Primer on modes of funding, valuations & terms sheets

1. Manish Singhal, Chief Saarthi
Saarthi Integrated Consulting LLP
www.saarthiconsulting.com
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2.  Different modes of funding available
 Choosing the right investment for your
business
 Primer on Valuations & term sheets
 Company Structure & Legalities
 Q&A
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3. Source: Wikipedia
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4. Type
of
Advantages
Disadvantages
Funding
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5. Type
of
Advantages
Disadvantages
Funding
FFFF
/
Entrepreneurs
free
to
use
Limited
advisory.
Only
Angel
money.
Typically
the
only
monetary
help.
Equity
risk
capital
available
in
pre-­‐ Dilu5on
can
be
heavy
if
not
revenue
stage
handled
right
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Saarthi
Integrated
Consul5ng
LLP.
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rights
reserved

6. Type
of
Advantages
Disadvantages
Funding
FFFF
/
Entrepreneurs
free
to
use
Limited
advisory.
Only
Angel
money.
Typically
the
only
monetary
help.
Equity
risk
capital
available
in
pre-­‐ Dilu5on
can
be
heavy
if
not
revenue
stage
handled
right
VC
Larger
chunks.
Advice
Dilu5on,
Corporate
Structure
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Copyright
Saarthi
Integrated
Consul5ng
LLP.
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rights
reserved

7. Type
of
Advantages
Disadvantages
Funding
FFFF
/
Entrepreneurs
free
to
use
Limited
advisory.
Only
Angel
money.
Typically
the
only
monetary
help.
Equity
risk
capital
available
in
pre-­‐ Dilu5on
can
be
heavy
if
not
revenue
stage
handled
right
VC
Larger
chunks.
Advice
Dilu5on,
Corporate
Structure
Private
Very
large
chunks
Mainly
available
to
large
Equity
businesses
©
Copyright
Saarthi
Integrated
Consul5ng
LLP.
All
rights
reserved

8. Type
of
Advantages
Disadvantages
Funding
FFFF
/
Entrepreneurs
free
to
use
Limited
advisory.
Only
Angel
money.
Typically
the
only
monetary
help.
Equity
risk
capital
available
in
pre-­‐ Dilu5on
can
be
heavy
if
not
revenue
stage
handled
right
VC
Larger
chunks.
Advice
Dilu5on,
Corporate
Structure
Private
Very
large
chunks
Mainly
available
to
large
Equity
businesses
Debt
No
equity
dilu5on
Typically
requires
collaterals;
Ability
to
repay
EMIs
©
Copyright
Saarthi
Integrated
Consul5ng
LLP.
All
rights
reserved

9. Type
of
Advantages
Disadvantages
Funding
FFFF
/
Entrepreneurs
free
to
use
Limited
advisory.
Only
Angel
money.
Typically
the
only
monetary
help.
Equity
risk
capital
available
in
pre-­‐ Dilu5on
can
be
heavy
if
not
revenue
stage
handled
right
VC
Larger
chunks.
Advice
Dilu5on,
Corporate
Structure
Private
Very
large
chunks
Mainly
available
to
large
Equity
businesses
Debt
No
equity
dilu5on
Typically
requires
collaterals;
Ability
to
repay
EMIs
IPO
Typically
highest
valu5on
Equity
dilu5on;
market
risks
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Saarthi
Integrated
Consul5ng
LLP.
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rights
reserved

