BUS405A Ch.12-15 Terms, Key Reading Points, and Slides

Convertible Debt

(Also known as convertible bond or a convertible note) -- a short-term loan that can be turned into equity when future financing is issued.

C corporation

(sometimes known as a "C-corp") a separate legal and taxable entity created by the state government and owned by an unlimited number of shareholders

S Corporation

(sometimes known as an "S-Corp")- a certain type of corporation which is eligible for, and elects special taxation status

Alternative Funding

-Bootstrap -Crowdfunding Peer to Peer -Angel Investors -Fringe Lenders -Venture Capital

JOBS ACT

1. Investor limits 2. Transaction Limits 3. Company Limits

Four reasons that motivate firms to go public

1. Is a way to raise equity capital to fund current and future operations 2. An IPO raises a firm's public profile, making it easier to attract high-quality customers, alliance partners, and employees 3. An IPO is a liquidity event that provides a means for a company shareholders (including its investors) to cash out their investments 4. By going public, a firm creates another form of currency that can be used to grow the company

Three questions before you Raise $$?

1. Why do you need the $$? 2. How much? 3. Where will you get it from?

SBIR Program is a

3 phase program -Meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal

Investor Model

A context for crowdfunding that gives backers an equity stake in the business in return for their funding.

Lending Model

A context for crowdfunding where funds are offered as loans with the expectation that the money will be repaid.

Copyright

A form of protection provided to the creators of original works in the areas of literature, drama, art, music, film and other intellectual areas

Due diligence

A rigorous process which involves evaluating an investment opportunity prior to the contract being signed

Early-stage financing

A stage of financing which involves larger funds provided for companies that have a team in place and a product or service tested or piloted, but has little or no revenue

Not for Profit

A tax status granted to companies performing functions deemed by Congress to be socially desirable that exempts them from income tax and, in some cases, allows them to receive tax deductible donations

Angel Investor

A type of investor who uses his or her own money to provide funds to young startup private businesses run by entrepreneurs who are neither friends nor family

Factors Affecting Financing

Accomplishments and performance to date -Investor's perceived risk -Industry and technology -Venture upside potential and anticipated exit timing -Venture anticipated growth rate -Venture age and stage of development -Investor's required rate of return or internal rate of return -Amount of capital required and prior valuations of the venture -Founders' goals regarding growth, control, liquidity, and harvesting -Relative bargaining positions -Investor's required terms and convenants

Size and Types of Loans

Almost all small businesses are eligible to apply for an SBA guaranteed loan -The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000 -An SBA guaranteed loan can be used for almost any legitimate business purpose -Since its inception, the SBA has helped make $280 billion in loans to nearly 1.3 million businesses

Describe angel investors and how they finance entrepreneurs.

Angel investors are typically high-net-worth individuals who are accredited investors investing their own money in startup ventures. Other types of angels include corporate angels, professional angels, enthusiast angels, and micromanagement angels, each characterized by distinct goals and value-added capabilities.

Strategic Partners

Another source of capital for new ventures -Alliances also help firms round out their business models and conserve resources

Trademark

Any word, name, symbol, or device used in business to identify and promote a product. Its counterpart for service industries is the service mark

SBA Guaranteed Loan Program

Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program. The program operates through private-sector lenders who provide loans that are guaranteed by the SBA. The loans are for small businesses that are not able to obtain credit elsewhere.

Describe different ways of building networks.

Building a network extends beyond socializing with friends and acquaintances, and it often involves active participation in organized networking events. In a new relationship, it is better to give value to get value; value is a two-way game.

Three vital corollaries determining bargaining power

Burn Rate Time to OOC (Out of Cash) TTC (Time to Close) Runway

Examples of Bootstrapping Methods

Buying used instead of new equipment; Leasing equipment instead of buying; Minimizing personal expenses; Sharing office space with other businesses; Coordinating purchases with other businesses; Obtaining payments in advance from customers; avoiding unnecessary expenses; applying for and obtaining grants

Trade Secret

Confidential information that provides companies with a competitive edge and is not in the public domain, such as formulas, patterns, compilations, programs, devices, methods, techniques, or processes.

Explain the difference between crowdsourcing and crowdfunding.

