Private Equity Exam

Investor Fit with ANGELS

"Investor fit" is particularly important to angel investors compared to venture capital fund managers. Angel investors place great importance on "chemistry" between themselves and the entrepreneur because they generally take a more hands-on approach in the businesses they invest in. angel:10-12 yrs. chemistry is most important here. venture: 3-4yrs pe: even less

the dd process -- what and when

1. Business Plan Review 2. Management Presentation 3. Site Visit(s) 4. Reference Checks 5. Competitive Analysis 6. Financial Analysis 7. The Deal Terms

How to Achieve Safe Harbor Status

1. Secure an internal valuation from a qualified individual (only valid in the case of an illiquid startup) §Less than 10 years old §No publicly traded securities §No stock granted that is subject to a put, call, or similar derivative §No reasonable anticipation to be acquired within 90 days or go public within 180 days.....OR... 2. Have the valuation done by a third party valuation firm. have ppl do it through market trends and mgmt all factored in and give u a valuation but not v costly

Some Term Sheet Components: 2. automatic conversion

1.All shares of Series A will automatically convert to Common Stock upon a firm commitment underwritten public offering of Common Stock of the Company at a price per share equal to at least five (5) times the price paid by the Investors with gross proceeds at least $25,000,000 (a "Qualified IPO").

What Did You Learn From the TESLA-VALOR Relationship?

1.How long did it last? few yrs 2.How much was invested? about 14.5mil from 3 funds 3.What else did TESLA receive other than funding? 4.What did Valor earn on their investment? 10x their investment. 14mil v 140milsales and mgt skills and marketing What did Tesla do in the electric car market that was unique or at least unconventional? sales, started on roadster opposite direction expensive to cheap cars weere others do cheap to expensive. crowdfunding. venture cap fund but 1st fund was boutique fund rest were 3,4,5 true venture size mil funds.

Some Term Sheet Components. 1. Optional Conversion.

1.Initially, the Series A will be convertible into Common Stock at a ratio of one share of Common Stock for each share of Series A. All shares of Series A will convert to Common Stock upon the vote of holders of a majority of the then outstanding shares of Series A, voting together as a single class.

START UP CAPTIAL COMES FROM ANGELS

90% Of the outside equity capital funding for seed/early stage entrepreneurs comes from angels - not VCs, PE or Investment Bankers

Junk Bonds:

A high-yield, high-risk security, usually issued by a company seeking to raise capital quickly in order to finance a takeover - leveraged buyout. short term. suually senior level debt

SUBORDINATED DEBT

A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings.

The Multiple....

A multiple is a fraction or maybe a whole number that is applied to a business's gross revenue, EBIT, EBITDA or net revenue (after taxes) One common multiple used for publically traded companies is the price/earnings ratio, which measures stock price to earnings. P/E ratio tells what the market (stock buyers) are willing to pay for the company's earnings. A higher ratio means people will pay more.

Institutional Investor

A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves. Examples: Pension funds, Life insurance companies only 5% all they can do

Unicorn Deal

A sale or acquisition valued at more than $1Billion dollars. Since 2014, there have been more unicorn valuations of $1B+ than there have been unicorn exits..... less common

Security

A security is a financial instrument that represents an ownership (in entity-buy or sell stock) position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an options or warrants. stock security is a security. intangible property. it represents an ownership in a company. security could also be any kind of debt instrument/ownership in anything options (same as warrant but for ppl in company to stay w company) and warrants (not in company. contracts to buy part of company at any time. penny nominal warrnt to get u to invest. incentive to outside ppl) are same thing depends on who owns it

VENTURE LEASING

A type of long-term, typically for commercial property or capital equipment, lease in which the payments are variable and adjusted periodically to reflect changes in the property's appraised value. The lease usually has the option to convert some or all of its value into equity.

Leveraged buyout: (LBO)

Acquisition of another company by using a significant amount of borrowed money. Very often, the assets of the company being acquired are used as collateral for the loans. The purpose of a leveraged buyout is to allow companies to make large acquisitions without having to commit a significant amount of capital.

Exit / Liquidity Event

An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an exit strategy for an illiquid investment (cant cash out until the company cashes out). 1 in 10 portfolio varying

Angel Investor

An investor who provides financial backing for small startups (seed and early stage) entrepreneurs. Angel investors are usually found among an entrepreneur's family and friends. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times. have to be reasonably demanding and successful to keep going or u will run outta money seed/first money in. along w founders taking money from own accts. angels give comps 1 chance usually. group of angels in a fund can have multiple rounds. heres a check to get u started not usually another one another one another one.

MOTIVATIONS FOR INVESTING-ANGELS

Angels: •Staying involved (sense of engagement) •Help fellow entrepreneur(s) •Give back to the state or local community? not their intent but happens kinda accidentally. Really? •Willing to invest a portion of portfolio in high risk areas •ROI is still important / key metric

VENTURE CAPITALISTS: ( a difference with Angels )

Because VC's are invested in companies that are generating revenues, a VC can ask.... •Do customers tell others about their experience? •Are the customers real? •Are the customers buying repetitively? •Will the VC investment accelerate the company's growth? 40% roi goal

Boards of Directors vs. Advisors

Board of Directors (must have board -5) -Elected by shareholders / governed by by-laws -Fiduciary responsibility to company (can be held liable) -Serve terms / most often compensated Advisory Board -Informal group of experts (tech, industry) and advisors -Selected by CEO / management team -Flexible - easy to expand / reduce size -No fiduciary responsibility Can have both

Accredited investor

By Securities and Exchange rules, an accredited investor must have a net worth (excluding primary residence) of at least $1M. OR income of $200K per year for the current year and previous 2 years. What is the purpose of this requirement? legal ability to sue. rewatch at 58min mark day 2 zoom.

Venture Capital:

Capital provided to some early-stage, but primarily to later stage growth companies ( usually generating revenue ). The venture capital invested in companies is in exchange for equity(ownership) in the companies. boutique and venture (10yr lifespan. 3 yrs raising money 3 yrs investing 4 yrs trying to make money and sell. does small checks up to 50mil)

Boards of Directors

Composition -5-7 members -2 management team, 2 investors, 1 independent Compensation -Typically stock (< 1%) -Directors & Officers (D&O) insurance BOD will change with each round of financing

The " Point of View"....Think about it

Consider the psychology, mind set, philosophy, risk profile etc. of a Venture Capital General Partner? What will drive/motivate a VC before, during and after an investment? all about ur represenatonof money vc raise 100mil from institutions (not eprsonal money usually) and 2% is fee for partners and 10mil a yr for 10yrs max. once u return 100mil to everyone u get 20% of rest of what u earn. do well on 1 they can raise another etc. cant raise money if u fail. why do corps like microsoft be venture capitals? bc its like r and d but cheaper.

WHAT ARE THE SOURCES OF THAT CAPITAL?