10.  Think through on which investment is right
for you
 Milestone based capital plan
• Raise only as much as you need to get to the next
milestone
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11. 2.5
2.5
Valua5on
%
Equity
Dilu5on
2
2.0
Equity Dilution (%)
1.5
1.5
Valuation (CR)
1
1.0
100%
0.5
0.5
50%
0
0.0
Time
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LLP.
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12.  For cash-flow businesses, debt capital is a
great option
Better money is the customer!
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13.  “Worth” of the company typically ascertained
while raising capital
 More of an art rather than science
 Determines the % dilution the entrepreneur
will go through while raising money
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14.  Investor wants to invest 1CR for 20% of the
company
 Post Money Valuation = 1CR / 20% = 5 CR
 Pre Money Valuation = 5CR – 1CR = 4CR
 Investor wants to invest 1CR for a 4CR pre-
money valuation
 Post Money Valuation = 1CR + 4CR = 5CR
 % of the company = 1CR / 5CR -= 20%
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LLP.
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15.  Models for Valuation
 Discounted Cash Flow (DCF)
• Forecast several years of revenue & expenses
• Discount the resulting cash flow back to the present
using a expected rate of return
 Cost-To-Recreate Model
• An estimate of what it would cost to duplicate the
venture
• Make vs Buy decision thinking
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16.  Models for Valuation
 Market Multiple Model
• Most commonly used
• Value the company by looking at recent sales or
offerings of comparable companies and then using a
multiple to adjust
• Typically 3x to 5x of projected revenues
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17.  VCs can go by their targets
 They are typically looking at 10x return
 Calculate how much further dilution the
company will go through to get to that target
 They plan for that dilution upfront and ask
for higher stake
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18.  Early stage companies are difficult to value
 Deferred valuation tied to next event of
funding
 Typically a discount on valuation is given
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19.  Management typically holds common stocks
 Professional investors, both angels and
venture capitalists, take preferred stock
 More control over decisions
 Better economic terms
 Interests of common stocks and preferred
stocks needs to be negotiated in the term
sheet agreement
 Ecomonic & Control Interests
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20.  Liquidation Preference
 In the event of sale / liquidation, preferred stock
holders are entitled for a pre-determined return
before common stock holders
 Participating clause further allows the preferred
stock holders to get further returns on pro-rata
basis
 If there is not enough cash, the preferred clause
can take the founders with no returns
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21.  Anti – Dilution
 Clause comes into play when there is a down-
round and the first round investor has to protect
his interests
 Full Ratchet & Weighted Average
 Pay-to-play clause can help the founders get
further investments from the original investors
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22.  Future Participation in Financing / Sale
 Right of First Offer – Preferred Stock holders get
the first right to participate. Can limit the
founders to get investors who can add more
value
 Drag-Along Rights
 Investors can force the sale of the company
 Tag-Along Rights
 Management agrees not to sell without giving
investors a right for pro-rata participation in sale
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23.  Board Composition
 Voting (Director)
 Non-Voting positions (Observer, Advisory)
 Investor Seat vs Majority by founders
 Veto Rights
 Majority of the items … Joint bank account
 Investor Rights
 Reports, Appointment of Auditors (internal &
external)
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24.  Legal & Accounting Fees
 Mostly all investors put the burden of the legal
fees on the entrepreneur. Can negotiate some
overall caps
 No Shop
 This prevents entrepreneurs from shopping
around with other investors while the dialogue is
on. Time period can range from a few weeks to a
few months.
 Due Diligence
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25.  For equity investments, private limited is the
only feasible company structure
 Proprietary, Partnerships, LLPs are not suitable
 Clean equity structure
 Avoid too many minority stake holders
 Intellectual Property
 Clear unambiguous records of IP developed in-
house
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26.  Investment is not a zero sum game
 Approach it with a win-win attitude
 Negotiate for protecting your long term
interests
 Lean towards smart money, only money is
not so good, good advice, good contacts also
worth their weight in gold
 Building a solid business is the best way of
attracting investments
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27. Albert Einstein was on a train. He could not
locate his ticket. The conductor approached
him and said, “ Everyone knows you around
here. I am sure your office can buy you
another ticket”
Einstein replied, “I am not worried about the
money, I need to find out where I am
going!”
From “Art of the Start”
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28. manish@saarthiconsulting.com
www.saarthiconsulting.com
www.facebook.com/saarthiconsulting
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