Tutorial on Investing I wrote. We're working on our own MVP Release and we also do a lot of work supporting startups. In my experience, there seems to be an lacking of education in the marketplace about VC/Angel/Seed/Investment and what investors look for. VC funding is highly popularized but it is not the only way to fund your business startup e.g. you can go organically or get a traditional loan and there are pros and cons to do each approach. I created this document for others to use as a tutorial or reference point of information, and hopefully help them in their own funding efforts. ***This is for example purposes only and proprietary information has been excluded or changed. ***

1. Funding and Investment Strategy for Our Company
MVP Development and Release
PRESENTED BY RECIPROCITY ROI, LLC
115 ELM ST. SUITE I-1001 FARMINGTON, MN 55024

2. Capital and What Is it?
Debt Funding vs. Equity Investment
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

3. Advantages of Debt Compared to Equity
Equity is not lost in our business and we reap a larger portion of the profit than we would if we had sold stock in our company to investors in
order to finance the growth.
Principal and interest obligations are known amounts which can be forecasted and planned for
Interest on the debt can be deducted on the our business tax return, lowering the actual cost of the loan
Raising debt capital is less complicated because we are not required to comply with state and federal securities laws and regulations
We are not required to send periodic mailings to large numbers of investors, hold periodic meetings of shareholders, and seek the vote of
shareholders before taking certain actions
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

4. Disadvantages of Debt Compared to Equity
Unlike equity, debt must at some point be repaid.
Interest is a fixed cost which raises the break-even point of our business.
High interest costs during difficult financial periods can increase the risk of insolvency
Being too highly leveraged can make it difficult to grow because of the high cost of servicing the debt
Cash flow is required for both principal and interest payments and must be budgeted for
Most loans are not repayable in varying amounts over time based on the business cycles of the company.
Debt instruments often contain restrictions on a company's activities potentially preventing us from pursuing alternative financing options
and non-core business opportunities
The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors
Accordingly, a business is limited as to the amount of debt it can carry
We may be required to pledge assets of our company to the lender as collateral
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

5. Angel Investors and Who Are They?
Angel investors are wealthy individuals who will give an entrepreneur financing in exchange for a share of equity in our business. Investment
sizes range, but usually are less than $1 Million. Angels often times work in organized groups that screen deals and invest with each other,
while many invest on their own. Angel investors are more serious than the type of investor we would find in a Friends and Family Round, but
they are usually less serious than a VC Firm.
Pro: Angels normally have experience in the industry and can offer helpful guidance and introductions to their network.
Pro: Because angels are less rigid than VC Firms, flexible business agreements are common.
Con: We can be forced to give up some degree of control over the company. Due to the high-risk nature of angel investing, angels rarely make
follow-on investments.
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

6. Friends and Family
The Friends and Family Round can act as a seed investment to get our business to a point where it will be able to obtain larger funding from
an Angels or VCs.
Pro: Funding is usually obtainable quickly due to an existing relationship.
Pro: Potential exists for the mutual vested interest in our business to bring and develop closer ties with loved ones.
Pro: The investment terms are usually more flexible and potential exists for numerous equity or pay back methods.
Con: Immense pressure to succeed can strain personal relationships.
Con: Friends and family frequently have an extremely limited ability to evaluate the potential of a business, though they tend to give advice
because of their monetary stake in the company.
Con: Friends and family usually bring nothing more to the table as an investor besides the initial capital.
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

7. Venture Capitalists (VC’s) and Who Are They?
Venture capitalists are investors who are willing to put forward a large sum of money in exchange for equity in our business, but who only
get their money out once our business either is acquired by another company or goes public. VC’s are professional investors that are all about
the money. They normally look for investments that can provide a 6X return on their investment, so we better be prepared to play and go big!
Pro: VCs can invest large sums at once and they can provide expertise and other assistance that is helpful in growing and exiting our business.
Pro: Being VC funded brings instant credibility to our company.
Pro: VCs open up doors to a vast network of individuals including partners and future investors.
Con: The term “Vulture Capitalist” exists for a reason. VCs are about the money and will take necessary steps to see a return on their investment,
including ousting us from our own company.
Con: VCs may steer the business in a direction that we don’t agree with. However, VC’s are very experienced and may know something that we
don’t.
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

