage and market) and add a premium valuation for experience and network

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VALUATIONOTHERInvestor policy, e.g. “the maximum post-money valuation for seed money is $2M”

Investor divides the numbers the entrepreneur provides by 10

… entrepreneur knows, so multiplies by 10, etc.Profit times 5, revenue times 2 (or any number), industry multipliers, β

Tens of other methodsFUNDING MASTERCLASS

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THE INVESTMENT PROCESSGO / NO GO decision after every stage in the deal making process: First contact, pitch Personal connection Business plan and/or presentation Term sheet Negotiations Signing term sheet (exclusivity phase investor) Due diligence Participation contract Deposit of money and changes of legal structure

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THE PROCESS1/9 FIRST CONTACT, PITCHYou can pitch when you meet an investor at an event

Get an introduction from somebody who knows the investor

Or select the right investors for your startup and send them an introduction email

Do not send your full business plan at first contact!

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THE PROCESS2/9 PERSONAL CONNECTIONBe clear in your goals and expectationsListen to the investor’s perspective and ask questions

First agree on mutual interest on your business

Do not start to talk about valuation immediately

Set goals for a next meetingFUNDING MASTERCLASS

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THE PROCESS3/9 BUSINESS PLAN / PRESENTATIONGive a 10-15 minute presentation highlighting the most important parts of your business plan, but also working on the relationship with the investor and discussing questions together.

Send your business plan. Only ask to have a NDA signed in case you disclose technology that is not patented/public yet.

Propose a date for the next meeting with a clear agenda immediately. Keep in control, don’t loose momentum.

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THE PROCESS4/9 TERM SHEETInvestor will send a term sheet in case the investor wants to proceed with the process.

In the termsheet the most important investment critera and terms are defined, like:ValuationPreferred stock and influence rightsIP claimsObligations founders

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THE PROCESS5/9 NEGOTIATIONS: VALUATION• With VCs it’s easier to ask more money than

to give away less shares, with informal investors it’s the other way around.• Investment in multiple stages (one contract)

can lead to better valuation. E.g., $200k at once will come at lower valuation than $100k upfront and $100k after first customer.• More risk for you: what if the customer comes

too late?FUNDING MASTERCLASS

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THE PROCESS5/9 NEGOTIATIONS: SHARE HOLDERS

• Drag-Along right• If big shareholders sell, small shareholders are forced to sell too• Tag-Along right• Like the previous, but small shareholders are not forced, they

have the right• Pre-emption right• Before another shareholder comes in, the existing shareholders

get the right to buy new shares• Right of first refusal• Like the previous, but also for existing shares and at the price

offered by the potential buyerFUNDING MASTERCLASS

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THE PROCESS5/9 NEGOTIATIONS: GENERALPreference rights, exit options, and penalties

• What if it goes very good?• More important: what if it goes bad?• Will you lose your shares?• Will you lose your management position?

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THE PROCESS5/9 NEGOTIATIONS: TAKE CONTROL• It is your business• Don’t get controlled and sucked up by the game• Be hard on the content, but soft on the relationship• Don’t get intimidated by negotiating tactics• If you don’t like the deal, take time to negotiate• Use an experienced and trusted advisor/mentor/lawyer

… and dare to walk away and cease the deal. Be nice though, it gives you credits

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THE PROCESS6/9 SIGNING TERM SHEETBe aware: after signing, the startup and investor go in an exclusivity phase: founders can not make a deal with another investor for a period of timeMake sure there’s a deadline on the due diligence process defined in the term sheet: you don’t want to be exclusive a long time and not have a deal.

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THE PROCESS7/9 DUE DILIGENCE In the due diligence the investor will research the founders, the books, contracts, IP and all that is or can be relevant for continuing or ceasing the deal.

Make sure that all info is complete and searchable for the investor.

You can also do a form of due diligence on the investor.Due diligence can be used for renegotiating by the investor in case you forgot to share something important, or can cancel the deal completely.

So, be honest about the risks and difficulties before.FUNDING MASTERCLASS

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THE PROCESS8/9 PARTICIPATION CONTRACT In the participation contract all aspects of the investment are defined, including agreements for future events.

Get your own lawyer, preferably paid from the future investment capital (not your current account)

This contract takes most time to review and negotiate.

After signing the deposit of money and changes of legal structure can be done.FUNDING MASTERCL

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THE PROCESS9/9 LEGAL AND FINANCIAL WRAP-UPDeposit of money (only then the deal is completed!)Changes of legal structureChanges of management freedom and board structure

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AFTER THE INVESTMENT

• Keep working on the relationship with your investor• Get used to an extra decision maker in your team• Prepare for more financial and strategic reporting• Use the network and time of the investor wisely• Keep looking for additional funding and investors:

your investor will help with contacts and negotiating with them or provide even an additional round of funding

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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.

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YOUR NEEDS?

What do you want me to cover in the final session?

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Benno Groosman MScBAExperienced startup entrepreneurwww.groosman.co

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