Spectrum: The Art of the Deal (Consolidated Deck)
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You made your pitch and investors are interested! Now what? It doesn't matter if the interested party is an angel, venture capital group or private investor, you need to understand the process and how to manage the relationship. Our Spectrum session on June 24, 2014 was held at the Austin Chamber and included an in-depth discussion of business valuation, term sheets, dilutive and non-dilutive funding, Shark vs Partner relationships, communications, assumptions and setting the right expectations. The session closed with a true insider's perspective as Light Bohrd CEO Chris Forgey shared his own recent story, including "the ask," negotiations and the "gotchas."
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Spectrum: The Art of the Deal (Consolidated Deck)
- 7. Kevin Castello Director Baylor Angel Network Bill Hulsey IP Attorney Hulsey-Calhoun Chris Forgey CEO LightBohrd & CTO OEM Group
- 8. SBDC – Now what? June 24th, 2014 Welcome Entrepreneurs, Investors and Guests!
- 9. Agenda Types of Funding Types of Investors Investor Fit Term Sheet Overview Typical Investment Process
- 10. Starting Vocabulary Entity Structure – LLC and C-Corp Security – Loan or Stock Convertible Note – initial loan structure which converts to equity in the future Stock – Common and Preferred Dilution – the loss of some founder ownership due to investments taken Crowdfunding – the use of an-online portal rather than face to face investor engagement Accredited Investor – SEC requirement for certain types of transactions Bootstrapping – Self funding by the founder team
- 11. What is the most advantageous funding for the founders?
- 12. What is the most advantageous funding for the founders?
- 13. OPM Funding Types Ownership 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
- 14. Investor Types EQUITY (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
- 15. 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
- 16. Crowdfunding Equity/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
- 17. 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
- 18. 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
- 19. 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
- 20. 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.
- 21. 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 years Return multiple for DD >20 hours 5.9x in 4.1 years
- 22. DD Process Overview • Quantitative Analysis • Qualitative Analysis • Management Team Analysis • Additional “Deep Dive” Analysis • Term sheet negotiation if applicable
- 23. 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
- 24. 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
- 25. 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
- 26. 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
- 27. Term Sheets Term sheets define Control Economics & General Legal
- 28. Term Sheets Term sheets define Control Economics & General Legal
- 29. Major Term Sheet Items • Valuation • Preferences – Dividends, Liquidation, Conversion Rights, Redemption Rights, & Voting Rights • Board of Directors
- 32. Valuation Myths • Valuations are: – Objective – Should be done by independent accounting firm – Same in every ______ (location, industry, stage, etc.) – The only term that matters
- 33. Major Term Sheet Items • Valuation • Preferences – Dividends, Liquidation, Conversion Rights, Redemption Rights, & Voting Rights • Anti-Dilution • Board of Directors ECONOMICS & CONTROL
- 34. Major Term Sheet Items • Valuation • Preferences – Dividends, Liquidation, Conversion Rights, Redemption Rights, & Voting Rights • Anti-Dilution • Board of Directors ECONOMICS & CONTROL
- 36. RESOURCES & UPCOMING Find us at: www.austinsmallbusinessanswers.com
Notes de l'éditeur
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