8. Bank Financing
Bank loans are the most frequently sought after source of financing and can be pursued at the nearest lending institution. Bank financing can
be tricky as there are many different types of financing options and interest rates to go along with them. It is imperative to educate ourselves
about the process and our options before beginning.
Pro: Banks offer a range of funding amounts and payback options to fit our business needs.
Pro: If we qualify, the time to funding is usually fairly quick.
Pro: If we go the financing route, we do not have to give up equity in the company.
Con: Bank loans are very difficult to obtain and the criteria is constantly changing.
Con: We owe the borrowed money whether our business succeeds or not.
Con: The large amount of documentation required can be tedious and time consuming.
Con: The financing options can be confusing. If we lack the knowledge or experience, we may lock yourself into an unfavorable deal with poor
payment terms.
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

9. Organic (Internal) Growth
Launch of new products
Expansion into new markets
Exporting
New distribution channels
Franchising
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

10. Organic (Internal) Growth Strategies
Channel Partners
Must have “demand” driven growth model
App Store Optimization Strategies e.g. best practices are important because it can ruin reputation and get our developer account blocked
Develop an internal company language for growth especially as we cross cultural barriers (critical)
Avoid typecasting
Develop Corporate Scholarships/Funds
Modernization
Frugality
Resourcefulness i.e. leveraging and exploitation
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

11. Inorganic (External) Growth
Takeover of competitor
Merger or Acquisition with competitor
Acquisition of Supplier or Major Competitor
Channel Partners, Joint Ventures, Foreign Collaborations or Strategic Alliances
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

12. Inorganic (External) Growth Strategies
Horizontal Integration Growth i.e. left to right and right to left such as buying a business operating at the same level as us or the same type of
company to deepen our capabilities in existing areas
Forward Integration e.g. Buy a distributor or affiliate marketer (forward in the sales cycle)
Backwards Integration e.g. Affiliate Marketer buys Wholesaler/Product Owner
Conglomerate e.g. no connection to our existing business
Vertical Integration Growth e.g. acquiring different types of companies to enhance supply chain/solutions capabilities
Outsourcing
***Much faster than internal growth strategy, but failure rates are 50-70 percent on average***
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

13. How Valuation Works
Scenario 1: $50 million dollar company receives $25million in funding for 25 percent of the company so the Pre-Money
Valuation = $100 million
Ask for enough money (minimum) to grow over 18 months towards the next round of investment. Investor does not have
incentive to negotiate you down from here. If the money is not provided, we do not grow and that is not in any investors
interest.
Tips and Points of Consideration
5-20 percent is reasonable to give away in equity
30 percent is possible if you’re getting a large sum of money invested
Never give more than 40 percent
Option pools can dilute valuation as well so it is important to develop an option pool of 10-20 percent to attract future talent
and employees
It is not just about traditional money making, but it is about making money while growing fast
Use anti-dilution measures (both for benefit of company and investor) such as caps on equity, Convertible Notes (Option to
buy shares later on at a set price) with Preferred Shares (This just means that the investor gets their money before anyone else
and protects from future dilution from new investors who want equity)
More investments mean further dilution, but this does have pros and cons depending on intent
For b2c, charging users can lower valuation which in return means a slower growth
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

14. Investment Strategies
Go Big Or Go Home
Raise as much as possible at the highest valuation possible and spend all the money fast to grow as fast as possible and if it
works then a business can obtain a much higher valuation in the next round of funding. For ex. A slow growing start up is
diluted 55 percent in a seed round, but a faster growing startup, is only diluted 30 percent by obtaining future funding VC
funding Therefore the VC funding round eliminates any dilution incurred during the seed round.
Raise As Needed
Less risk
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

15. How and What Investors Look For
Potential Considerations for Investors
How much is the exit i.e. How much can the company sell for?
How much money will it take to grow the company where someone will buy it for the exit? For ex. Instagram received a total of $56 million
based on fact they would exit for $1billion. So $1billion - $56millon = $940 million (is how much value the company created. So when
Facebook bought them, they made $940million, collectively). In this case, the investor decides how much they think they can make on the
business based on potential dilution, total funding and total valuation at exit.
Investors want full diluted opportunity that illustrates their returns and percentages of company they will own based on said investment
e.g. what is the net valuation after ownership stakes and option pools, etc.
Have their been previous investors. If so dilution will continue to occur and terms, controlling interests may affect everyone’s interests.
Execution, Judgement in Utilization of Resources, Leverage
Investors will agree to equity terms that are comparable to the performance and value of similar companies
Investors want to see traction and speed to market (the more they see of this, the more likely they are willing to open their wallets)
Investors want to see execution, so paint a picture of past success with startups, or paint a picture of a person who gets it done
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