Debt - typically restricted to established firms with a proven track record or substantial collateral. ( What does the D/E ratio mean? ) * Revenue Loans? Why are these potentially attractive? convertible note is debt instrument that can be converted in future round. have to know value of company to know if its worth investing. Equity - typically provided by: •Entrepreneur's own pockets •Friends and Family ( often times by "fools" ) •('Angel') investors - among the first money in ( debt or equity ) •Venture capital - minority equity investment •PE - Controlling equity investment or company purchase •Investment Banks - buy side or sell side of target company

Investor Expectations - THE MODEL

Does the business model fit with the: •Market •Industry •Customer •Sales/Distribution Channels The Ultimate Question: Can a sustainable business be built around or grown with this set of products and services?

PE MARKETS AND DRY POWDER

Dry powder levels in North America and in Europe are at all time highs as of the end of 2019. ( $750+ B ) What does that do to company valuations in all sectors and among all investing classes? near exit is minimal risk life support-hasnt failed but makes just enough to stay in business but not enough to attract new investors. get nothing here but 0 is a tax writeoff. equity holders cant do anything to force thhe company to sell or go under. debt holders may be able to push them into a bankruptcy/liquidation event if ur a creditor. aka convertible notes that are debt and might want to go in w one instead of equity buy in this scenario.

Angel Investor Exits & Returns (2018)

EXITS: Mergers & Acquisitions 54% Bankruptcies 24% IPO 4% RETURNS: Average: 23% Range: 18-28%

Rules and Regulations

Early stages of private equity investment are exempted from SEC Regulation under Regulation D: 504 505 506 Unlike publically traded and capitalized companies. fed govt gives us a break. the numbers are exemptions for relatively small amts of pe angel investors primarily being able to invest in these startup companies w/o having to go throguh ipo paperwork. accredoted=nw1mil not including residence, income 500k+ and sophisticated. cant sue if accredited if they take ur investment money. if unaccredited (uncle, prof) u could lose 50k and sue. want accreddited bc unaccredited are a legal libaility.

Private Equity and Venture Capital

For emphasis: understand what and where the capital is coming from and going to.....think about the perspective and expectations of the investors.....are they the same?.....what about the investment psychology? yes. think ab who is writing the check and whose money it is especially for angels (ur money vs company or partner money-dif perspective and dif set of pressures) special acquisition pressures deb/cred cards.

Nationally the average business sells for around 0.6 times its annual revenue. But many other factors come into play.

For example, a buyer might pay 3 or 4 times earnings if a business has market leadership and a strong management.

Full Ratchet Anti Dilution Provision

For example, an investor who paid $2 per share for a 10% stake would get more shares in order to maintain that stake if a subsequent round of financing were to come through at $1 per share. The early round investor would have the right to convert his shares at the $1 price, thereby doubling his number of shares.

Capitalism is Our Stage

Given the previous background on capitalism and what it means, let's drill down into some of the essential elements that enables a business to raise capital.

KEY MILESTONES

Hitting milestones will likely be key to tranches Revenue targets will be primary Others may include: •Prototype development •Beta testing •Product shipments •Management team hires •Breakeven or cash flow positive

What about Pre-Revenue Firms?

How do you arrive at a valuation without a track record? using their pe's to set up valuations Could you apply public multiples with discounts? •Limitations of multiples ( as we have just seen ) - Factors beyond projections that we look at as investors •Management team experience •Industry appeal •Trends & Current Market Reality

Investor Expectations Validated

How will the investor(s) validate any or all of this information regarding the business model, value proposition and plan? Via DUE DILIGENCE......you will have a chance to conduct due diligence in the Team Presentations.

due diligence and the money

INVESTORS WILL WANT TO VALIDATE: - Financial Strategy - Capital Requirements - Structure - Valuation - Exit Strategy

Due Diligence & the Model

INVESTORS WILL WANT TO VALIDATE: -Revenue Model -Value Proposition -Distribution Strategy -Competitive Differentiation -Growth Strategy

When Should it Start?

If the investors have done their homework properly, the due diligence process will not be undertaken unless the deal is: 1.Within the investor's "sweet spot" 2.The investor can bring industry knowledge to the deal

Some Term Sheet Components: Treatment on Reorganizations, Consolidations, Mergers and Sales of Assets

In any reorganization, consolidation or merger which results in the shareholders of all classes of stock of the Company owning less than 50% of the outstanding voting power of the surviving corporation or the sale of all or substantially all of the Company's assets, such an occurrence shall be treated as a liquidation, dissolution or winding up, unless the holders of a majority of the Series A vote otherwise.

What is a Qualified Funding Source

In the angel world, it starts with an accredited investor ... a person with a net worth of $1M or an annual income of at least $200K (excluding primary residence) -Revised definition in 2010 Dodd-Frank bill - This should be your first screening criteria when you start the search telling teh entrepreneur that by law this self attested angel investor understands the risks and unless u commit fraud or misrepreentation sometimes they can afford to lose the money but theres ntohing they can do if u go to 0. provided theres no fraud or misrep. if ur not accreddited they can sue u to give u ur money back even if no fraud or misrep so nonaccredited investors on the cap table are a big red flag for other investors. we generally will say we dont want to invest in u or u need to unwind and basically give them theri money back b4 we come on board bc its litigation waiting to happen

Investor's Perspective

Investors aren't necessarily greedy ... they require a high rate of return to make up for their portfolio investments that don't hit it big.

Why Raise Money and What Do You Invest In?

It all starts with an IDEA...but it is more than that! It is the basis of everything the company does! Think about it.....

VC Method in Practice

It helps to understand the numbers Potential investors will run the models to validate (but not to set) a valuation At the end of the day ... investors are -Looking for reasonable value -If they don't get the return, they won't go there Don't expect a lot of room for negotiation. there is negotiation but not a lot ex: investment of 1mil expected 5yr exit of 20mil rev w np 2mil and 12,5x pe for industry so if they hit 2mil net w 12.5x the company val is 25mil. only thing we know for sure is that we will put in investment for 1mil. 25mil is theoretical. investor vc roi is 40% which is a 5x return. so when company sells for 25mil u need to get 5x1mil=5mil. so u needa own 20% of 25mil to get 5mil when it sells. ur 1 mil investment needs to buy 20% stake in company. company premoney valuation needs to be 4mil or less so u get 5mil post money w ur 1mil investment.

Remember the Common Goal

Keep in mind that there will be some common ground among Angels, VC's, PE and Investment Bankers when it comes to ROI. (usually measured in multiples of invested capital) The differences appear in the time to exit, amount of capital required, debt and risk tolerance (always unknown and personal. risk tolerance is higher for angels).

Angel Investing

Keep in mind the continuum of capital with Angel investors among the first money into a company and comparatively small amounts. PE Firms and Investment Banks are on the other end of the spectrum and in the business of literally buying the company....not investing in them.

So what is the multiple?

Let's say the multiple for a particular industry is 2. If the earnings of the business are $900,000, the multiples of earnings calculation means the business may be valued for sale at $1,800,000. start the convo at 1.8mil. theyre all adjustable just gets things started, gets in ballpark.

HOW MUCH FUNDING?

Like the Bears' Porridge: -Not too little -not too much -but Just Right What drives the need? •How much money you need to show significant growth or achieve next value-enhancing milestone • • •How much of the company will be "sold" (not given) to the investor. This is the EQUITY concept.

