Spectrum: The Art of the Deal (Consolidated Deck)
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Transcript of Spectrum: The Art of the Deal (Consolidated Deck)
Kevin CastelloDirector
Baylor Angel Network
Bill HulseyIP Attorney
Hulsey-Calhoun
Chris ForgeyCEO
LightBohrd &
CTO OEM Group
SBDC – Now what?June 24th, 2014
Welcome Entrepreneurs, Investors and Guests!
Agenda
Types of FundingTypes of Investors
Investor FitTerm Sheet Overview
Typical Investment Process
Starting VocabularyEntity Structure – LLC and C-CorpSecurity – Loan or StockConvertible Note – initial loan structure which converts to equity in the futureStock – Common and PreferredDilution – the loss of some founder ownership due to investments takenCrowdfunding – the use of an-online portal rather than face to face investor engagementAccredited Investor – SEC requirement for certain types of transactionsBootstrapping – Self funding by the founder team
What is the most advantageous funding for the founders?
What is the most advantageous funding for the founders?
REVENUE!
OPM Funding TypesOwnership Dilutive
• Convertible Notes• Stock Sale – Common or Preferred• Membership Unit Sale including
preferred• Some Corporate• Crowdfunding – Investment
ANY Sale of Equity is Dilutive
Non or Minimally Dilutive
• Grants• Loans• Revenue Based Funding• Some Corporate• Crowdfunding – Reward or Loan
Most non-dilutive money must be repaid on a set schedule
Investor TypesEQUITY (Think Exit)
• Friends & Family• Accelerators/Incubators• Angel Investors• Angel Networks• Venture Capital• Private Equity
DEBT
• Credit Cards• Private loans• SBA• Banks• Factoring• Revenue or Royalty
Financing is a hybrid
F & F Angels VC PE
Sophistication Low Moderate to High High High
Stage Early Early Early Growth Major Growth
Typical Round Size
< $100K $200K - $2mm $5mm+ $25mm+
Expected Returns What’s that? 60-100% annually
40-100% annually
20-40% annually
Valuations Ditto Average $2.5mm Average $7mm Average $114mm
Security Varies Conv. Notes or Preferred Stock
Preferred Stock Complex Instruments
CrowdfundingEquity/Debt• Accredited Investors
– Can do equity or loans– General Solicitation won’t apply for
portals
• Non-accredited Investors– Not legal in many states– Not legal interstate– JOBS Act rules STILL in process– Texas Intrastate rule expected in
August
Rewards
• Provides something of value for a donation
• Does not provide any ownership or dividends
• Evaluate portals for traffic and fee structures
Revenue Based Financing
• Investment is paid as a % of revenue• Can be loan or stock based• Non-dilutive in long term• Payments vary with revenue• Typically 3-10% of revenue to a 2 to 5X+ multiple
Process of an Investment• Finding and contacting investors• Early evaluation – interest and screening• Formal evaluation – screening and maybe fees• Pitch Presentation to Investors• Due Diligence if interest• Term Sheet• Closing Docs and Funding
3-9+ month process!
Definition of 'Due Diligence - DD'1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Read More: http://www.investopedia.com/terms/d/duediligence.asp#ixzz24qNuxEE3
Practical DD Definition
Whatever the investor does prior to making an investment decision.
In general, the more sophisticated the investor the more in-depth the due diligence.
Does DD make a difference?
Kaufmann Foundation 2007 Study “Return to Angel Investors in Groups” by Dr. Rob Wiltbank
Return multiple for DD < 20 hours 1.1x in 3.4 yearsReturn multiple for DD >20 hours 5.9x in 4.1 years
DD Process Overview
• Quantitative Analysis• Qualitative Analysis• Management Team Analysis• Additional “Deep Dive” Analysis• Term sheet negotiation if applicable
Quantitative Analysis
• Documentation review that supports the authenticity of the startup
• Expect general solicitation questions• Duration: days to weeks mainly dependent upon
entrepreneur responsiveness• Deliverable: Completed comprehensive checklist
Qualitative Analysis• Angels and subject matter experts to gather more details
of the business through a question and answer session with the company’s management team, customers, suppliers, distributors, and others.
• Duration: days to weeks• Deliverable: Report of findings and opinions of a subject
matter expert
Management Team Analysis• Discovering the strengths and weaknesses of the
management team and begin building an Advisory Board or Board of Directors as applicable
• Duration: days to weeks• Deliverable: Background check reports and report of other
findings and recommendations • Bad Actor Rule is now active
Deep Dive Analysis
• Fact finding or research if the Angels feel that additional information is necessary to validate the investment
• Duration: days to weeks• Deliverable: Report with findings and
recommendations
Term Sheets
Term sheets define Control
Economics& General Legal
Term Sheets
Term sheets define Control
Economics& General Legal51% does NOT = Control
Major Term Sheet Items
• Valuation• Preferences – Dividends, Liquidation,
Conversion Rights, Redemption Rights, & Voting Rights
• Board of Directors
Valuation Only Focus
Valuation Only Focus
Valuation Myths
• Valuations are:– Objective– Should be done by independent accounting firm– Same in every ______ (location, industry, stage,
etc.)– The only term that matters
Major Term Sheet Items
• Valuation• Preferences – Dividends, Liquidation, Conversion
Rights, Redemption Rights, & Voting Rights• Anti-Dilution• Board of Directors
ECONOMICS & CONTROL
Major Term Sheet Items
• Valuation• Preferences – Dividends, Liquidation, Conversion
Rights, Redemption Rights, & Voting Rights• Anti-Dilution• Board of Directors
ECONOMICS & CONTROL
51% does NOT = Control
RESOURCES & UPCOMING EVENTS
Find us at:www.austinsmallbusinessanswers.com