16. Sample of Key Valuation Terminology
Pre-Money Valuation - Value of a company before equity investment
Post-Money Valuation – Pre-Money Valuation, plus equity investment
Revenue Run Rate – Current revenue in annualized form or even quarterly
Cap Table - Analysis of current equity distribution and dilution from each round of investment
Burn Rate - Rate at which company spends cash
Runway – Time until company runs out of money
Seed Money – Money to get a business off the ground
Angel Money – Private investors who are typically smaller than VC’s
Series A Funding – First official round of funding where investors get preferred stock. Based on previous success using seed
capital.
Series B Funding – Additional funding allowing to keep raising money to make bigger moves and company will need to hit key
benchmarks to justify this funding e.g. goal is to take business to the next level
Series C Funding - For scaling, acquisition
Preferred Stock and Common Stock – Fixed dividends paid over priority to common stock dividends. Preferred stock offer
greater interest and control within a company
Dilution - Decreased ownership due to additional equity investments
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

17. Examples of Dilution
As mentioned before in a previous slide, the pre-money valuation of
a company is simply the value of the company before an equity
investment is made. The post-money valuation is the pre-money
valuation plus the equity investment.
Scenarios 1: Suppose we initially issue 1,000,000 shares of stock
and divide them equally between 2 people at our company. After
some initial success, we decide we need additional capital. An
investor states they are willing to invest $5 million at a post-money
valuation of $15 million, giving an implied pre-money valuation of
$10 million. So before we receive the investment, the original shares
were worth (see example to right):
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

18. Examples of Dilution cont’d
So now there are 1,500,000 shares outstanding where we own the original 1,000,000 shares, representing 67percent of the company.
Suppose our company continues to grow and show promise. It is not long before we may need additional capital. A new investor now is
willing to invest $10 million at a post-money valuation of $30 million, giving an implied pre-money valuation of $20 million. Notice that
the investor is willing to give a premium to the previous round! Using the same calculations, each share is worth $13.33 before the
investment ($20,000,000 / 1,500,000) and our company will issue 750,000 new shares ($10,000,000 / $13.33) to this latest investor.
Following this transaction, there are 2,250,000 shares outstanding with the 1,000,000 owned by us, representing 44percent of the company.
As we can see, each round of capital that we raise, reduces our ownership stake in the company (i.e. “dilutes”). However, each time we raise
capital, the value of each of our shares is getting higher and higher (from a couple bucks to $10 per share to $13.33 per share). The outside
investors from early rounds are also subjected to dilution at each subsequent round of funding. Investors can mitigate the amount of dilution
they incur by participating or “playing” in each funding round. In other words, the investors who have invested previously may exercise the
option to invest in subsequent rounds to maintain their equity stake.
When raising capital, pre-money valuation and the dilution of our ownership is an important issue as a business owner. Remember though,
owning 10percent of a huge pie can often be more lucrative than owning 50percent of a small pie, and we may often need outside capital to
build a large pie
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

19. Example of A Company Projected Investment
Timeline in Accordance With Product
Development Life Cycle
INTRODUCTION 3rd
QTR 2018
GROWTH
1st QTR 2020- 1st QTR 2025
MATURITY
1st QTR 2025-1st QTR 2027
DECLINE
2027/2030
InvestmentAmount
EARLY ADOPTERS
4th QTR 2018-4th QTR 2019
Exit or Stay
Acquisition/Merger
$25m-$50m
$5m-$25m
$500k-2m

20. Questions To Ask Yourself and Have Prepared Before You
Approach Investors For The First Time
1. Do you at least have a pitch deck (required) and preferably things to support (not required yet):
A. Competitor Charts
B. Business structure/hierarchy, team
C. Value Proposition
D. Budget Forecast
E. Build Forecasts or Product Forecasts for the Market
2. Are you looking for funding or investing; there is a difference. How much? (required)
3. Name of your company and year founded (required)
4. Website URL (required)
5. You need to have your quarterly, annual revenues ready for reporting. Net profits and gross e.g P and L
6. Any prior funding or investment, and if so what were the terms
7. How much funding and how will it be allocated
8. DO NOT ask investors for NDA’s – Non-Disclosure Agreements. If an NDA is needed it can be provided when there is mutual interest
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-1001
Farmington, MN 55024

21. Companies Don’t Drive Growth Customers Do
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-
1001 Farmington, MN 55024

22. Questions?
Comments?
Concerns?
Reciprocity ROI, LLC and Partners 115 ELM St. Suite I-
1001 Farmington, MN 55024