Basic definitions, types of investors, stages of your startup, determining the amount of money you need, milestone based funding, contract terms and deal making process.

1. How to close an
investment deal
An introduction from an
entrepreneurial perspective
Benno Groosman MScBA
www.groosman.info
July 20, 2015
LaunchBase in Maastricht

2. 1. Personal introduction
Motivation
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3. Introduction
Benno Groosman MScBA
• MSc Entrepreneurship & New Business Venturing
• 10 years entrepreneur
• Involved in multiple startups and experience in multiple incubators
and accelerators
• Award winning health care company with 3 international patents
and multiple products, €1.4M funding and… a bankruptcy
Now:
• Director Base pre-incubation programme at Maastricht University
• Cofounder Surge-on Medical: patented innovations for (knee) surgery
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4. Introduction
Scope
• This presentation is based on investor studies in USA,
UK, Germany, Israel and The Netherlands.
• Combined with my own experience in my company in
The Netherlands:
• ~25 informal investors
• ~15 VC funds
• 3 term sheet negotiations
• 1 participation contract
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5. Introduction
Agenda
1. Types of investors
2. Stage and size of investment
3. Multiple series of investments
4. Valuation
5. Deal making process
6. After the investment
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6. 1. Types of investors
• What type of investors do you know?
• How do they differ from each other?
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7. 1. Types of investors
A selection
• Friends, family and fools
• Governments, universities, larger companies
• Private equity
We will talk about:
• Business angels (informal investors)
• Venture capital funds
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8. 1. Types of investors
Business angel / informal investor
Individual with personal capital and experience
in entrepreneurship or a certain branche
available.
Typically wants to use his money AND time for
your company: “smart capital”.
Indication of investment range $10-100k.
Can make syndicates with other investors to
expand network and make bigger total
investments.
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9. 1. Types of investors
Venture capital fund
Fund collects money from companies,
governments, investors, pension funds, etc.
Funds typically have a 5-7 year investment
range and do multiple investments in that time.
$500k and more per investment.
Fund managers and investor managers are
responsible for ROI on the fund capital. Investors
in the fund want to monitor this, so there’s more
“paper work”.
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10. 1. Types of investors
Other funds
• Investing pension funds;
• Corporate venture capital;
• Government seed and growth capital;
• Equity funds ($10M and up)
And many more, but usually for the high-growth
stage of a company (for example: after 3 years,
$10M+ in revenues).
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11. 2. Stage and size of investment
Startup financing cycle

12. 2. Stage and size of investment
Stage and type of money

13. 2. Stage and size of investment
How much money do you ask for?
Ask the money that you really need to reach your
next milestone, not too little, and about 15-25%
extra for unforeseen expenses.
Informal investors don’t like to pay for marketing,
big office space and high salaries. They want to
build the business by investing in prototypes,
production, sales, patents, strategic positions etc.
Use the money to grow the value of your company.
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14. 2. Stage and size of investment
• How much money do you need to go to
the market?
• Which types of funding are you aiming at?
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15. 2. Stage and size of investment
Timing of investment
Best position to negotiate is when you don’t really
need the money yet.
Investors can delay the dealmaking, so make sure
you have a financial buffer.
Informal investors / business angels: 3 months.
VC funds: 6 to 12 months.
+ time you need to get to get them in your network!
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16. 2. Stage and size of investment
Postpone an investment
Get money from:
• Selling your test product
• Make customers pay in advance
• Use governmental subsidies and grants
• Consultancy (but don’t loose your focus!)
... TO BE ABLE TO MAKE A BETTER DEAL.
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17. 2. Stage and size of investment
Investment and the bank
In later stages you could use the investment as a
multiplier to get bank a bank loan.
Example:
€300k investment could enable a €600k bank loan.
Banks don’t like risks. Investor money reduces their
risk. Banks finance working and growth capital, not
marketing, salaries and research and development.
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18. 2. Stage and size of investment
Milestone based funding
• Define the milestones in your startup plan
• Determine the amount of money you need to
reach each milestone
• Match (combined) milestones with available
funding sources
• Try to secure the funding of different
milestones by combining the commitment of
different (types of) funding sources: you could
capture these in one investment contract
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20. 2. Stage and size of investment
Milestone based funding: DIY
• Define the milestones in your startup plan
• Determine the amount of money you need to
reach each milestone
• Which funding sources and types of investors
could match each milestone?
• Can you combine the milestones for funding?
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21. 3. Multiple series of investments
You might need more investments to start, grow,
expand your company.
First investment deal is considered to be the
most important,
as the terms determine the ease of acces for
future investments,
and the dilution of shares starts here.
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22. 3. Multiple series of investments
An example on equity dilution