Exit / Liquidity Event:

Liquidity events are typically used in conjunction with venture capital/angel investors or private equity firms, which will aim to reach one within a reasonable amount of time after initially making an investment. The most common liquidity events are initial public offerings ( IPOs) and direct acquisitions by other corporations or private equity firms ( M&As )

What is Due Diligence?

MULTIPURPOSE - Depends on your position: -Verifies the business plan -Attempts to uncover the missing pieces and tries to assess the unknowable -It will attempt to contain the risk of a new business investment

HOW SOON?

Major uses of cash should be projected over ramp-up period e.g. instead of simply stating a need for $ 1 million, indicate $200,000 for fixtures and equipment, $250,000 for prototype development over 1st 6 months, $300,000 for year one production and operations, and $250,000 for marketing campaign beginning end month 3 May want to include a visual timeline of capital infusion needs.

Median Pre-Money Valuations (Angel Groups)

Median pre-money valuations rose to $3 + million (after several steady quarters at $2.5 million) Source: Angel Resource Institute HALO Report geography plays a big part. west coast highre at 10-12 mil but east is 2.5-3. country medium is prob 3mil and is going up

STAGED INJECTIONS OF CAPITAL MAY MAKE SOME SENSE

Milestones, Credibility and Cash -Performance may be measured as prototype completed, sales targets met, mgt team positions filled, etc. Tranches -Staged infusions of cash that are part of a single round of investment Planning for subsequent rounds -Understand and anticipate downstream implications

VENTURE CAPITALISTS....HOW DO THEY WORK?

Mutual fund analogy -General partners •Salaried managers •Minimal investment •Huge upside -Limited partners •Corporations, pension funds, wealthy individuals •Totally passive involvement Over 500 venture capital funds Size: $20 million to $5 billion (avg. size decreasing)

HOW TO QUALIFY AND RETAIN AN I.B.

NASD ( National Association of Securities Dealers ) Self regulating professional organization Being licensed means they're subject to regular NASD audits to ensure that everything they do complies with all government rules and regulations An I.B. should have an established track record of actually raising money. However, no amount of past success will ever be able to predict any degree of future success in a specific company. but have to do due dilligence on all The variables are always complicated and in flux. •Although retainers will vary widely, a general rule of thumb is to allot $15,000 to $25,000 for raises under $5 million and $50,000 to $100,000 for raises in the $10 million to $50 million range. •Then there will be a 5 to 10% fee based on the amount raised....or •5 to 10% equity in the form of warrants based upon the number of shares sold.

AREN'T PROFITS ENOUGH?

NO •Must demonstrate understanding of cash vs profit •Must be connected to the market realities •Must exhibit understanding of impact of growth on capital requirements •Relationships - Sales:Inventory, Sales:A/R, Sales:other assets

DIFFERENCES AMONG THE INVESTING GROUPS

Now that we have a "flavor" of how the target investment is viewed in a general sense.....are there some different perspectives among Angels, VC's, PE and Investment Bankers ?

Private Equity: A Broad Definition

Private Equity: Private equity is equity capital that is not quoted on a public exchange and generally falls into: •Angel (start up) •Venture, Growth or •Buyout categories. ( PE Firms and Investment Banks )

The Private Equity Segment

Private equity consists of investors and funds that make investments directly into private companies for controlling interest or conduct buyouts of public companies that result in a delisting of public equity.

Private Equity and Venture Capital

Private equity firms mostly buy mature companies that are already established. The companies may be under performing due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues and add VALUE. Venture capital firms, on the other hand, mostly invest in startups with high growth potential

PRIVATE EQUITY FIRMS:

Private equity firms, are groups of investors that use collected pools of capital from wealthy individuals, pension funds, insurance companies, endowments, etc. to invest in businesses....they are buying company stock to control the company. takes pub traded comp private to get out of sec and filings. buy fixer uppers at low price and maybe rekaunch as ipo or take the company and sell it. buy low sell high short time for liquidation gotta do it right or they wont raise another fund. all instiutitonal money other ppls money not theirs

Is All Private Equity the Same?

Private equity funds mimic venture capital firms in that they invest directly in companies, primarily by purchasing private companies. A PE firm may even use leveraged buyouts to acquire financially distressed companies. ( Debt ) Unlike hedge funds that are focused on short-term profits, PE funds are focused on the longer term potential of the of the companies they have acquired.

What type of economic environment is required for successful raising of capital?

Pure Capitalism: is an economic system in which individuals own productive resources, and those individuals can use resources in whatever manner they choose, subject to common productive legal restrictions. Otherwise known as the Rule of Law. adding value when u take money.

Some Context in the PE World

Quick Facts Private Equity Firms Headquartered in the U.S.: 3,883 firms Buyout/Growth Expansion Funds Currently Fundraising in the U.S.: 414 funds Private Equity-Backed Companies Headquartered in the U.S.: 12,992 companies Employees Hired by U.S. Private Equity-Backed Companies: 11.3 million employees US Private equity firms have approximately $5 T in assets under management through the end of 2019. Private equity is the ONLY option available for a business in need of a RISK SHARING partner. US female founded companies have raised over $7.2B in 2018. This represents about 12.5% of all VC investments made. Is this equitable? Appropriate? Proportional? pe is a risk sharing partnership.

But what about Early-Stage Ventures?

Remember, they have -Limited track record -Highly variable or negative profits -Negative cash flows -Partial management team -Additional risk of start-up

Investor's Financial Expectations-Valuation

Remember: Investors are participants in a marketplace -Expectations will vary -Choices are many -Angel investments are part of a portfolio ...the High Risk portion

What is SAFE HARBOR? - Valuation

Safe harbor guarantees: §The IRS must accept the valuation as valid unless they can demonstrate that the valuation is "grossly unreasonable." §The burden of proof is on the IRS. Basically, you are innocent until proven guilty.

A Sample Early-Stage Portfolio

So what is the portfolio ROI for investments 1 - 9 ? 3.7 X which equates to 26%

Pre- and post- investment

Some variables shift with the investment -Total value of the company -Relative balance of ownership Example demonstrated

What About YAHOO and the Power of the Board ?

Starboard Value LP ( Hedge Fund ) fires a shot across the bow 8-10-2015 Proxy fight instigated 3-24-2016 Yahoo settles and agrees to add 4 more board members and push the sale of core Yahoo businesses. Yahoo sells to Verizon for $4.4 B CEO Marissa Mayer, received a severance package worth more than $50 million.

Capital Call

The GP will make capital calls from the LP's who have made an investment commitment. The capital call follows the culmination of a deal for the fund and pending investment. Generally the LP's have a short time horizon to submit the capital.

The Ultimate Factor in Valuation?

The MARKET What would a willing BUYER pay a willing SELLER? Applies to Angel, VC and even PE & I.B. expect broader valuations and framework valuations are goong up dramaticalyl then went down them back up then down in 08 then back up. mkt never learns. have lots of cash and not enough to buy like inflation

Keep This in Mind for Your Team Presentation

The companies you are presenting are all in the Angel stage of funding. Identifying and targeting the "right" Angel investors is a critical first step. Understanding how the various groups operate is critical.

