1. Allan ChaoStartup ConsultantStartup V8allan@startupv8.comUC Berkeley Extension, Summer 2012
2. Question of the day:How much does it cost to raise money?
3. The Agenda Quiz Quick review of last session Startup Legal Issues Finance and Incubation Guest Speaker: Justin Hovey (attorney) Guest Speaker: Jorden Woods (fundraising consultant)
4. Quiz Time Good luck!10 minutes max
5. Quick review of prior material Positioning and Targeting Pay-per-click (PPC) Demographics Google Adwords Psychographics Social Media (SM) Segmenting Blogging, Twitter Public Relations (PR) Value Proposition / Unique Selling Launch Strategy Proposition Analytics Differentiation Virality Competitors Offline Marketing MySpace vs Facebook “on-the-ground” campaigns First Mover Advantage Events Risk and myth Traditional marketing TV, radio, magazines Niche Referrals Critical Mass Revenue vs Profit Two-sided markets Business Models: B2C, B2SMB, B2E Revenue Models Source Data Analysis Advertising Conversion Funnels Subscription Models Search Engine Optimization (SEO) Organic Freemium Techniques Churn rate Blackhat marketing Product Market Fit Pivot
6. Most common Legal Issues Non-disclosure Agreement (NDA) Contracts With cofounders, employees, vendors, customers, clients, etc. Incorporation General advice
7. NDA Non-disclosure Agreement Most commonly “Mutual Non-disclosure Agreement” Used for protecting your ideas and execution Tends to be overused by novice entrepreneurs Most professionals in the startup environment do not sign NDAs unless there is another agreement in effect Investors Consultants Contractors
8. 5 Legal Entities to do Business Non Incorporated: Sole Proprietorship Partnership Incorporated C-Corporation LLC S-Corporation
9. Non-incorporation (not companies) Sole Proprietorship Individual doing something. Requires minimal paperwork Taxes apply to individual Personal liability Partnership A few partners with equal ownership of the company Requires much less paperwork than incorporation Taxes apply to partners Personal liability for all partners
10. Benefits of Incorporation More “formal” and professional Make purchases on behalf of the company, without giving out personal information Liability shield Company is liable, avoid personal liability Clear ownership and rules of rights and responsibilities E.g. reporting requirements Raising money from investors Lasts longer than the owners
11. Types of Incorporation LLC The “simplest” legal entity No stock, no shares, only “members”, loosely organized Very poor organizational structure for investors Pass-through taxation C-Corporation The “most organized” legal entity Company owned by stock and shares. Clear rights and ownership. Best organizational structure for investors. Double taxation S-Corporation Similar to C-corporation Limited number and types of shareholders Pass-through taxation
12. Shares Company is owned by its shareholders Shares give voting rights for major issues Profits distributed according to shares E.g. 1,000,000 shares outstanding (100% of ownership) Founder 1: 400,000 shares Founder 2: 400,000 shares 200,000 shares reserved for first round of investors Common Stock Standard ownership and voting rights Preferred Stock Many variants, e.g. first pay-out in case of closure or acquisition This is one of the causes for the “how high are you aiming” issue Stock options Used for less important employees, option to buy stock at a low strike price. No ownership yet, so no voting rights.
13. Vesting Vesting “vest” fraction of shares each month over time Usually 4 years (1-yr cliff) for employees Usually 2 years (no cliff) for advisors No vesting for investors E.g. 1,000,000 shares (100% of ownership) Founder 1: 400,000 shares vesting over 4 years Founder 2: 400,000 shares vesting over 4 years 200,000 shares reserved for first round of investors Founder 1 vesting example After 1-11 months: no ownership After 12 months: 100,000 shares (reached cliff) After 13 months: 108,333 shares (1/48th per month) After 48 months: 400,000 shares (fully vested)
14. Dilution Dilution After all outstanding shares have been distributed In order to raise money, create new shares and issue them to next round of investors All existing shareholders get diluted Started with 1,000,000 shares (100% of ownership) Original Founder 1: 400,000 shares = 40% Founder 2: 400,000 shares = 40% Seed investors: 200,000 shares = 20% E.g. 700,000 shares created for Series A Founder 1: 400,000/1,700,000 = 23.5% Founder 2: 400,000/1,700,000 = 23.5% Seed investors: 200,000/1,700,000 = 11.7% Series A investors: 500,000/1,700,000 = 29.4% ISO pool: 200,000/1,700,000 = 11.7%
15. Patents When is the right time to file a patent? Patent Trolls
16. Methods of Financing a startup “organic” growth versus “land-grab” growth How high are you aiming? Personal Wealth Debt Financing Bank loans are very unlikely because startups fail Personal loans are much more common Frequently in the form of convertible debt Equity Financing Venture capital
17. Equity Financing Goal = Give away significant ownership of your company to raise money and bring on talent. Founders Very generally, founders start with an equal split 50-50 or 33-33-33 More complicated ways to calculate… google “founder equity calculator” Thinking that the idea is worth significantly more (e.g. 80-20) shows inexperience and lack of understanding Capitalization tables to predict effects of dilution Employees expect to get vesting stock
18. Equity Fundraising Rounds Friends and Family $50-250k Convertible notes Angels up to $1 M Super angels up to $2.5 M VCs Series A $3+ M Normally 2-3 rounds… ABC exit. Rounds DEF = “cramdown” rounds… bad terms The one goal of investors is to exit. $$$$$
19. Convertible Notes Basically, straight debt that has a maturity date If the startup raises venture capital, the debt “converts” into equity The conversion rate is based on the valuation at the time of venture capital, with some discount for the additional risk Convertible notes are easy (fewer terms, less paperwork), and do not require valuation of the company Most commonly used with Friends and Family and Angel investors.