Crowdfunding involves raising funds from a large audience, typically through the Internet. Crowdsourcing involves using the Internet to attract and manage free labor generated by enthusiasm for the product or service.

Describe 10 ways in which entrepreneurs can conduct a successful crowdfunding campaign.

Crowdfunding is flexible and exciting but not without its challenges; it's not free money. Entrepreneurs still need to make sure their product/service addresses a real business need, a benefit to customers that is being under-addressed or unaddressed. Successful campaigns start as early as is feasible, maintain commitments, and do not overpromise.

Explain the advantages of crowdfunding for entrepreneurs.

Crowdfunding is not just a means to generate necessary cash, but also a good direct line of contact with end users. Many crowdfunding options exist, and entrepreneurs are free to use whichever method they chose.

Define the four contexts for crowdfunding.

Crowdfunding largely falls into one of four types: patronage model, lending model, reward-based model, and investor model.

Describe the common IP traps experienced by entrepreneurs.

Entrepreneurs often make mistakes in the following areas: Public disclosure of an invention or innovation; Failure to protect products, processes, brands, and so on; Inability to determine originality; Failure to allocate ownership; and Failure to protect IP in global markets.

Define bootstrapping and illustrate how it applies to entrepreneurs.

Entrepreneurs use their own sweat equity in combination with other bootstrapping strategies to make enough progress to get in a better position to attract more formal types of funding.

Two most common alternatives for raising money

Equity Funding and Debt Financing

Define equity financing for entrepreneurs and outline its main stages.

Equity financing is the sale of ownership stake within the company in exchange for funding. Seed-stage financing, startup financing and early-stage financing describe funds in support of different early-business objectives. As the organization grows, it may then seek out second- or later-stage financing through subsequent rounds of financing. Businesses may also choose to undergo an IPO, opening the firm to general market funding and offering an exit to early investors.

Venture Capital

Exceptional growth potential -There are about 462 VC firms in the US in 2010 that provide funding to about 2746 firms (1001 first time) -VC firms fund very few entrepreneurial firms in comparison to business angels -Due Diligence -Stages

Commercial Banks

Historically, have not been viewed as practical sources of financing for start-up firms -This sentiment is not a knock against banks; it is just that banks are risk adverse, and financing start-ups is a risky business -Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet -Although many new ventures have good management, few have the other characteristics, at least initially

Before you start know the End

How you get money can determine the End -Sell: To outsiders-Buy-should I stay or should I go?-Merge; To market; To insiders-LBO-ESOP-Carry -Hold: family

Phases of the SBIR

I: To demonstrate the proposed innovation's technical feasibility II: Available to successful phase I companies. The purpose is to develop and test a prototype of the innovation validated in phase I III: Period in which phase II innovations move from the research-and-development lab to the marketplace

Define IP and how it affects entrepreneurs.

IP is intangible personal property created by human intelligence, as a result of creativity such as inventions, trade secrets, slogans, logos, and processes. The four main types of IP are copyright, trademark/service mark, trade secret, and patent. It behooves entrepreneurs to understand IP because startups are by definition innovative and likely to involve the creation of IP.

Illustrate the basics of enterprise valuation.

Investors use a variety of factors to come to valuation proposals, including market conditions, opportunities, competition, comparables and how much value a given venture can add to the mix.

Two Key points of Fundraising

It's brutal -No reward for effort -Harder than selling your product-fewer targets -Investor Behavior is Challenging-they have...Big decisions+ on things not understood=random -Don't let it kill morale

Creative Sources of Financing or Funding

Leasing Small Business Innovation Research Grants Crowd Sourcing Strategic Partners

Explain the legal requirements of hiring employees.

Legal requirements related to hiring employees include registering employees with the state labor department, keeping records of employee tax history, preparing the appropriate legal documentation, and complying with safety regulations.

Assess the global impact of IP theft.

Millions of people all over the world violate IP laws every day by ignoring copyright. IP theft costs the United States almost $300 billion every year.

Three core principles of Entrepreneurial Finance

More cash is preferred to less cash Cash sooner is preferred to cash later Less risky cash is preferred to more risky cash

Explain the role of networks in building social capital.