VENTURE CAPITALISTS:

The difference between an A team and a B team doesn't come down to the quality of the idea; it's whether the team can carry that idea to success. instrittuional money - other ppls money

Fund Raising Drivers-Why Participate?

The main reasons for the exuberance surrounding exposure to PE include the asset class's continued outperformance of: •public markets, •unprecedented low yields on credit, •lackluster performance by other alternatives such as hedge funds.

Investor Fit with VENTURE CAPITALISTS

The management team's reliability, honesty and potential for a long-term relationship and work ethic all come into play. A team who understands their roles and performs them with enthusiasm and efficiency is very hard to beat. A VC must feel completely confident in the abilities as well as the character of the team before investing. very quick to repplace team memebrs.

The Mechanics of Capitalism

This system concerns the three Ps, prices, profits, and private property. Producing those goods and resources that people (the market) will buy at profitable prices will yield efficiency. ( This implies adding value....not simply transferring money from one entity to another. ) In fact, one could argue that this system encourages efficiency, stability of output, employment and economic growth.

Some Term Sheet Components

This term sheet summarizes the principal terms of a potential private placement of preferred shares of XYZ, Inc. (the "Company") with INVESTOR ( the Investor ). " This term sheet is intended solely as a basis for further discussion and is not intended to be and does not constitute a legally binding obligation. No legally binding obligations will be created, implied, or inferred until the Preferred Stock Purchase Agreement is executed and delivered by all parties. Without limiting the generality of the above, it is the parties' intent that, until that event, no agreement shall exist among them and there shall be no obligations whatsoever based on such things as parole evidence, extended negotiations, "handshakes," oral understandings, or courses of conduct (including reliance and changes of position)."

Summary

We have established a general landscape for private equity and defined the primary funding mechanisms. As we continue through the topics, we will compare and contrast the relevant points of view, Angel, VC, PE and Investment Banking.

The Reason?

What are the investors really looking for in the due diligence process? A REASON TO SAY "NO"

Introduction to PE

What we need now is to get familiar with some of the most commonly used terms/vocabulary. Think about it.....how often do you read or hear information in which a portion consists of terms that you do not know or fully understand the meaning?

MEZZANINE DEBT

When a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt and allow for greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts. st, high term, almost like warrant, senior level debt, just more tools to quickly raise money but its expensive. better return higher risk

Be Prepared

When networking yields results ... •Research the angel group's focus or area of interest. •Make certain that the angels have a common interest in the target industry / business type •Expertise is as important as the money •Interesting tidbit: ROI for companies with "involved" angels is 3 times that of firms with "uninvolved" angels (Source: ACA) if they netowrk and funding and expertise.

PRIVATE EQUITY

Working with PE firms requires many of the same considerations of Angel and VC. Relationships and alignment of goals. Very often, the PE firm will find you if you have a rapidly growing company in an attractive sector.

Some Term Sheet Components: 1. liquidation preference

a.In the event of any liquidation, dissolution or winding up of the Company, the Investors shall be entitled to liquidation preference equal to the investment price paid for the Series A, plus unpaid dividends, if any, prior to the distribution of any proceeds to the holders of Common Stock. b.Any assets remaining after such preferential distribution and any liquidation preference payment made to other Company stockholders that have liquidation preference over Common Stock will be distributed to all stockholders, including the Investors, pro rata on an as-converted basis.

Some Term Sheet Components: 1.Protective Provisions. For so long as 5% of the Series A remain outstanding, consent of the holders of a majority of the Series A will be required for any action which:

a.Materially alters or affects the rights, preferences or privileges of the Series A. b.Increases or decreases the authorized number of shares of Series A. c.Creates or issues any series or class of shares having a preference or priority equal or senior to the Series A as to the payment of dividends or liquidation, or having redemption rights, registration rights or antidilution protection equal or senior to the Series A. d.Declares or pays any dividend on Common Stock (other than stock dividends). Results in the sale, conveyance, or other disposition or encumbrance of all or substantially all of the Company's property or business or a merger or other similar transaction in which 50% or more of the voting power of the Company is transferred

Cap Table (capitalization table)

be familiar w cap tables. they show who owns what. after every round of investing it changes and peoples percentage and money changes bc u have more investors. worried ab volume of money not percentage of company rly. pie needs to be almost exponential 2-3x growing so ur volume/dollars is still growing even tho ur percentage is going down. they've negotiated and convertible note and they'll negotiate later so convertible note is just listed it doesn't own stock or anything. just a 100 loan. that will convert at some point so it will be more diluted for investors. after every round we have to make sure we have accounted for 100% of ownership. debt is listed but no equity there. post money share: act after the startup round. not adding convertible debt to valuation bc theyre not equity holders. all rounds are totally independent from the other rounds. so the terms and conditions from seed round may not survive or be there in the a round or b round, independent! don't worry ab previous round except post money valuation aka 600 in seed round. yellow is second round (a). would like to see value go up 2-3x. pre money share: each sh costs this much. convertible note could be voluntary and covert whenever u want but not yet so sits there. 102 shares sold in round 2 so total sh issued =600+102=702. percentage point has lowered a lil but dollar act has gone up substantially so thats great. lower/nxt round. 17/sh price. invest 10k = 585sh. 100 converts at 2000 making sh $20. this is what we call a cap. we cap it. price and value of company goes up exponentially but note sits there. but biggest driving factor for note/debt that sits there. want that to happen when company is at begging so sh are cheaper. so if its voluntary u convert asap but if not. their terms on note said cap at 2k so they converted now. even tho it said 12k can convert ur note as if its 2k. more sh than they can by f its 17.09. u convert it as though comp is only 2k even tho its 12k. these caps and noes are b important. caps make notes so valuable even w seed stage rounds bc theyre quick and easy. simply a debt instrment that will convert to equity at my option but cap it at a certain # to get all the upside potential. cap it but convert it at 2k when everyone else is at 12k. dilutes other investors % a lot but post value is much more 22100 so they make much more money. $100 picks up 1.5% bc of that cap. big reward for taking big risk as first investors. should be 35 sh not 20. corrected and reposted. worry ab pre money for next round. u plug that in and everything else calculates out. no conversions on test just take home final. what are some favorable terms if ur a convertible debt owner?: cap, discount, primary, convert and get 20-30% discount if u buy in at this round assuming u haven't met cap. reward for being primary investor. convert at cap of 2k or get a discount. pre money is not calc except u want it to go up 2-2.5x each round. if comp is meeting milestones it should cause ur meeting ur promises and milestones (sig step in company's life). every step costs money. I'm going to achieve 300milesstones $500k for 1, 10k for another, etc. if u meet 2/3 milestones thats ok u only go up a lil in money not 2-3x. but if 2 were v imporatn but #3 not that important more of a timing issue it won't push down valuation that much but if u miss a revenue target thats a flat round or bad news and u def don't grow how u said still growing a lil somethings seriously wrong so maybe u have flat round w same price but u need momey/investor. not good for equity holders bc gets more diluted (minimizes dilution if price goes up more faster want to sell less equity for more money) but good fir investors (max equity stake if price doesn't go uo as much cause they wanna buy more equity for less money). flat/down round bc these not as critical as other ones hit.

