Uploaded byManish Singhal
Funding Fundamentals
The document discusses various modes of funding available for businesses, including angel investing, venture capital, private equity, debt, and IPOs. It outlines the advantages and disadvantages of each type of funding. The document also covers topics like company valuations, dilution, term sheets, and negotiating preferences between common and preferred stockholders.
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Funding Fundamentals
- 1. Manish Singhal, ChiefSaarthi Saarthi Integrated Consulting LLP www.saarthiconsulting.com © Copyright Saarthi Integrated Consul5ng LLP. All rights reserved
- 2. Different modes offunding 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 onwhich 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 thecompany 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 toinvest 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 goby 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 companiesare 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 holdscommon 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 inFinancing / 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 & AccountingFees 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 nota 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 wason 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.com www.saarthiconsulting.com www.facebook.com/saarthiconsulting © Copyright Saarthi Integrated Consul5ng LLP. All rights reserved