Guide to startup investment

Masterclass Investments

Startup Festival – Friday 22 November 2013

Agenda (1)

14:00 – Introductions14:30 – About investments: technical and practical

- Pecking order of Finance- Type of investors- Investment process- Some advice

Agenda (2)

15:15 – Case part 1: preparation15.45 – Case part 2: negotiation16:30 – Case part 3: evaluation17.00 – Wrap up and drinks at the bar

Introductions

Niek Huizenga

Founder of startupsAdvisor strategy & investments

Lecturer entrepreneurshipTraveller (South Africa, Benin, Uganda,

Tanzania, Silicon Valley)

Contact:

niek@yeah.euhttp://about.me/niekhuizenga

What is finance?

• Verb: “provide funding for a person or organization”

Who needs investment?

Pecking order of finance

• Own money• Gift / subsidy• Loan– Normal loan– Subordinate loan– Convertible loan

• Equity

Trust driven funders

Fact driven funders

• They manage money of others and have ROI as the main goal

• Focus on evidence:– Business opportunity– Tractions– Team, team, team

• The ideal investment has: – A working product– A growing market– A launching customer– An experienced team

Funding stages

1. Pre Seed: €10k to €50k (own money, FFF)– Idea stage, searching for business model, founding team only

2. Seed: €100k to €500k (angels, crowd)– Prototype stage, first customers, first employees

3. Series A/B/C: €500k to €5M (VC)– Scaling stage, growing revenue, growing team

4. Exit: €.. (IPO, acquisition)– Serious challenger in the market

Funding stages

The search for funding (1)• Do you have the ambition?

• Can your startup become a real business?

• What stage you are in?

• Define your risk profile?

• How much funding you need?

• What are you willing to share / give away?

• What do you need besides funding?

The search for funding (2)1. Make your materials: one pagers, slide deck, business plan

2. Make a list of potential funders (desk research)

3. Visit events where you can meet potential funders (field research)

4. Approach the least appealing funders first and practice

5. When you have enough feedback and confidence, approach the most appealing funders

Be critical to yourself, if you do not find investor’s interest maybe it is because of you!

Making the deal: Term Sheet• Negotiate the terms for funding

– Valuation– Type of stock– Dividends– Anti Dilution Rights– Governance– Vesting conditions– Management and CEO replacement– Ambition for exit– Confidentiality– Termination conditions– Other….

• If no experience: always get an advisor!!

Making the deal: Due Diligence

• Due diligence– Product– Market– Team– Financial

• Do your own due diligence!

Making the deal: Bring in the lawyers!

• Paperwork– Participation agreement– Shareholders agreement– Guarantees and disclosing– Management agreement– Company constitution– Representations– Warranties– Etc. etc. etc.

Making the deal: Champagne!!

• Closing– Day at the notary!– Lot of signatures!– Don’t forget to celebrate!!

Some advice

• The investment process will take 6 to 18 months.

• Put everything on paper and assume worst case scenarios.

• Never sign anything until you fully understand.

• Do not give away too much in the pre seed / seed stage.

• Negotiate fair and respectful, the investor will be your future partner.

• Remember: you can only give away shares once.

Case: Aerospace InvestmentPart 1: Preparation (20 minutes)- Form groups of 2 (founders versus investors)- Choose your counterpart- Each group discusses their own targets and negotiation strategy

Part 2: Negotiation (45 minutes)- Start negotiating. - All substantive terms need to be negotiated.- No deal when BATNA is below 45 points.- Do not forget to evaluate the process.

Part 3: Evaluation (45 minutes)- Each groups shares their Score Sheet and Process Evaluation.- Scores are evaluated.- Practical experiences are shared.

Substantive Terms

• Valuation / equity percentage• Type of stock

– Common– Preferred: convertible or redeemable (also callable)

• Dividends• Anti Dilution Rights / First right of refusal• Board Members• Vesting of Shares• CEO Replacement Provision• No Shop Provision