Kevin CastelloDirector

Baylor Angel Network

Bill HulseyIP Attorney

Hulsey-Calhoun

Chris ForgeyCEO

LightBohrd &

CTO OEM Group

SBDC – Now what?June 24th, 2014

Welcome Entrepreneurs, Investors and Guests!

Agenda

Types of FundingTypes of Investors

Investor FitTerm Sheet Overview

Typical Investment Process

Starting VocabularyEntity Structure – LLC and C-CorpSecurity – Loan or StockConvertible Note – initial loan structure which converts to equity in the futureStock – Common and PreferredDilution – the loss of some founder ownership due to investments takenCrowdfunding – the use of an-online portal rather than face to face investor engagementAccredited Investor – SEC requirement for certain types of transactionsBootstrapping – Self funding by the founder team

What is the most advantageous funding for the founders?

What is the most advantageous funding for the founders?

REVENUE!

OPM Funding TypesOwnership Dilutive

• Convertible Notes• Stock Sale – Common or Preferred• Membership Unit Sale including

preferred• Some Corporate• Crowdfunding – Investment

ANY Sale of Equity is Dilutive

Non or Minimally Dilutive

• Grants• Loans• Revenue Based Funding• Some Corporate• Crowdfunding – Reward or Loan

Most non-dilutive money must be repaid on a set schedule

Investor TypesEQUITY (Think Exit)

• Friends & Family• Accelerators/Incubators• Angel Investors• Angel Networks• Venture Capital• Private Equity

DEBT

• Credit Cards• Private loans• SBA• Banks• Factoring• Revenue or Royalty

Financing is a hybrid

F & F Angels VC PE

Sophistication Low Moderate to High High High

Stage Early Early Early Growth Major Growth

Typical Round Size

< $100K $200K - $2mm $5mm+ $25mm+

Expected Returns What’s that? 60-100% annually

40-100% annually

20-40% annually

Valuations Ditto Average $2.5mm Average $7mm Average $114mm

Security Varies Conv. Notes or Preferred Stock

Preferred Stock Complex Instruments

CrowdfundingEquity/Debt• Accredited Investors

– Can do equity or loans– General Solicitation won’t apply for

portals

• Non-accredited Investors– Not legal in many states– Not legal interstate– JOBS Act rules STILL in process– Texas Intrastate rule expected in

August

Rewards

• Provides something of value for a donation

• Does not provide any ownership or dividends

• Evaluate portals for traffic and fee structures

Revenue Based Financing

• Investment is paid as a % of revenue• Can be loan or stock based• Non-dilutive in long term• Payments vary with revenue• Typically 3-10% of revenue to a 2 to 5X+ multiple

Process of an Investment• Finding and contacting investors• Early evaluation – interest and screening• Formal evaluation – screening and maybe fees• Pitch Presentation to Investors• Due Diligence if interest• Term Sheet• Closing Docs and Funding

3-9+ month process!

Definition of 'Due Diligence - DD'1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

Read More: http://www.investopedia.com/terms/d/duediligence.asp#ixzz24qNuxEE3

Practical DD Definition

Whatever the investor does prior to making an investment decision.

In general, the more sophisticated the investor the more in-depth the due diligence.

Does DD make a difference?

Kaufmann Foundation 2007 Study “Return to Angel Investors in Groups” by Dr. Rob Wiltbank

Return multiple for DD < 20 hours 1.1x in 3.4 yearsReturn multiple for DD >20 hours 5.9x in 4.1 years

DD Process Overview

• Quantitative Analysis• Qualitative Analysis• Management Team Analysis• Additional “Deep Dive” Analysis• Term sheet negotiation if applicable

Quantitative Analysis

• Documentation review that supports the authenticity of the startup

• Expect general solicitation questions• Duration: days to weeks mainly dependent upon

entrepreneur responsiveness• Deliverable: Completed comprehensive checklist

Qualitative Analysis• Angels and subject matter experts to gather more details

of the business through a question and answer session with the company’s management team, customers, suppliers, distributors, and others.

• Duration: days to weeks• Deliverable: Report of findings and opinions of a subject

matter expert

Management Team Analysis• Discovering the strengths and weaknesses of the

management team and begin building an Advisory Board or Board of Directors as applicable

• Duration: days to weeks• Deliverable: Background check reports and report of other

findings and recommendations • Bad Actor Rule is now active

Deep Dive Analysis

• Fact finding or research if the Angels feel that additional information is necessary to validate the investment

• Duration: days to weeks• Deliverable: Report with findings and

recommendations

Term Sheets

Term sheets define Control

Economics& General Legal

Term Sheets

Term sheets define Control

Economics& General Legal51% does NOT = Control

Major Term Sheet Items

• Valuation• Preferences – Dividends, Liquidation,

Conversion Rights, Redemption Rights, & Voting Rights

• Board of Directors

Valuation Only Focus

Valuation Only Focus

Valuation Myths

• Valuations are:– Objective– Should be done by independent accounting firm– Same in every ______ (location, industry, stage,

etc.)– The only term that matters

Major Term Sheet Items

• Valuation• Preferences – Dividends, Liquidation, Conversion

Rights, Redemption Rights, & Voting Rights• Anti-Dilution• Board of Directors

ECONOMICS & CONTROL

Major Term Sheet Items

• Valuation• Preferences – Dividends, Liquidation, Conversion

Rights, Redemption Rights, & Voting Rights• Anti-Dilution• Board of Directors

ECONOMICS & CONTROL

51% does NOT = Control

RESOURCES & UPCOMING EVENTS

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