- Venture Capital

Anti-Dilution: WEIGHTED AVERAGE - Explain broad based - Explain narrow based

Take a weighted average of down round and your round to get new conversion price. Much more fair to company. This method makes a proportional adjustment. Issue is that new investors may want to dilute old investors because they are assuming extra risk (the down round, implying things aren't going great). Broad-based ratchet: All rights of ownership (real or potential) are counted in the denominator of "total shares", whether they are preferred or convertible shares, warrants, or options. Narrow-based ratchet: Only common stock outstanding is used to compute the weighted-average price of shares to all investors.

Liquidation Preference

Liquidation preference determines the payout order in case of a corporate liquidation. For example, assume a venture capital company invests $1 million in a startup in exchange for 50% of the common stock and $500,000 of preferred stock with liquidation preference. Assume also that the founders of the company invest $500,000 for the other 50% of the common stock. If the company is then sold for $3 million, the venture capital investors receive $2 million, being their preferred $1M and 50% of the remainder, while the founders receive $1 million. Conversely, if the company sells for $1 million, the venture capital firm receives $1 million and the founders receive nothing.

Top Startup Accelerators - Globally

PLATINUM PLUS RANK: 1. Angel Pad 2. Y Combinator PLATINUM RANK: 3. Alchemist 4. Amplify LA 5. Mucker Lab 6. StartX 7. Techstars GOLD RANK: 8. 500 Startups 9. Gener8tor 10. HAX 11. Healthbox 12. MassChallenge 13. R/GA 14. SkyDeck SILVER RANK: 15. Capital Innovators 16. Dreamit 17. PlugAndPlay 18. REach 19. Yield Lab

Define Participating Preferred - Provide an example in liquidation event - Provide an example in regular dividend event

Participating preferred is a type of preferred stock that gives the holder the right to: Receive dividends equal to the normally specified rate that are paid to preferred shareholders PLUS AN additional dividend based on some predetermined condition. Participating preferred stock can also have liquidation preferences upon a liquidation event. Additional dividend paid to preferred shareholders is usually triggered only if the amount of dividends that common shareholders receive exceeds a specified per-share amount. Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to receive the stock's purchasing price back AS WELL AS A PRO RATA SHARE of any remaining proceeds that the common shareholders receive. EXAMPLE - LIQUIDATION Consider that Company A has $10 million of preferred participating stock outstanding, representing 20% of the company's capital structure with the other 80%, or $40 million, made up of common stock. Company A liquidates, and the proceeds are $60 million. The participating preferred shareholders would receive $10 million but also would be entitled to 20% of the remaining proceeds, $10 million in this case (20% x $60 million - $10 million). Nonparticipating preferred shareholders would not receive the additional consideration. EXAMPLE - REGULAR DIVIDEND Suppose Company A issues participating preferred shares with a dividend rate of $1 per share. These preferred shares carry a clause on extra dividends for participating preferred stock. If Company A announces that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share ($1.00 + 0.05) as well. Like other forms of preferred stock, participating preferred stock takes precedence in a firm's capital structure over common stock but ranks below debt in liquidation events.

What will you do if you don't get a job here or in the venture capital industry?

Say you'd work on leads with other VC firms, or with related businesses like investment banks, market research firms, or small companies that might interest VCs. The keys here are 1) to be excited about other jobs that are similar to the job you are interviewing for, and 2) to have other options. VCs instinctively value something higher if there's competition for them (and that includes you). That said, prioritize venture capital

Top Startup Accelerators - Canada

TORONTO: 1. Creative Destruction Lab (CDL) 2. The Next 36 3. Extreme Startups 4. Highline 5. The DMZ (Ryerson U) 6. INcubes 7. JOLT VANCOUVER: 1. Launch Academy 2. Radius@SFU 3. Spring Activator 4. The Next Big Thing 5. BC Venture Acceleration Program 6. Wavefront Accelerator

Can you explain why your former company took the path they did?

ok np

Talk about one of your favorite investments?

ya duh

Anti-Dilution: FULL RATCHET - Is it good or bad? - Explain it - Provide example

- Bad for the company - If new stock is issued at a price lower than that paid by prior investor who has full-ratchet protection, the prior investor's conversion price is rest to the price paid for new stock. Ex: prior investor paid $1/share for 100,000 shares of pref. The company issues 1 single share of additional stock at $0.10, each of the prior investor's 100,000 shares are therefore convertible into 10 shares of common stock. This happens regardless of how much money comes in.