23. 3. Multiple series of investments
How many shares do you want to keep?
• Do you want to own 100% of a small pie?
• Or a part of a huge pie?
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24. 3. Multiple series of investments
Cap table
Find more info and and Excel sheet at:
• http://venturehacks.com/articles/cap-table
• http://venturehacks.wpengine.com/wp-
content/uploads/2009/10/Venture-Hacks-Cap-Table.xls
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26. 4. Startup valuation
• Valuation of startups is not just a numbers
game. It’s more about expectations, feelings,
investment limits etc.
• But, start to quantify your value by:
• Real option pricing;
• Discounted cash flow;
• Comparing to other startups.
• Science, art or random?
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27. 4. Startup valuation
Real option pricing / net present value
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28. 4. Startup valuation
Discounted cash flow method
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29. 4. Startup valuation
Other methods
• Investor policy, e.g. “the maximum post-money
valuation for seed money is €2M”
• Profit times 5, revenue times 2 (or any
number), industry multipliers, β
• Tens of other methods
• Investor divides the numbers the entrepreneur
provides by 10; entrepreneur knows, so
multiplies by 10, etc.
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30. 5. Deal making process
What do investors want to get?
• Control
• Preference rights for future rounds
• Big percentage of shares
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31. 5. Deal making process
• What do you want to give?
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32. 5. Deal making process
What does the founder wants to give?
• No control
• No preference rights
• Only a small percentage of shares
So… a negotiating process is needed to make
the deal.
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34. 5. Deal making process
GO / NO GO decision after every stage
• First contact, pitch
• Personal connection
• Business plan and/or presentation
• Negotiations (ongoing)
• Term sheet
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35. 5. Deal making process
GO / NO GO decision after every stage
• Signing term sheet (exclusivity phase investor)
• Due diligence
• Participation contract
• Deposit of money and changes of legal
structure
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36. 5. Deal making process
Key negotiation points (1)
Valuation
• With VCs it’s easier to ask more money than give away
less shares, with informal investors it’s the other way
around.
• Investment in multiple stages (one contract) can lead to
better valuation. E.g., $200k at once will come at lower
valuation than $100k upfront and $100k after first
customer.
• More risk for you: what if the customer comes too late?
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37. 5. Deal making process
Key negotiation points (2)
Preferred stock and influence rights
• Tag-Along right
• If big shareholders sell, small shareholders are forced to
sell too
• Pre-emption right
• Before another shareholder comes in, the existing
shareholders can buy shares at the same price
• Right of first refusal
• Like the previous, but with pre-specified terms www.groosman.info

38. 5. Deal making process
Key negotiation points (3)
Preference rights, exit options, and penalties
• What if it goes very good?
• More important: what if it goes bad?
• Will you lose your shares?
• Will you lose your management position?
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39. 5. Deal making process
Take control of the process (1)
• It is your business
• Don’t get controlled and sucked up by the game
• Be hard on the content, but soft on the relationship
• Don’t get intimidated by negotiating tactics
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40. 5. Deal making process
Take control of the process (2)
• If you don’t like the deal, take time to negotiate
• Use an experienced and trusted advisor/mentor/lawyer
• … and dare to walk away and cease the deal. Be nice
though, it gives you credits.
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41. 6. After the investment
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or
?

42. 6. After the investment
• Keep working on the relationship with your investor
• Get used to an extra decision maker in your team
• Prepare for more financial and strategic reporting
• Use the network and time of the investor wisely
• Financial results matter
• Keep working on followup investments
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43. 6. Questions and discussion
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44. Thanks for your attention!
Please feel free to contact me
Benno Groosman MScBA
Phone: +31 6 1253 2039
Email: benno@groosman.info
Website: www.groosman.info
Twitter: www.twitter.com/Benno_Groosman
Slideshare: www.slideshare.net/benno_groosman