Slide deck from Spectrum session June 24, 2014 at the Austin Chamber titled: The Art of the Deal: Investors Liked Your Pitch, Now What?

1. SBDC – Now what?
June 24th, 2014
Welcome Entrepreneurs, Investors and Guests!

2. Agenda
Types of Funding
Types of Investors
Investor Fit
Term Sheet Overview
Typical Investment Process

3. Starting Vocabulary
Entity Structure – LLC and C-Corp
Security – Loan or Stock
Convertible Note – initial loan structure which converts to equity in the future
Stock – Common and Preferred
Dilution – the loss of some founder ownership due to investments taken
Crowdfunding – the use of an-online portal rather than face to face investor
engagement
Accredited Investor – SEC requirement for certain types of transactions
Bootstrapping – Self funding by the founder team

4. What is the most advantageous
funding for the founders?

5. What is the most advantageous
funding for the founders?

6. OPM Funding Types
Ownership Dilutive
• Convertible Notes
• Stock Sale – Common or
Preferred
• Membership Unit Sale including
preferred
• Some Corporate
• Crowdfunding – Investment
ANY Sale of Equity is Dilutive
Non or Minimally Dilutive
• Grants
• Loans
• Revenue Based Funding
• Some Corporate
• Crowdfunding – Reward or Loan
Most non-dilutive money must be
repaid on a set schedule

7. Investor Types
EQUITY (Think Exit)
• Friends & Family
• Accelerators/Incubators
• Angel Investors
• Angel Networks
• Venture Capital
• Private Equity
DEBT
• Credit Cards
• Private loans
• SBA
• Banks
• Factoring
• Revenue or Royalty
Financing is a hybrid

8. F & F Angels VC PE
Sophistication Low Moderate to High High High
Stage Early Early Early Growth Major Growth
Typical Round
Size
< $100K $200K - $2mm $5mm+ $25mm+
Expected Returns What’s that? 60-100%
annually
40-100%
annually
20-40% annually
Valuations Ditto Average $2.5mm Average $7mm Average $114mm
Security Varies Conv. Notes or
Preferred Stock
Preferred Stock Complex
Instruments

9. Crowdfunding
Equity/Debt
• Accredited Investors
– Can do equity or loans
– General Solicitation won’t apply for
portals
• Non-accredited Investors
– Not legal in many states
– Not legal interstate
– JOBS Act rules STILL in process
– Texas Intrastate rule expected in
August
Rewards
• Provides something of value
for a donation
• Does not provide any
ownership or dividends
• Evaluate portals for traffic
and fee structures

10. Revenue Based Financing
• Investment is paid as a % of revenue
• Can be loan or stock based
• Non-dilutive in long term
• Payments vary with revenue
• Typically 3-10% of revenue to a 2 to 5X+ multiple

11. Process of an Investment
• Finding and contacting investors
• Early evaluation – interest and screening
• Formal evaluation – screening and maybe fees
• Pitch Presentation to Investors
• Due Diligence if interest
• Term Sheet
• Closing Docs and Funding

12. Definition of 'Due Diligence - DD'
1. An investigation or audit of a potential investment. Due diligence serves to
confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take
before entering into an agreement or a transaction with another party.
Read More:
http://www.investopedia.com/terms/d/duediligence.asp#ixzz24qNuxEE3

13. Practical DD Definition
Whatever the investor does prior to making an
investment decision.
In general, the more sophisticated the investor the
more in-depth the due diligence.

14. Does DD make a difference?
Kaufmann Foundation 2007 Study
“Return to Angel Investors in Groups” by Dr. Rob Wiltbank
Return multiple for DD < 20 hours 1.1x in 3.4 years
Return multiple for DD >20 hours 5.9x in 4.1 years

15. DD Process Overview
• Quantitative Analysis
• Qualitative Analysis
• Management Team Analysis
• Additional “Deep Dive” Analysis
• Term sheet negotiation if applicable

16. Quantitative Analysis
• Documentation review that supports the
authenticity of the startup
• Expect general solicitation questions
• Duration: days to weeks mainly dependent upon
entrepreneur responsiveness
• Deliverable: Completed comprehensive checklist

17. Qualitative Analysis
• Angels and subject matter experts to gather more
details of the business through a question and answer
session with the company’s management team,
customers, suppliers, distributors, and others.
• Duration: days to weeks
• Deliverable: Report of findings and opinions of a
subject matter expert

18. Management Team Analysis
• Discovering the strengths and weaknesses of the
management team and begin building an Advisory
Board or Board of Directors as applicable
• Duration: days to weeks
• Deliverable: Background check reports and report of
other findings and recommendations
• Bad Actor Rule is now active

19. Deep Dive Analysis
• Fact finding or research if the Angels feel that
additional information is necessary to validate
the investment
• Duration: days to weeks
• Deliverable: Report with findings and
recommendations

20. Term Sheets
Term sheets define
Control
Economics
& General Legal

21. Term Sheets
Term sheets define
Control
Economics
& General Legal

22. Major Term Sheet Items
• Valuation
• Preferences – Dividends, Liquidation,
Conversion Rights, Redemption Rights, &
Voting Rights
• Board of Directors

23. Valuation Only Focus

24. Valuation Only Focus

25. Valuation Myths
• Valuations are:
– Objective
– Should be done by independent accounting firm
– Same in every ______ (location, industry, stage,
etc.)
– The only term that matters

26. Major Term Sheet Items
• Valuation
• Preferences – Dividends, Liquidation, Conversion
Rights, Redemption Rights, & Voting Rights
• Anti-Dilution
• Board of Directors
ECONOMICS & CONTROL

27. Major Term Sheet Items
• Valuation
• Preferences – Dividends, Liquidation, Conversion
Rights, Redemption Rights, & Voting Rights
• Anti-Dilution
• Board of Directors
ECONOMICS & CONTROL

28. Questions & Discussion