7 questions every venture MUST answer?

1. Engineering: Can you create breakthrough technology, instead of incremental improvements 2. Timing: is now the right time to start your particular business 3. Monopoly: are you starting with a big share of a small market? 4. People: do you have the right team? 5. Distribution: do you have a way to not just create, but deliver your product? 6. Durability: will your market position be defensible 10 and 20 years into the future? 7. Secret: Have you identified a unique opportunity that others don't see?

Most Active PE Mega Firms Globally (5B+ AUM) - 15 of em

1. KKR (Kohlberg Kravis Roberts) 2. Carlyle 3. Bpifrance 4. TA Associates Management 5. Audax Group 6. HarbourVest Partners 7. Blackstone Group 8. The Riverside Company 9. Providence Equity Partners 10. Apax Partners 11. Apollo Global Management 12. H.I.G. Capital 13. Bain Capital 14. Warburg Pincus 15. TPG (Texas Pacific Group)

Name the most active PE Firms in Canada: - 5 of em

1. Persistence Capital Partners 2. PFM Capital Inc. 3. Fondaction CSN 4. 32 Degrees Capital 5. XPND Capital

Most Active VCs Global: - 20 of em

1. Tiger Global Management 2. Technology Crossover Ventures 3. Andreessen Horowitz 4. Norwest Venture Partners 5. KPCB (Kleiner Perkins Caufield & Byers) 6. Lightspeed Venture Partners 7. Vivo Capital 8. Founders Fund 9. Draper Fisher Jurvetson (DFJ) 10. Bain Capital Ventures 11. Canaan Partners 12 Sovereign Capital 13. GGV Capital 14. Sofinnova Ventures 15. Sequoia Capital 16. Khosla Ventures 17. GE Ventures 18. New Enterprise Associates 19. TriplePoint Capital 20. Google Ventures 21. IVP - Institutional Venture Partners 22. Benchmark Capital 23. First Round Capital 24. Union Square Ventures 25. Greylock Partners

Statistics of VC backed companies as of 2015: What percent of public companies? What is the market cap?

43% of US public companies 63% of the market cap 85% of all research and development They also employ over 3 million American workers. Tesla, Apple, Microsoft,

Liquidiation Example: Investor invests $1 million at a pre-financing value of $1 million [50-50 ownership]. Participating Convertible Preferred Stock with a 10% dividend rate and a 2x liquidation preference. Sold 2 years later for $5M EXACTLY much does the investor get, how much does the entrepreneur get?

After two years, the preferred stock purchase price plus ACCRUED dividends (10% annually) has grown to $1.2 million. After applying the multiplier of two, the liquidation amount is $2.4 million, which the investor gets "off the top." The remaining $2.6 million is divided pro rata with the as-converted shareholdings, or 50-50, meaning $1.3 million each. The investor has received $3.7 million and you get $1.3 million. Under these circumstances, what appeared to be a 50-50 deal at the outset became a 75-25 deal!

What did you like about your old job and why did you leave?

Be sure you know the answer to this. The answer to this question should indicate your strengths and why VC is the right industry for you at this point. Be clear about why you are moving on, but don't complain excessively about your previous job.

Liquidity Preference Example: Assume Pre-Money Valuation is $3M Investors put in $2M Exit Amount is $5M Liquidation Preference is 1x NON-participating preferred shares Will they convert to common?How much is returned to investors if they just held common stock? What if they held convertible preferred stock?

COMMON Total returned to investor: $2M Liquidity Preference Return: $0 PREFERRED Total returned to investor: $2M Liquidity Preference Return: $2M It doesn't matter if they convert or not here - the value of shares is equal whether they convert or not.

Liquidity Preference Example: Assume Pre-Money Valuation is $3M Investors put in $2M Exit Amount is $5M Liquidation Preference is 2x NON-participating preferred shares Will they convert to common?How much is returned to investors if they just held common stock? What if they held convertible preferred stock?