PRIVATE EQUITY: •How does a PE firm make money?

by selling their money Private equity funds make money from a) convincing capital holders to give them large pools of money and charging a % on these pools and b) generating returns on their investments. They are investors, not advisors. targeted return on investment: 20%.

WE HAVE ALREADY ESTABLISHED THAT NEW AND EXISTING COMPANIES REQUIRE...

capital!

cap table notes

debt/convertable note is shown there but doesnt affect anything or post money

purpose of a portfolio

diversification. some do well some dont. venture capital and angel goal is 10 investments so they have better change at a pos roi.

•What is the funding "food chain"? •What is the funding landscape? •Where do Angels, Venture Capitalists, PE and Investment Bankers fit? ( Micro to Mega and Buy or Sell ) •What are other funding sources? •Do the investors have different expectations?

food chain/landscape: angel investor, boutique venture, venture capital, pe, maybe investment banking from very small amt private personal funds to lots of money. need money gotta hav e it

• how much money generally each company would need for investing.

more than a mil going to angel will not be productive. more than a mil ur looking for boutique venture cap. 10-100mil=big venture cap. bils=pe. less than a mil=angels

general partner

runs the business and faces unlimited liability for the firm's debts raises money makes capital calls from limited oartners to put money in instiutions or high up partners looks over money may own multiple companies

VENTURE CAPITALISTS: •How does a VC make money?

same way an angel does: merger, acquisition, or ipo. loewr rate of return than angels bc takes less time short time for liquidation

due diligence

the attention reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation. • before u write the check gotta do due diligence to do everything right. due dil time range for each investment group-seed stage: less time bc theres not a lot there not much to spend time on. generating revenue, looking for 50-100mil vc investment: more time. a lot more meaningful stuff to go to to tell meaningful info. the more mature the company the longer due diligence

favorable note terms

u want a cap and maybe a discount like convert it and get a 20-30% discount when u inves t in next round as long as u dont have a cap

special purp acquisition corp

we tatlk ab relevant facts. leverage debt/buyouts if they know they can flip it for money like house flipping when u buy pub comp and make it private do u go through ipo. no. reverse merger.

INVESTMENT BANKERS: Focus on value, not price

while price is of course important, it means nothing if the value is not right. If the price of an asset is too high, instead of just thinking about bringing the price down, think in terms of different payment terms, how to exclude some liabilities or risks, etc. price is fairly imporant but want to show their value caause lack of value will drive the price down.

financial analysis -- investors look for...

• Actual vs. Plan • Sales (Are they real?) • Leverage (operating, financial) • Valuation (validation at this point in the process) • Returns (ROI, IRR, etc.)

due diligence summary

•A prepared due diligence notebook, website, or data room is a good thing....what does it demonstrate to the investor? •Timeline...60 to 90 days....maybe longer •Target company must know the business, market and financials inside and out!

What is the Term Sheet

•A term sheet is a non binding document. clear and brief and 3-4 pgs long and straigth forward •It spells out expectations, obligations, relationships between the investor and the entrepreneur receiving the investment. •It will address only the essential elements of agreement between investors and company •Funds likely have a template - individuals may or not •Negotiations will determine ultimate structure •The stronger the critical factors (mgt team, proven market, etc.) the stronger the negotiating position •Remember that investors think early about exit strategy, and it's not likely an IPO •An entrepreneur should be familiar with deal structure concepts before approaching investors - Preparation is key to negotiating successfully entrepreneurs need to be familiar w terms before they go forward.

Key Points

•Aim for a "fair market" valuation •Don't overprice early rounds, or you'll likely get hurt in the end •Focus on the dollars (#) vs. the equity stake (%) 10% of $20MM is a lot better than 100% of 200K...or 0! •For first time entrepreneurs, average ownership at liquidity event is 7-8% (mid-upper 20's for second timers)

The Search

•Angel investors don't advertise. •Angel investors don't hang out a shingle. •You could be surrounded by Angels and not even know it. •Careful networking is required to access this funding source. wealthy indiivudals

Networking

•Angels tend to form networks either by design or by chance •Some key entry points to these networks will be found through wealth management specialists, attorneys, bankers, accounting firms, universities

INVESTMENT BANKERS

•Banks are middlemen between a company that wants to issue new securities and the buying public. •Banks advise buyers and sellers on business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation. •Banks match up buyers and sellers as well as buy and sell securities out of their own account to facilitate the trading of securities (buy - sell) After the repeal of Glass-Steagall in 1999, investment banks now offer traditionally off-limits services like commercial banking. ( taking deposits - lending money )... Including mortgages. What could possibly go wrong with that?....... Answer: 2008

FOR WHAT?

•Be specific about what the money buys •Include projected acquisition schedules for equipment, employee hiring timetables, marketing expenditures, etc. •Save detail for projections

Investor Expectations

•Board members are there to help the enterprise succeed. Look for what is missing (expertise, contacts, etc.) •Interests should be aligned •Board members with a rubber stamp do not help you succeed •Communicate between board meetings as needed

Overview of Methodologies: for acquisition of ongoing firms...

•Book Value - Assets less Liabilities - limited use •Market Value - comps of similar investments •Income Value - free cash flows, discounted •Multiples of revenue/earnings •Average of relevant methods - weighted as appropriate

HOW WILL THE PROJECTIONS BE JUDGED?

•Clarity of reports •Assumptions clearly articulated, credible, justified •Market-based & customer-focused •Error free, no obvious omissions •Current data

Classes of Notes, Options and Warrants

•Convertible notes •Warrants •Options •Revenue Loans

Convertible Notes

•Definition: Debt instrument that converts into equity at first institutional round of financing •Interest payments - often deferred •May include warrants to purchase future shares •May be used for family/friend and angel rounds, or as a "bridge" •Pros - no need to set valuation, fewer legal documents, quicker •Cons - debt holders can call loans, investor concerns (limited upside)

INVESTOR EXPECTATIONS

•Financials indicate the need and the capacity •Entrepreneur thoroughly understands the business model and financial metrics •Assumptions have been tested & validated •Conventional format •Multiple scenarios are represented •No overkill

NDA's

•From the entrepreneur's point of view, now would be the time to bring out the NDA for the investor to sign. •However.......any serious investors will not sign an NDA......they see too many deals. • •Asking for an NDA could indicate an uninformed entrepreneur......not a good sign.

Strategic Use of the Board

•Funding (future rounds) •Networking •Industry expertise •Guidance •Open doors •Objective sounding board

KEY QUESTIONS FROM THE INVESTORS

•How much money is needed? For what? How soon? For how long? •What are the stages of need? •What do investors expect? •What are key financial reports? •How does the company demonstrate credibility? -i.e. What supports the assumptions? •Are profits enough? •What are the key milestones?

