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DAVE GILLESPIE
Crash Course in Funding Vehicles
“The MVP ‘s of Fundraising”
@davegillespie
Bertha 600,000 60%
John 400,000 40%
1,000,000 100%
Initial Cap Table
How to Structure a Deal?
Private Equity
IPO
Pre-Sales (i.e. Kickstarter)
Incubators/Accelerators
Revenue
Bank Loans
Venture Capital
Concept Startup...
COMMON INVESTMENT VEHICLES
Preferred Equity
Warrants
Convertible Debt
PREFERRED EQUITY
Equity with Preferential Financial Terms,
Control, Information Rights
PREFERRED EQUITY
Preferential Financial Terms
 Liquidation Preference -- Investor gets paid back first from any
liquidati...
PREFERRED EQUITY
Participation Rights
• Participating Preferred (aka “double dip”): Investors are repaid prior to other
co...
PREFERRED EQUITY
Control and Voting Rights
 Pro Rata Rights to Participate in Next Rounds
 Consent Rights to many action...
WARRANTS
 Like an Option. Investor receives the right to purchase a certain number of
shares at a late date for a pre-det...
CONVERTIBLE DEBT
Debt that converts to equity at a negotiated discount to the price paid by
investors at the time of Next ...
CONVERTIBLE DEBT
Conversion at Next Financing
• Conversion Discount. Discount is usually 10% to 50% - Higher Risk and Long...
Which Vehicle is Best?
STRUCTURING AN EQUITY DEAL
Primary Drivers in Negotiations
1. How much money will the Investor Invest?
2. How much of the ...
Milestones
Get legal
Open first
brewpub
Sell some beer.
Founders Cash 20,000.00$
KickStarter 30,000.00$
Loan 100,000.00$
T...
How much of the Company will the Investor Own?
• Professional Investors. VC’s and Angel Groups typically internal
guidelin...
HOW MUCH IS MY COMPANY WORTH
Pre-Money Valuation
Negotiated “value” of your company prior new investment.
Post-Money Valua...
Pre-Money Valuation
Investment Amount
Post-Money Valuation
Investmen
t Amount
$250,000
Pre-
Money
Valuation
Post Money Val...
Pre-Money Valuation
Investment Amount
Post-Money Valuation
Investmen
t Amount
$250,000
Pre-
Money
Valuation
Post Money Val...
Formulas
• Share Price = Pre-Money Valuation / Total
Outstanding Shares
$750,000/1,000,000 = $0.75
• Number of New Shares ...
“The minimum viable product is that
version of a new product which allows
a team to collect the maximum
amount of validate...
DEFINING THE MVP
What is the Minimum Viable
Product for Fundraising?
The minimum set of
terms that will enable a
buying de...
Equity MVP
Would you invest $_____ to own x% of my
Company?
Convertible Debt MVP
Would you invest $x for a convertible not...
Identify and use an MVP when Fundraising
1. facilitate quicker buying decisions with less effort
2. produce verifiable inv...
CONTACT INFORMATION
Dave Gillespie
dgillespie@kgmlaw.com
614-344-4842
@davegillespie
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Fundraising MVPs -- CMH Startup Week

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Crash Course in Startup Fundraising Terms. Introduces Minimum Viable Product approach to help get done smarter, faster, and easier.

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Fundraising MVPs -- CMH Startup Week