COMMON Total returned to investor: $2M Liquidity Preference Return: $0 PREFERRED Total returned to investor: $4M Liquidity Preference Return: $4M They will not convert to common. WHY? Because to will stay as preferred shares to utilize their liquidation preference and maximize return, $4M. This is an example of downside protection.

Liquidity Preference Example: Assume Pre-Money Valuation is $3M Investors put in $2M Exit Amount is $12.1M Liquidation Preference is 2x NON-participating preferred shares Will they convert to common?How much is returned to investors if they just held common stock? What if they held convertible preferred stock?

COMMON Total returned to investor: $4.84M Liquidity Preference Return: $0 PREFERRED Total returned to investor: $4.84M Liquidity Preference Return: $4M They WILL convert to common WHY? Because liq pref is 2x, but valuation is 100k more than liq conversion amount. So they will maximize return, an extra $840k for conversion to common. Up until $12,000,000, the investor will stay as preferred and utilize their liquidation preference.

Preferred Stock Conversion - What does it convert into? - What is the typical conversion ratio - When is conversion typically involved?

Converts preferred stock into common, usually at a 1:1 basis. Conversion price is just he price that achieves the desired ratio - divide the amount invested by the conversion price to get your ratio. Conversion gets involved when you consider participation caps, drag-alongs, and IPO rights.

What makes a good venture capitalist?

Everyone will have their own favorite answers for this question, but you won't lose any points by talking about curiosity, passion, a desire to be in an entrepreneurial environment, creating value, and learning something new every day. Also, venture capital is a very small club where reputations have little room for a second chance. A strong sense of ethics will serve you well throughout your career. Charles Harris, chairman and CEO of publicly-held New York venture firm Harris & Harris Group, is a firm believer in life experience as value-added characteristic of any successful VC "What makes a successful venture capitalist? Effectiveness, broad life experiences and diverse backgrounds brought to the table. Enough experience to know when you need to bring in some help."

What are the major trends in your industry?

First, be able to explain the big picture. "My industry built overcapacity over the last six years, so a wave of consolidation is beginning." "Explosive growth and competition for technical talent has made the business unprofitable, so we are looking overseas." This shows you can frame market forces in simple and understandable ways. Second, explain trends that would only be apparent to an observant insider. "There was an assumption in the industry, based on macro price competition, that the customer didn't want higher prices. Turns out consumers believed that higher prices indicated quality, so the companies positioned in the upper tier have fared better." "Four of the six competitors didn't pay close enough attention to the standards bodies and wasted two years building software that won't be compatible with the next generation databases. They're in trouble and they don't even know it yet." This sort of insight shows you get how things really work.

Define: - Gross Burn - Net Burn - What is an acceptable burn rate?

Gross Burn: The amount of capital you spend every month, regardless of the revenues you generate, Net Burn: The amount of expenses that remains after you've subtracted your revenue (i.e., your total loss once all incoming and outgoing money has been calculated). Here's an example: If you spend $500,000 per year then your monthly gross burn (i.e., the total money spent) is $41,666.67: $500,000 ÷ 12 months = $41,666.67. If you spend $500,000 per year but you generate $25,000 per month in revenue then your monthly net burn (i.e., the amount of money lost once earnings have been subtracted) is $16,666.67: $500,000 — ($25,000 x 12 months) ÷ 12 months = $16,666.67. A commonly accepted rule of thumb is to spend less than 5 - 8 percent of your most recent capital raise per month, about 1 year

How would an investor justify insisting on Anti-Dilution rights?

If pressed for justification, the investor may explain that if the value of a company declines between rounds, management must be largely responsible. The investor maintains that he shouldn't be penalized for management's deficiencies.

Would you ever want to be an entrepreneur?

If you are a pre-MBA candidate, it's fine to say yes. Most VC types have entrepreneurial leanings and vice versa. However, for a partner-track candidate, this is a dangerous question. If a VC firm is going to give you a coveted partner-track position, it wants you to stay in the firm and make it a lot of money.

When you evaluate a business plan, what's the most critical element you look for?