20. Investors want to Exit Option 1: IPO = Initial public offering Makes the most money ($1 billion +) Hardest to do (very few companies make it this far) Notables: Facebook, Groupon, LinkedIN Option 2: Acquisition Usually makes less money ($10 million - $1 billion) “Easier” to do Notables: YouTube (Google), Skype (Microsoft), Instagram (FB) Option 3: “Lifestyle business” Makes the least money (recurring “passive” income of <$1 M) “Easiest” to do No angel or VC investor will invest in a lifestyle business. Notables: 4-hour workweek
21. The Startup Lifecycle http://www.netvalley.com/silicon_valley/Legal_Bridge_From_El_Dorado_to_Silicon_Valley.html
22. Venture Capital historyhttp://techowtest.files.wordpress.com/2012/03/historyofstartupsandbubbles1.png
23. Equity Financing caveats Takes a long, long, long time to raise money. Very involved process Prepare to spend money to raise money Preparation workshops Preparing Presentations Flights to investors Dinner Beware of losing your company Term sheets must be reviewed by your lawyer!
25. Alternative Financing Crowd Funding Kickstarter.com Rockethub Competitions / Grants Solo Funding Bank loans unlikely Second mortgage Credit cards!!?? Start eating ramen noodles
26. Incubation Programs that help entrepreneurs get started on their projects in exchange for 5-10% equity Very small seed capital ($20,000) Networking and relationship building Presentations to angel investors Application based… very competitive (internationally)
28. Crunchbase, AngelList Crunchbase Useful for finding funding status of startups http://crunchbase.com/ AngelList Useful for finding info about individual investors http://angel.co/
29. Justin Hovey Bio Mr. Hovey focuses on venture financings, mergers and acquisitions and corporate and securities matters. Mr. Hoveys practice includes advising entrepreneurs and start-up companies, venture capital financings, mergers and acquisitions and initial public offerings as well as counseling public companies in securities and compliance matters. Mr. Hovey’s startup practice focuses primarily on companies in the gaming, social media, online advertising and entertainment space.
30. Questions to ask Justin When should a startup incorporate? How can cofounders protect themselves from bad breakups? What do you think about using LegalZoom to incorporate? What’s the most common legal problem that startups face? What’s the difference between a good attorney and a great attorney?
31. Jorden Woods Bio Jorden Woods is a Silicon Valley serial entrepreneur who has founded and led 3 IT-focused companies over the last 12 years: two enterprise software companies and a management consultancy. He very much enjoys working with entrepreneurs and fast-paced high-tech companies in either a consulting or operational capacity. As a Silicon Valley serial entrepreneur he has significant experience in the areas of mobile/wireless solutions, Web 2.0/3.0, online/mobile video gaming, enterprise software, networking, medical software/devices, Ajax/RIA technologies, and globalization.
32. Questions to ask Jorden What are the most common fundraising issues that startups face? What are investors looking for in entrepreneurs and startups? What’s the best way for an entrepreneur with a qualified startup to find investors? What is the process of raising money and how long does it take? What are the personal liabilities for an entrepreneur who receives funding for his company?
33. Homework (Team) Prepare your Final Presentation
34. Final Project Presentations Present your startup to an investment firm Target a 15 minute presentation Pitch deck Business plan Demo (wireframes, mockups?) How far you’ve gotten in your project (code, deployed?) 5-10 minutes of questions and discussions Alternative Final Project Presentation 15 minutes about a startup case study or research subject