  1. 1. DAVE GILLESPIE Crash Course in Funding Vehicles “The MVP ‘s of Fundraising” @davegillespie
  2. 2. Bertha 600,000 60% John 400,000 40% 1,000,000 100% Initial Cap Table How to Structure a Deal?
  3. 3. Private Equity IPO Pre-Sales (i.e. Kickstarter) Incubators/Accelerators Revenue Bank Loans Venture Capital Concept Startup Growth Late Stage Friends and Family Angels Founder's Cash Typical Sources of Growth Capital Grants/Contests
  4. 4. COMMON INVESTMENT VEHICLES Preferred Equity Warrants Convertible Debt
  5. 5. PREFERRED EQUITY Equity with Preferential Financial Terms, Control, Information Rights
  6. 6. PREFERRED EQUITY Preferential Financial Terms  Liquidation Preference -- Investor gets paid back first from any liquidation or exit transaction  Dividends/Preferred Return -- Investor is entitled to additional return similar to interest, i.e. 8% per year. • Scalable technology startups – these are not typically paid out until an exit if ever • Food and Beverage Startups – often paid out of cash flow of business
  7. 7. PREFERRED EQUITY Participation Rights • Participating Preferred (aka “double dip”): Investors are repaid prior to other common stockholders, plus they will also “participate” as common stockholders and receive their pro rata share of what’s left. • Nonparticipating preferred stock (aka “single dip”): With this option preferred stockholders can either take their liquidation preference (i.e. be paid out before common stockholders plus interest) or convert their preferred stock to common stock and take their pro rata share of total proceeds.
  8. 8. PREFERRED EQUITY Control and Voting Rights  Pro Rata Rights to Participate in Next Rounds  Consent Rights to many actions by the Company  Rights to Board Seats, board observation and/or specific information  Redemption Rights  Anti-Dilution Provisions  Registration Rights  Drag-Along Rights
  9. 9. WARRANTS  Like an Option. Investor receives the right to purchase a certain number of shares at a late date for a pre-determined price.  Economics Very Similar to Regular Equity. Especially when exercise Price is often nominal or $0.001 per share  Valuation Important. Pre-Money Valuation determines the number of shares the investor will have the right to purchase.  Less Investor Control. Investors are not treated as shareholders until the holder exercises their right to purchase the shares.  Inexpensive to document. Good for smaller dollar earlier rounds.
  10. 10. CONVERTIBLE DEBT Debt that converts to equity at a negotiated discount to the price paid by investors at the time of Next Financing. Loan Terms. The investment is initially treated as loan with interest and a maturity date. • Interest typically ranges from nominal to 12% although are pretty low in todays environment. • Loan term is typically from 1 to 5 years, with 3 being standard.
  11. 11. CONVERTIBLE DEBT Conversion at Next Financing • Conversion Discount. Discount is usually 10% to 50% - Higher Risk and Longer Time call for bigger discount. • Valuation Cap. Conversion price is often subject to a maximum valuation (the “Cap”) • I.e. “Maximum price determined by dividing $6,000,000 by the total number of outstanding shares (on a fully diluted basis) immediately prior to the Next Financing.” • Watch out for the “Cap Trap” - If used, the Cap must be set higher than current attainable pre-money valuation or it’s a deep discount deal for investor and will cause heavy dilution.
  12. 12. Which Vehicle is Best?
  13. 13. STRUCTURING AN EQUITY DEAL Primary Drivers in Negotiations 1. How much money will the Investor Invest? 2. How much of the Company will the Investor own?
  14. 14. Milestones Get legal Open first brewpub Sell some beer. Founders Cash 20,000.00$ KickStarter 30,000.00$ Loan 100,000.00$ TOTAL 150,000.00$ Sources of Capital Capital Requirements: $250,000 How Much Should I Ask For?
  15. 15. How much of the Company will the Investor Own? • Professional Investors. VC’s and Angel Groups typically internal guidelines about how much of a company they want to own for funding a given round. Typically 20% to 35% • Others. The percentage can vary outside the typical range, but is almost always the primary driver of the conversation. “How much equity does that get me?”
  16. 16. HOW MUCH IS MY COMPANY WORTH Pre-Money Valuation Negotiated “value” of your company prior new investment. Post-Money Valuation Value of your company including new investment.
  17. 17. Pre-Money Valuation Investment Amount Post-Money Valuation Investmen t Amount $250,000 Pre- Money Valuation Post Money Valuation $250,000 $?????? + Investment Amount = X% of Post-Money Valuation X = Investor’s Ownership
  18. 18. Pre-Money Valuation Investment Amount Post-Money Valuation Investmen t Amount $250,000 Pre- Money Valuation Post Money Valuation $1,000,000 $250,000 25% $750,000 75% + Investment Amount = X% of Post-Money Valuation X = Investor’s Ownership What’s the Deal? $250,000 for 25% of the Company
  19. 19. Formulas • Share Price = Pre-Money Valuation / Total Outstanding Shares $750,000/1,000,000 = $0.75 • Number of New Shares = Investment Amount / Share Price $250,000 / $0.75 = 333,333 CALCULATING SHARE PRICE Shares Ownership Bertha 600,000 45% John 400,000 30% Investor 333,333 25% Totals: 1,333,333 100% Investment Amount 250,000.00$ Pre-Money Valuation 750,000.00$ Share Price 0.75$
  20. 20. “The minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.” -Eric Ries MINIMUM VIABLE PRODUCT
  21. 21. DEFINING THE MVP What is the Minimum Viable Product for Fundraising? The minimum set of terms that will enable a buying decision by an investor.
  22. 22. Equity MVP Would you invest $_____ to own x% of my Company? Convertible Debt MVP Would you invest $x for a convertible note that converts to equity in the Next Round at a x% FUNDRAISING MVP’S
  23. 23. Identify and use an MVP when Fundraising 1. facilitate quicker buying decisions with less effort 2. produce verifiable investor feedback 3. enable the founder to scrap or modify the “product” to produce a better fit with the market. Easier, Faster, Smarter TAKE-AWAYS
  24. 24. CONTACT INFORMATION Dave Gillespie dgillespie@kgmlaw.com 614-344-4842 @davegillespie

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