Networks provide social capital such as access to sources of financing, information, expertise, and support; and networks can be excellent sources for loyalty. They allow for learning and information exchange; and social capital enables access to a range of resources, including venture capitalists, angel investors, advisors, banks and trade shows.

Explain how networking can help to build the founding team.

One of the most valuable things an entrepreneur can do is connect with individuals who serve as great complements on a founding team. Research even suggests that team-started ventures are more successful than solo-founded ventures. Networking skills can often be relied on as the means to that end.

Demonstrate the value of networks for entrepreneurs.

Relationships are key to business success, and entrepreneurs in particular will need to skillfully interact with a vast array of stakeholders. Networks provide entrepreneurs with access to private information, diverse skillsets, and power. Networks can also be relied on for personal and emotional support.

Business Angels or Informal Investor

Relatively small investments -Difficult to find-Not so now, its cool to be an angel

Government Grants

SBIR and STTR -are two important sources of early-stage funding for technology firms -These programs provide cash grants to entrepreneurs who are working on projects in specific areas -The main difference between the SBIR and the STTR programs is that the STTR program requires the participation of researchers working at universities or other research institutions

Initial Public Offering

Sale of stock to the public Most entrepreneurial firms go NASDAQ An IPO is an important milestone for a firm A complicated and expensive process

SBIR Program

Small Business Innovation Research competitive grant program that provides over $1 billion per year to small businesses for early stage and development projects

Illustrate the benefits of virtual networking.

Social media sites and other forms of virtual networking provide additional channels to meet or interact with stakeholders from the world over. Entrepreneurs have a number of different virtual communities in which they can participate, with many communities offering access to a specific subset of interests in entrepreneurship. Common social media platforms like Facebook also contain groups that are similar in fashion to online entrepreneurship communities.

Lengthy Product Development Cycles

Some products are under development for years before they generate earnings. The up-front costs often exceed a firm's ability to fund these activities on its own.

Outline the most common legal errors made by startups.

Startups may make some common mistakes that could be expensive. The most common mistakes they make are in choosing the legal structure of the venture, not having a written agreement defining the many parameters of their relationship, not paying close enough attention to forming the right vesting schedules, and issuing shares to people who are not accredited investors.

Preparing to raise debt or equity financing

Step 1: Determine precisely how much money is needed Step 2: Determine the type of financing or funding that is the most appropriate Step 3: Develop a strategy for engaging potential investors or bankers

Linkages

The connections to people or groups regardless of their position in an organization, society, or other community

Describe the effects of crowdfunding on entrepreneurship.

The crowdfunding movement has provided a democratic means of funding that has never before existed on the scale it exists today. Equity crowdfunding has emerged as a popular crowdfunding alternative, where ownership stakes (stock) are issued in exchange for funding.

Bridges

The links that go further than simply sharing a sense of identity; for example, making connections with distant friends or colleagues who may have different backgrounds, cultures, and so on

Identify common bootstrapping strategies used by entrepreneurs.

The list of common bootstrapping techniques is extensive. It includes ideas like using the home as the office, renting or leasing before buying, minimizing personal salary initially, developing and reaching out to contacts, offering equity reimbursement, and maintaining low operating inventories.

Explain the most common types of legal structures available to startups.

The most common types of legal structures include: Sole Proprietorship, General Partnership, C corporation, S corporation, Limited Liability Company (LLC), Limited Partnership, Limited Liability Partnership (LLP), and Benefit Corporation. In addition, most of these business structures can be run as a not-for-profit provided the company complies with IRS section 501(c).

Crowdfunding

The process of raising funding for a new venture from a large audience (the "crowd") typically through the Internet.

Crowdsourcing

The process of using the Internet to attract, aggregate, and manage ostensibly free labor from enthusiastic customers and like-minded people.

Explain the money versus power trade-off and the funding life cycle.

The typical "entrepreneur's dilemma" is choosing between retaining significant ownership and control versus securing substantial funding and losing majority ownership. The venture typically starts with finding partners and securing initial funding, followed by formal founding and registration of the business. As the business grows and additional financing is needed, angel and venture capital investments are sought out. Finally, the most successful of startups often accomplish an IPO.

Describe how investors carry out due diligence processes.