Strategic Use of the Board

•How to effectively use your board members? •What is expected of board members? •How much engagement with the investors? •What is expected of entrepreneurs? add value to the comapny and are improtatn to investors

Tranches and TERMS

•How would tranches be reflected in a term sheet? •Would each tranche have the same terms as the initial tranche? Valuation? • •Any milestone must clearly represent increase in value to the customer / marketplace

THE KEY FINANCIAL REPORTS

•Income Statements •Balance Sheets •Statements of Cash Flows •Other reports of key indicators •Sales, Margins, Inventory, other key ratios

What are Tranches?

•Instead of receiving the entire money needed at once, some may be held back and disbursed upon hitting specified milestones (revenues, mgt team hire, product development, etc.) •Still part of current round •Pro - may instill added discipline and motivation •Con - may reduce some management flexibility milestones advance the company and are significant and meaningful to company. incentive to meeting milestone.

Due Diligence Checklist

•It is common for most angel groups to have a due diligence check list document •The check list will contain fairly standard requests for basic business and market information •Much of the check list will focus on the legal organization of the business, capitalization structure, contracts, debt etc.

Suggestions for Those Seeking Capital

•Learn what investors look for and expect •Understand the factors that influence value •Know why valuation factors are important to the investor •Consider all important factors - not just those within your comfort level •Anticipate investor questions on valuation •Look at comparative deals (comps)

Some Common Terms

•Liquidation preferences (its a favorable term to the ivnestor. if i invest 100k in a compnay and i have a liquidation preference, which is fairly standard and so is a 1 x approach. u get ur money back first then u participate in percentage for rest of ocmpany. •Preferred stock (dont want divs) / Common stock (foudners money) •Anti-dilution (if i buy 10% equityy stake and next round is down round u will not be diluted anymore u stay at 10% equity stake. comes out of founders) •Protective provisions (says im gonna invest this money but these rules will protect me when u try to sell company or assets or get debt - even if they only have 1% ownership) •Registration rights (in every term sheet but only help u if u take a company public -ipo. register all ur shares of new pub comp) •Vesting rights: vest 20% of ur 80% each ur and 5% comes back. holds some of ur stock and earn some back over yrs. vest it back to stay w company. •Revenue loans (pay some percentage of gross rev back)/ Convertible notes (debt that converts to equity. creditors/debt hodlers habe a lot of power. disadvantage: give u 100k debt that converts to 100k equirty maybe next round so 100k converts based on 10mil valuaton. now u are up 5-6x in value. convert in hgiher price. when u convert ur note u geta 20% discount. u get 20% more stock when u convert. could miss all the upside if u only get 20% discount/ CAPS on convertible notes says if i give u the note and ur next round is valued at more than 5mil thats cap if u get valuation of 10 u convert at value of 5 but everyone goes our at 10. can convert at no more than this numver. then u get all the upsides. v popular.

REMEMBER! References will be Checked

•Management Track Record / Reputation •Former Employers •Direct Reports •Industry Leaders or Peers • Board Members • Advisors • Competitors • Credit Reports • "Spy" Services

HOW SHOULD RISK BE REPRESENTED?

•Multiple scenarios •Most likely, Survival, Upside •Don't have worst case exceed likely best reality •Must accommodate the 'what if' •Risk must be represented

Most Common Mistakes

•Not researching the interests of the angel group properly •Not being prepared when invited to make a pitch •Accepting investment money from non-accredited investors •Paying angel group "brokers" (waste of money)

Due Diligence & the Management

•Proven track record -Relevant business experience -A failure is significant (learning on someone else's $$$) •Integrity, dedication and commitment •Vision and the ability to articulate it •Knowledge, skill level, intelligence •Coachable leadership •Ability to assemble a team INVESTORS WILL WANT TO VALIDATE: -Size -Growth Rate -Barriers to Entry -Customers -Segmentation -Differentiation -Competition -Distribution Channels

HOW DO YOU DEMONSTRATE CREDIBILITY?

•Represent a clear business model •Convey understanding of industry segment •Projections are connected to realistic assumptions •Reasonable timeline •Investor questions/concerns are anticipated

Summary

•Respectful confrontation and tension is your friend. •Investors want more than press releases and good news. •The Board should provide for a periodic efficient clear and concise reporting process. •Get bad news out fast with potential solutions or fixes or adjustments. AND... •Ask for help if the path is not clear.

Cap Table Implications

•Shareholder Dilution • •Each Round can be unique • •Downstream considerations

FOR HOW LONG?

•Should use multi-scenario projections •Most likely, survival, upside •Time to cash flow positive •Overly optimistic sales projections lead to: •Worst case è perceived as unsophisticated, unrealistic •Best case è missed milestones, disappointed investors •Understand realistic exit issues

Businesses are valued for different reasons:

•Someone wants to buy the business •You want to sell your business •You want to establish a value in case you lose your business in a disaster ( insurance ) •You are seeking an equity investment. The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business. A business valuation might include a review of the company's management, its capital structure, its future earnings prospects, or the market value of its assets.

THE FINANCIAL PROJECTIONS

•State the financial need •Financial need should represent the vital signs •Demonstrate the depth and quality of planning •Indicate expected ROI

if DD process is successful -> the deal!

•Term Sheet is Presented •Legal Representation Should be Secured •Document Preparation •Closing •Post-Closing Actions

Key Issues or Targets in the DD Process

•The Management •The Market •The Model •The Money / Financials

Investor Expectations - THE PLAN

•The plan must provide a range of financial outcomes (low to high) Some sensitivity analysis is helpful too ! •The plan must be both realistic and believable. •Management must know the dynamics - what affects the plan? •Addressable market - must be well defined and understood. •Positioning and competition - where, who and differentiation? •Backup plan - Survival is the key and must be demonstrated. •Exit plan - Where does the investor cash out? M&A or IPO ? angels spend least amt of time screening companies/for ideas. angels look at some areas of busines that they have equity in. dont look at forecasts. venture caps look at bsuiness plans cause theres real data there. takes more times to look at companies.

Other Factors that Influence Due Diligence

•The type of deal •The risk profile of the investors •The industry knowledge of the investors Every due diligence process is unique

Legal Entity - Investor's Perspective

•VCs will likely only invest in a C Corporation(given their institutional investors / Employee Retirement Income Security Act .....ERISA) •Angels are more flexible depending on the deal -Company can begin as an S Corporation or LLC (mostly. p and l can pass through to those new mems of llc. doesnt pay tax so angels prefer this) and convert to a C Corporation later •Discuss tax considerations with attorney & accountant...or Prof. Willis •Significant angel investors / VCs prefer DELAWARE corporations due to management friendly statutes & existing case law

Key Questions

•What are the factors in valuing the company? •What is vs What might be •Overview of methodologies •Revenue vs pre-revenue •What about multiples? •What resources are available for use in valuation? •Option pools? Voting rights? Geography? •Opinion of value vs negotiating skills vs the market

Key Questions

•What is the Term Sheet? simple outline of what the deals gonna be. start off w this. these are our terms for which e are going to invest •Who determines the structure of the deal? person writing the check •What are some common terms? •How are stock types significant? •What are tranches? may be helpful in team pres •Does the type of legal entity matter? yes for llc corp etc

the multiple: Sometimes the earnings are adjusted to take out:

•income taxes, •non-recurring income and expenses, •non-operating income and expenses, •depreciation and amortization, •interest expense or interest income, •owner compensation. we can adjust

Takeaways about Angels, VCs, PE and Investment Bankers:

1.All seek strategic and "long term" relationships with the invested companies. 2.All seek an exit/liquidity event: Angels10-12 years, VCs 4-5 years, PE 3-5 years and Investment Bankers 2-3 years. 3.All fit nicely in the continuum of capital investment.