The answer is management—the brains behind the operation. A good company is a three-legged stool. One leg is management, a second is market opportunity, and the third is the product or technology. - Top management is a must, since a solid team can always deal with and change the business model if necessary. - A business or market opportunity must also exist, since at the end of the day, somebody has to sell something to make this all worthwhile. With a seasoned team and viable market, any faulty product or technology can be fixed. - That said, too many plans are written around technologies that are more feature than stand-alone product

Do you have any questions for me?

The best place to start is to ask questions about the near-term evolution of the firm. Other good question topics include: • Average deal size? • How investments are sourced (and by whom)? • Average investment- to- exit horizon (first dollar in to last dollar out)? • Role with portfolio companies (active vs. passive)? • Due diligence methodology? • Appetite for syndication? Leading vs. following? • Sweet spot for deal fundings (Series A, B, C, or later stage)? • Don't be afraid to ask the partners their thoughts on interesting investment opportunities. Learn about firm's portfolio companies and which partner sits on which board. Learn the histories of the companies. You can find out most of this from the web and trade press. It also helps to talk to other VCs. Discover companies the venture capital firm (probably) regrets not investing in. Asking about a missed opportunity shows you know that all firms err— besides showing that you've done your research.

How would you value an investment?

The idea is to get the best deal possible and still have the entrepreneur take your money and give you a seat on the board. Saying that you would use several methods and then triangulate on a number wouldn't be unreasonable. That number would serve as an anchor around which you would begin discussions with the entrepreneurs. Begin by putting an upper bound on the valuation by estimating the maximum potential exit valuation for a company and then backing into a number by calculating the maximum price the firm could pay and still get their desired return (after subsequent round dilution). That desired return is typically 40 percent per year, or 10 times the invested capital over a reasonable period, such as five years. The Discounted Cash Flow (DCF) method can only be used on later stage companies with significant profit history and relatively predictable growth plans. Price earnings multiples from comparable public companies do not work well either, since most early-stage startups have no earnings (and may have little to no revenue). A third and more common way VCs hone in on valuation is to look at comparable private equity investments made by other VCs in similar firms. This leads toward the following if/then decision: If the startup in X field/industry has Y dollars of current revenue with a product in Z stage of development, then it will be valued within a specific, predetermined (by the market), dollar range.

Option Pools - What are they - When are they refreshed? - What percentage of total equity do they represent?

The pool represents the reserve of stock which the options will convert into if exercised. The pool is held aside for existing and future employees and other service providers, to make them happy workers. Typical option pools range from 10-20%, with the percentage determined on a pre- or post- money basis. Refreshing an option pool is typically done on a pre-money basis. this means it dilutes existing shareholders but not new investors. Standard is to refresh it on this pre-money valuation.

What can you do for us that others can't?

There are many ways to ask this question, but the point is clear: "Why are you the best candidate for the job?" Have a good answer, but refrain from sounding arrogant.

Where do you want to be in five years?

This is a question asked by very few VCs, but you should have an answer prepared nonetheless. If the position you are interviewing for is pre-MBA, express a desire to attend business school and be in a position to work in the venture capital industry somewhere. Many firms are worried about making false promises to young professionals if the person doesn't fit into a partner track position, so they might be more comfortable if you don't say, "I want to be a partner at your firm." If the position is a partner track position, you probably want to suggest you are looking for a place as a partner in five years, preferably at their firm.

What companies in your industry might make interesting investments?

This is the end game for VCs. Always have an answer for this question

Name most active VCs in Canada: - 10 Private Independent - 7 Government/Pension

VCs in order of most deals: 1. Real Ventures 2. Cycle Capital Management (CCM) 3. Relay Ventures 4. iNovia Capital 5. WestCap Management Ltd. 6. Avrio Ventures 7. Lumira Capital 8. Yaletown Partners 9. CTI Partners 10. Celtic House Venture Partners Government/Pension 1. Omers Ventures 2. BDC Capital 3. EDC Equity 4. MaRS IAF 5. Innovacorp 6. Investissement Quebec

Would you want to invest in companies geographically near or far from our offices?

You want to invest near the VC offices to make monitoring and supporting the company easier. You would try to increase returns by giving each invested company more attention and thus an increased chance of succeeding. Early stage investments especially need assistance, and some venture firms turn away any entrepreneur that are far away. On the other hand, it's worthwhile to search for lower valuations on good companies in faraway regions underserved by competing venture capital firms.