Fund Raising

March 28, 2013

Financing the Venture

Equity capital Debt capital Stages of growth and financing

Funding Rounds

Equity Financing

Equity financing is provided by individual or institutional investors Individual investors include:

FFF Angels Venture capital Corporate VC

Institutional investors include:

Equity Financing

Costs of equity financing

Usually greater than debt financing However, no interest payments and no responsibility to re-pay Pre-money valuation Post-money valuation

Equity ownership is determined by venture valuation

Terms of Financing

Valuation

Multiples technique

Metrics are specific to industry Multiples on revenue, profit, free cash flow, unique users

Discounted cash flow Seeking $500,000 Pre-money valuation: $1,000,000 Post-money valuation: $1,500,000 Dilution: 33%

Example:

Terms of Financing

Unit size: Minimum investment that will be accepted Min/Max

Minimum amount that enables closing Maximum amount that will be accepted (limits dilution)

Authorized shares Issued shares

Issued shares constitute ALL of the ownership

Stock options Subscription agreement Shareholders agreement Elevator pitch

Equity Financing

Advantages include:

No interest payments to creditor Investors have pecuniary interest in your success Investors can bring valuable skills and experience Investors often provide needed follow-on financing Raising equity financing is demanding and potentially costly Investors will seek a lot of info on venture and you Investors may demand influence on venture management Time required to keep investors informed Legal and regulatory compliance will take up some time

Disadvantages include:

Debt Financing

Normally provided via an institutional lender

Commercial banks Credit unions Business loans from FFF should include careful documentation Many banks will require a personal guarantee Entrepreneurs generally pay prime rate plus a risk premium

Loans can also be obtained from FFF

Secured loans require collateral

Lenders will compete for loans based on interest rate

All loans have terms (long or short)

Debt Financing

Restrictive covenants

Positive Negative

Covenant violation can lead lender to call the loan Line of credit (revolving loan) Small Business Administration (SBA) loans

Guaranteed by (not originated by) federal government Not all lenders have SBA financing options

Always look for a lender that understands your business Always look for a lender with a track record in your industry

Debt Financing

Advantages include:

Can expense principal and interest payments Tax benefits Burden on ventures cash Obligation to pay includes personal (non-business) assets Loans affect a ventures credit rating and cost of capital

Disadvantages include:

The Use of Funds Statement

The startup budget (AKA Use of Funds Statement) Outlines how the venture intends to use funds raised Only need broad strokes, not exact figures Equity investment: $500,000 Uses: Marketing: $125,000 Development :$200,000 Production: $75,000 Salaries: $100,000

Executive Summary

Private Placement Memorandum

Alternative Financing

Bootstrap financing

Growing via what is called organic growth Profits re-invested in venture Venture scales with profitability