SESSION FIVE: ADVANCED FUNDING & WRAP-UP
Benno Groosman MScBA – www.groosman.co – Athens, June 7, 2016 –
MASTERCLASS FUNDING FOR INNOVATIVE STARTUPS
Benno Groosman MScBA – www.groosman.co – Athens, June 7, 2016 –
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.
FUNDING MASTERCLASS www.groosman.co
IN THIS PRESENTATION
Scope
More term sheet (economic & control)
What investors look for
Negotiation
Summary & wrap-up
Other resources
FUNDING MASTERCLASS www.groosman.co
SCOPE
Funding needs focus
You can’t “try to raise money” or “do it in yourfree time”
Make an investment strategy, stick to the strategy and dedicate time for finding investors and closing the deal
Know the investment terminology and process
FUNDING MASTERCLASS www.groosman.co
TERM SHEET
In a term sheet the startup and investor agree on economics and define legal control over the company.
See also session 4 for many of these terms: http://www.slideshare.net/benno_groosman/funding-for-innovative-startups-part-4-of-5
FUNDING MASTERCLASS www.groosman.co
TERM SHEET (ECONOMIC)PRICE PER SHARE
Technically an investor buys shares in your startup with his investment
The valuation can be postmoney or premoney: ask!
Postmoney: €1M investment at €4M valuation gives investor 25% equity €1 / €4 = 0.25 = 25%
Premoney: €1M investment at €4M valuation gives investor 2o% equity €1 / (€1 + €4) = 0.2 = 20%
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TERM SHEET (ECONOMIC)OPTION POOL
The startup can make an option pool, to reward employees or advisors (typically 5-20% equity)
It’s important to determine if this pool will be allocated before or after
the investment
and how the founders/investor will dilute their equity in future occasions
FUNDING MASTERCLASS www.groosman.co
TERM SHEET (ECONOMIC)LIQUIDATION PREFERENCE (1)
In the case of liquidation the proceeds can be divided between the founders and investors in different ways.
Liquidation can be: merger, acquisition, sale of voting control, sale of almost all the assets, etc.
This is being defined in this part of the termsheet
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TERM SHEET (ECONOMIC)LIQUIDATION PREFERENCE (2)
Many investors will claim the nominal value of the shares + dividend to start. Extra participation rights apply too:
Full participation
Capped participation
No participation
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TERM SHEET (ECONOMIC)LIQUIDATION PREFERENCE (3)
Assume the purchase price of the venture is €10M and there’s only one investor who invested €1M at a €3M postmoney valuation.
Full participating: investor will get first his €1M and then 1/3of the remaining €9M = €4M in total.
Nonparticipating: investor will get 1/3 of €10M = €3 1/3M
Capped participation (preference): in case of for example a 3x cap the investor will get maximum 3x €1M = €3M
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TERM SHEET (ECONOMIC)VESTING
Vested stock will only be fully transferred to a founder after he or she stayed in the company for a few years (typically 4).
In case of 4 years, this can be done for example with 25% of your equity after completing the first year (cliff) and pro ratoon a montly basis for 36 the months after.
What happens in case of an early merger?
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TERM SHEET (ECONOMIC)VESTING (MERGER)
Single-trigger acceleration:
Automated accelerated vesting upon a merger (founder/employee will vest his shares)
Double-trigger acceleration:
Extra on the single-trigger, the second trigger is the founder/employee to be fired (for example) in order to vest accelerated. The buying party hereby has more security the key people will stay with the company (which can increase the valuation for the other shareholders too)
FUNDING MASTERCLASS www.groosman.co
TERM SHEET (ECONOMIC)ANTI DILUTION
Antidilution protects the investor for a lower future valuation. This lower future valuation could otherwise give a new investor a bigger part of the equity, at a lower price (and thereby diluting the shares of the previous investor).
If the price is lower, in the case of an anti dilution term, all the share distribution will take place as if it was at the stock price of the first investment.
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TERM SHEET (CONTROL)
Board of directors: investor can appoint members of the board
Protective provisions: veto on decisions or with large majority (>70% voting rights)
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TERM SHEET (CONTROL)
Drag-along: obligation for other shareholders to sell their shares when other shareholders sell, so they can be dragged in a complete sell of the companyTag-along: right to join other shareholders when they are selling their shares, the other shareholder can tag-along on the success of the other
FUNDING MASTERCLASS www.groosman.co
TERM SHEET (OTHER)
Redemption rights: investor can sell his shares back to the company to protect downside risk
Dividend
Information rights: time frames and standards for the startup to deliver future (financial) information to the investor
Right of first refusal: shareholder first has to try to sell to other shareholders
Voting rights
Founders activities/time: usually 100% of professional time founder has to go to the startup
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WHAT INVESTORS ASSESS ON
Team (experience, expertise, complementarity)
Product/market fit
Intellectual Property
Traction
Revenues
Match with fund
Manageable risks
Stage
FUNDING MASTERCLASS www.groosman.co
NEGOTIATION
First, you negotiate for your company! Some personal goals can conflict with what’s best for your venture.
The best result is getting a balanced and fair deal that you understand, while maintaining a good relationship with the investor.
FUNDING MASTERCLASS www.groosman.co
NEGOTIATION
Prepare the necessary documentation (business plan and more), the right support (experienced people), and know what you want to achieve.
Have a plan B. Many (if not most) deals never happen.
Realize that in a new round, you’ll negotiate new terms (triggered by the new investor).
FUNDING MASTERCLASS www.groosman.co
NEGOTIATION
FUNDING MASTERCLASS www.groosman.co
www.linkedin.com/pulse/negotiation-frank-chen
NEGOTIATION
FUNDING MASTERCLASS www.groosman.co
OTHER RESOURCES ON FUNDING
Online:
www.crunchbase.com
www.askthevc.com
www.groosman.co / www.slideshare.net/benno_groosman
Books:
Venture deals (be smarter than your lawyer and venture capitalist), Brad Feld & Jason Mendelson *
The Art of Startup Fundraising: Pitching Investors, Negotiating the Deal, and Everything Else Entrepreneurs Need to Know, Alejandro Cremades
* this 5th Masterclass was partly inspired on this book
FUNDING MASTERCLASS www.groosman.co
SUMMARY MASTERCLASS
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.
FUNDING MASTERCLASS www.groosman.co
FOLLOW ME
Benno Groosman MScBA
Experienced startup entrepreneur
www.groosman.co
FUNDING MASTERCLASS www.groosman.co