To ascertain the prospects of any potential investment, angel investors and venture capitalists alike conduct due diligence processes of the firm under consideration. Essential to this process is identifying a method and timing for the investors to recoup their capital at exit, such as completing an IPO.

Discuss how legal considerations can add value to entrepreneurial venture.

Understanding the legal considerations applicable to the business is as important as understanding user needs. Taking legal considerations into account may add value to the firm. Whether it is a lawyer, free website content, or some form of legal expert, obtaining competent legal advice will certainly help improve the performance of the venture.

Explain the role of venture capitalists (VCs) and how they finance entrepreneurs.

Venture capitalists differ from angels in the sense that they are professional money managers. Entrepreneurs should also exhibit at least as much caution as venture capitalists when seeking VC funding; the owners are likely to concede a significant ownership stake in the venture, and need to be certain of both why venture capital is absolutely necessary and which firm would provide the best guidance.

Patronage Model

a context for crowdfunding that describes the financial support given by backers without any expectation of a direct return for their donations

reward-based crowdfunding

a context for crowdfunding which involves rewarding backers for supporting a project

Limited Liability Company (LLC)

a form of business ownership that combines the taxation advantages of a partnership with the limited liability benefits of corporation without being subject to the eligibility requirements of an S corp

Equity Crowdfunding

a form of crowdfunding that gives investors the opportunity to become shareholders in a company

Patent

a grant of exclusive property rights on inventions through the U.S. and other governments

Heterogenous team

a group of people with a mix of knowledge, skills, and experience

Founding Team

a group of people with complementary skills and a shared sense of commitment coming together in founding an enterprise to build and grow the company

Homogenous team

a group of people with the same or similar characteristics such as age, gender, ethnicity, experience, and educational background

Sole Proprietorship

a person who owns a business and has full exposure to its liabilities

Groupthink

a phenomenon where people share too similar a mindset, which inhibits their ability to spot gaps or errors

Cognitive Comprehensiveness

a process in which team members examine critical issues with a wide lens and formulate strategies by considering diverse approaches, decision criteria, and courses of action

Seed-stage financing

a stage of financing in which small or modest amounts of capital are provided to entrepreneurs to prove a concept

Startup financing

a stage of financing in which the money is provided to entrepreneurs to enable them to implement the idea by funding product research and development

Venture Capitalist (VC)

a type of professional investor who generally invests in early-stage and emerging companies because of perceived long-term growth potential

Leasing

a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments -Major advantage-enables a company to acquire the use of assets with very little or no down payment -Leasing is almost always more expensive than paying cash

Why Most New Ventures Need Funding

cash flow challenges, capital investments, and lengthy product development cycles

Sources of Debt Financing

commercial banks, SBA guaranteed loans

Intellectual Property (IP)

intangible personal property created by human intelligence, such as ideas, inventions, slogans, logos, and processes

Cash Flow Challenges

inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales

Crowdsourcing

inviting broad communities of people - customers, employees, independent scientists and researchers, and even the public at large - into the new product innovation process

7(A) Loan Guaranty Program

most notable SBA program available to small businesses

Sources of Personal Financing

personal funds (the vast majority; sweat equity), friends and family (the second source of funds), bootstrapping (a third source)

Social Capital

personal social networks populated with people who willingly cooperate, exchange information, and build trusting relationships with each other

Crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

Impression Management

the concept of how people pay conscious attention to the way they are perceived and the steps they take to be perceived by others in a certain way

Vesting

the concept of imposing equity forfeitures on cofounders over a certain period of time on a piecemeal basis should they not stay with the company

Bonds

the connections with family, friends, and others who have a similar cultural background or ethnicity

Capital Investment

the cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firm's ability to provide funds for these needs on its own

Sweat Equity

the increase in value or ownership interest created as a result of hard work

Self-selected stakeholders

the people who "self-select" into a venture in order to connect entrepreneurs with resources in an effort to steer the venture in the right direction

Bootstrapping

the process of building or starting a business with very little funding or capital or virtually nothing at all

Equity Financing

the sale of shares of stock in exchange for cash

General Partnership

two or more people who have made a decision to co-manage and share in the profits and losses of a business

Sources of Equity Funding

venture capital, business angels, initial public offerings