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Funding Fundamentals

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Primer on modes of funding, valuations & terms sheets

Primer on modes of funding, valuations & terms sheets

Published in: Economy & Finance, Business

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  • 1. Manish Singhal, Chief SaarthiSaarthi Integrated Consulting LLPwww.saarthiconsulting.com ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 2.  Different modes of funding available Choosing the right investment for your business Primer on Valuations & term sheets Company Structure & Legalities Q&A ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 3. Source: Wikipedia©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 4. Type  of   Advantages   Disadvantages  Funding   ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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   ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  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   ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  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   ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 12.  For cash-flow businesses, debt capital is a great option Better money is the customer! ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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% ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 18.  Early stage companies are difficult to value Deferred valuation tied to next event of funding Typically a discount on valuation is given ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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) ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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 ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 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” ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  
  • 28. manish@saarthiconsulting.comwww.saarthiconsulting.com www.facebook.com/saarthiconsulting ©  Copyright  Saarthi  Integrated  Consul5ng  LLP.  All  rights  reserved  

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