The Government and Capitalism

The government is limited to provide certain public goods such as national defense, basic education, roads, utilities, internet and legal systems (property rights and Rule of Law). This is "bare bones" capitalism....do you agree? What is missing?

Fundamentals of Raising Capital

•Early Stage (Angels) Primary focus is on the idea and determining if it is solving a real problem? •All levels of investing ( Angels, VC, PE and Inv. Banking ) Does the business model create value or is an existing business undervalued? Will capital speed growth and expansion? Does the business plan make sense? ( Can the plan be executed and how much will it cost? - The investment! )

Primary Groupings of Angel Investors

•Individual angels • •Angel networks • •Committed angel funds 10 minimum investors 2mil, 10 angel investments, 200k each of can give a lil more to one if u liek it

Private Equity Objectives

1.The creation of an OPPORTUNITY - a new idea and start up of a company ( Angel level ) 2.The pursuit of GROWTH - taking the new idea and growing the company and the market ( Venture level ) 3.The pursuit of CASH - achieving a positive cash flow from operations allows the company to buy time when things go poorly as well as avoiding reliance on external capital ( investors, public or private want to get 4-10x ur money back. want company to sell/liquidate/nbe bought out by a company. 5 yrs in the days. now it may take more 15 yrs growing but not liquidating yet. they have to do it. faster it can grow and shorter investment to liquidity is better. growth rate in some industries is slow so their not good candidates for pe and venture capital. cash is king mainly fo rstart ups.

Retail Investor

: Individual investors who buy and sell securities for their personal account, and not for another company or organization. Also known as an "individual investor" or "small investor".

PE Firm

A PE firm is a company with expertise in executing a venture, growth or buyout investment strategy. It raises and advises a fund through two separate legal entities: General Partner and Investment Manager. The General Partner is wholly responsible for the management of the fund. The Investment Manager is responsible for deal flow and portfolio management. buys companies, doesnt invest. look for undervalued companies for companies not performing as well as others in industry bottom 20% if mkt is groeing u can buy them at low price put cap into it and change mgmt and sell it for more money. venture cap can write big checks like pes too but they invest not buy comps.

Dry Powder

A slang term referring to marketable securities that are highly liquid and considered cash-like. Dry powder may also refer to cash reserves kept on hand to cover future obligations or purchase assets, if conditions are favorable. cash kept under the mattress for future investments. if i find a companie as a venture or angel u write 100k total but 50k first round and 50k in future round as dery rounder to spread risk and help urself if valuation goes up. may be negotionating warrants in first round that i can use future roudns. most funds and individuals do this. lone wolfs like troy dont do this.

What Drives the Need?

All businesses at any stage of existence require capital to grow, acquire, pay employees, pay dividends, pay legal, R&D, advertise/promote....etc. The question is: "where is this capital going to come from and who is going to write the check?" all businesses need money tesla didnt get their cause elon had his own money he got it from others.

Investment Banker

An investment banker is an individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other entities, or who works in a large bank's division that is involved with these activities, often called an investment bank. Investment bankers may also provide other services to their clients such as mergers and acquisition advice, or advice on specific transactions, such as a spin-off or reorganization. Lending their expertise to a company to help it determine the best strategy and the best place to raise either debt or equity capital. Preparing all the necessary documents to accurately present the value proposition for funding and to protect both the company and the investor from any misunderstandings. (PPM) Ensuring that all government regulations have been followed in the raising of any capital. (SEC) on buy or sell side like a broker w due dilligence paperwork and valuation w years of fin data and papers and mkt. must be done to show what bus is worth. make most their money on fees, can invest in a nother company rto help u raise capital thats where they make momey and may get some equity. like brokers and consultants.

INVESTMENT BANKERS:

Investment banking is a 300-year-old industry; the first transaction on record was the British East Indies Trading Company merging with its largest competitor in 1708. Being in the digital age. Businesses can achieve awareness and distribution far easier than in the past, enabling strategic acquirers to identify them earlier, without the need for human subject-matter experts. Structured data, machine-learning algorithms and proprietary data are revolutionizing the way buyers and sellers of companies connect, not only more intelligently, but also more quickly. In the past, buying a company required people with subject-matter expertise to help identify the right M&A target (buy side or sell side) and all the related data and information you needed to make the decision. Today, intelligent matching algorithms and proprietary data sets that span the globe enable buyers to identify the right target within minutes and connect within a matter of hours. Successfully manage all the relationships involved, including the decision to walk away -When facing the other side, parties may treat each other like enemies, which reduces the potential to learn and develop good solutions. EGO can be the nemesis of everyone!....at all phases make all their money on fees and paperwork

Private Equity vs Venture Capital

Private equity firms will usually take a 100% ownership of the companies in which they invest. As a result, the companies are in total control of the firm after the buyout. Venture capital firms invest in 50% or less of the equity of the companies. Most VC firms prefer to spread out their risk and invest in a portfolio of different companies. larger piece, generating revenue (not pre rev thats angel), writing bigger check.

LIFE CYCLE OF EMERGING GROWTH COMPANIES

Seed / Start-up Stage -Founders / Family / Friends, sometimes Angels / Crowd Funding Early Stage -Angels / Private Equity / Venture Capital Expansion Stage -Venture Capital / Private Equity Later Stage -Private Equity / Mezzanine Debt Exit -Mergers & Acquisition (M&A) / IPO / Buy or Sell Investment Banking most expensive money is in early rounds

Funding Combinations for Start ups: incubators

Think of an incubator just as the name suggests: a place to incubate your idea, develop your business plan, and prep your startup for growth. Incubators typically work with young startups for an indefinite period of time, and startups work alongside each other in a shared, collaborative environment. While many programs are government-funded, some incubators do take equity for incubation services. Incubators usually offer mentorship, access to legal, accounting and/or HR services, and connect their portfolio companies to large investor-networks. Accelerators offer a very focused, time-windowed curriculum where startups receive mentorship, education, and networking resources. Acceleration programs are typically more competitive than incubators and like to work with early-stage startups that have already shown significant traction or product-market fit.

VENTURE CAPITALISTS: ( focus )

You need a team of experts who can sell, market or design circles around their peers.....not just a great idea and a large market potential. A VC is looking for an environment where the business can communicate effectively, overcome problems quickly, work toward shared goals and achieve mutual success. There's a stark difference between founders who are doing it for the first time and founders with multiple companies on their resumes.

private equity landscape

continuum. its like a river full of money and wherever ur going to fish in the river is going to determine what knd of fish ur going to get so what stage. what stage in company that u pick is the money u get. get first money from angel/individual. seed money. then as u get bigger move to boutique venture and venture. more rounds, larger rounds, larger companies starting to generate revenue or generating revenue and now need bigger money they will use to grow. vc's are all ab growing. vc's perspective each stage. they're investing their money. time limit w vc. target is 10yrs. if it goes longer ppl start getting nervous. invest more money in later stage cause closer to liquidity event. dif than angel. grow w venture capital. they're investing to liquidate. pe's are large looking to buy out or control comps. looking for fixer upper where stock price is too low for ex and they have a good product and are performing under 10%. theres value there but u gotta get to it. time is important they'd like to do it in 2-3yrs. investment bankers: big broker not chase or citibank going out on their own to buy/sell comps. put deal together find buyer raise money take care of legal aspects. maybe sometimes put their own money in but usually just a broker on buy or sell side. remember the perspective from each side.

• test example Q: describe company going out for 2nd round of funding, given #s of pre money and post money valuation. had some milestones they missed and say they need to raisee X act of dollars and who would they find it from and what valuation would they get.

go to bouq=tuie or venture cap ro angel and suggest this valuation bc the ones that they missed were v important but not devastating so we have up/down/flat round. go up 2-3x valuation if they hit their milestones. up round of 20% if they miss 3/5 milestones. give reasons why u did that. there may be 1 calculation that has an exact answer. vc valuation model ch 6 valuation. know it bc vc's do that model no matter how silly and simple it looks. in order to establish ballpark pre money valuation to see if comp and u can even reach some sortt of agreement, vc invest 1mil given, company projects 5yr revs at 20mil and np at 2mil 10%. pe ratio for companies in that industry are 12.5%. sale of company in yr 5 should be 25mil. target of 40% roi in 5yrs. expecting 5x that money back in 5yrs. need to own 20% of company during sale. critical calculation: my 1mil in pre money valuation needs to be so 1mil can buy a 20% stake. 4mil pre money + 1 mil investment gives u post of 5mil. 1/5=20%. pre money of 9mil kills ur investment and u won't get the 5mil out of it. half of what u need to get ur 40% roi. the vc valuation is conversation starter or stopper. they say it works or is too much. half mil like 4.5mil won't do much. post is # u use to determine ur %.

ANGELS: How will the Angel investor make money

invest money and wait for the cash out long time for liquidation so higher return and more risk my money 50-60% roi

investment mgr (other main person in pe firm besides gp)

the ones who look for the deals and manage the portfolio companies they buy portfolio spreads the risk

ANGELS: (what are they focused on?)

•Ensuring that the startup has a clear and complete business plan. •What is the problem and what is the solution? •What is the business model? (how do you solve the problem and make money doing it?) •How big is the market for the product or service? •Who are the competitors and how is the company different? (Are competitors a good thing?) •Does the investor have a good understanding of the sector?

Investment Banks vs Private Equity Firms

•Investment banks and private equity firms are both involved with placing the shares of companies into the hands of investors and facilitating M&A deals. •Investment banks tend to act as middle-man, marketing shares of publicly traded companies to other investors in a sell-side function. •Private equity firms, on the other hand, invest their own money in a buy-side fashion in privately held companies. brokers on buy or sell side. go out and reais funds. represent buyer side or sell side. provide expertise on regulation paperwork etc. if they put money into their own fund they make more money. they sell and buy.

Other Investor Expectations in General

•Is the company's purpose; Clear, Concise, Compelling? measure this by mission sttement and ask employees individually to see if they all say the same thing •Can the company communicate it? Can the consumer understand it? Does it grab attention or capture the imagination? •Is it high growth - scalable? •Is the company undervalued? Under performing? •Is the company's idea unique? (this is rare) •Is there a way out (exit)? ....this is the end game for all investing.

An IDEA to a Venture Capitalist:

•Later stage / appropriate valuation •High potential - significant growth •Large market •High margins •Sales revenues ( other than drug discovery ) •Experienced management team •Potential exit in 3-5 years.

An IDEA to an Investment Banker: (usually on the sell side)

•Target company for M&A (buy or sell) •Appropriate valuation (buy or sell) •Strong potential to create NEW VALUE •High margins or potential to achieve them •Experienced management team •Potential exit / identified buyers for the company

Who are the Players?

•The majority of venture capital consists of institutional investors and accredited investors who can commit sums of money for long periods of time. (illiquid and earlier stage) •Private equity investments have shorter holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. Read the Valor and Tesla Motors article...long term P.O.V.: lt relationship of venture capitlal providing money and expertise. venture capital = isntritutional, put together funds its not their money but angels its their money. ur writing a check out of other ppls insstitutional money and ur investing it. neithre is better but its a dif set of pressures and a dif motivation. phsychology plays a great deal in this pe world pov. we have the institutional investors and fairly long pds of mind. these are illiquid (cant sell them quick;y) cash in ur stock after they sell the company to get ur money or it goes to 0 and u get a tax writeoff. pe is money not raised through public mkts. pe firms: high end lots a money. purpose is to take control and buy out other companies. they take a public company buy it and make it private and add value then sell it. pe is designed to buy control of a comany. mng it not just investing. buying and controlling.

Angel Investing : What Angels Look For

•The quality, passion, commitment, and integrity of the founders. •The market opportunity being addressed and the potential for the company to become very big. •A clearly thought out business plan, and any early evidence of obtaining traction toward the plan. •Interesting technology or intellectual property. •An appropriate valuation with reasonable terms.

An IDEA to an Angel:

•Very early stage / appropriate valuation •High potential - significant growth •Large market •High margins •Proof of concept in place •Sound management team ( or at least building one ) •Potential to exit in 7 or 8 years

Summary so far.....

•We have defined a general protocol for the private equity field. •We have established a general purpose and context for the need to raise capital. •We have draw attention to the perspectives and considerations that drive each level of investing... time to exit, amount of capital being raised, purpose.

ANGEL PROFILE

•Wealthy individuals - "accredited investors" •Experienced and successful entrepreneurs •Range of involvements (Passive investor à Lead investor) •$25K to $500K per investment •Current estimate of ~ 300,000 active angels -Potentially could be 4-5 million angels •Approximately 350-400 angel groups in US -75% network, 25% committed funds •Invest close to home - geography plays a role.

VENTURE CAPITALISTS: Customers. (they need to exist) There is an emphasis on the customer:

•What compels them to buy this product or service? •What problems does this product or service solve? •Why is it better than the alternatives? •Why is it worth the price?

Not all money is a "good fit"

•What is a "qualified funding source"? •Where do Angels live? •Can you avoid the Angel from HELL? •What do Angel networks look like? •What due diligence can an entrepreneur conduct? •What is the most common mistake committed when seeking a funding source? ego can be a real problem. entrepreneurs are mostly interested in getting money and they string u along ask investor when was the last time u wrote a check and they shoudl be writing 2-4 checks a yr. thats the bad angel. they have the money but not the attitude. begging to sell every 2 weeks.