Financial Statements That Investors Want From Your Start-Up

www.sheffieldfinancialforms.comwww.sheffieldinvestments.net

Financial Statements That Investors Want From Your Start-

UpDavid Sheffield

Introduction

• My CV• 8 Years in Banking and Finance• Most famously, Analyst for Sir Stelios Haji-Ioannou and the

easyGroup• Participated in the founding of a number of companies:

• EasyGym• Fastjet• Space Sports

• Responsible for screening all submitted investment proposals.

What are your biggest fears about talking to investors?Question #1

What are the most important characteristics I was asked to look for in potential investments?Question #2

Question #2

• Contracts or LOIs or Patents• Scalable Model• Market Research, Financial Projections, Competitive

Analysis• Financing Terms• Metrics

Line Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Metric #1 0 500 1250 6000 45000 125000Metric Multiplier #1 125 125 125 125 125 125Metric Multiplier #1 1 1 1 1 1 1COGS #1 45 45 45 45 45 45Metric #2 0 50 200 800 1200 8000Metric Multiplier #2 135 135 135 135 135 135Metric Multiplier #2 1 1 1 1 1 1COGS #2 65 65 65 65 65 65Metric #3Metric Multiplier #3Metric Multiplier #3COGS #3Total Revenue -€ 69,250€ 183,250€ 858,000€ 5,787,000€ 16,705,000€ Total COGS -€ 25,750€ 69,250€ 322,000€ 2,103,000€ 6,145,000€

What do you think is the best way to interest investors?Question #3

Question #3

• Asking for advice gets you money, asking for money gets you advice. (Mainly about where to go shove things!)• The “Me Too” mentality.

What do you guys know about letters of intent?Question #4

Question #4

• Not a contract• Outlines terms of a potential deal• Useful for negotiating other aspects of the firm• Brings the attention of an investor, shows intention of

commitment

What’s the difference between an income and a cash flow?Question #5

Question #5

• Can be the same, sometimes not• Cash flows are when money changes hands• Income can be contracted but not yet paid• Cash flows can also come from non-income activities• (Ex: Borrowing from the bank, Stock issuance)

You sell 10,000 units to a store that will pay you 90 days. When is it an income, and when is it a cash flow?Question #6

Question #6

• It’s an income now• It’s a cash flow in 90 days (If they pay!)

What are the three major financial statements?Question #7

Question #7

• Income Statement• Balance Sheet• Statement of Cash Flows• Investors need to see all 3 to get the full picture

Income StatementLine Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Total Revenue -€ 69,250€ 183,250€ 858,000€ 5,787,000€ 16,705,000€ Cost of Goods Sold -€ 25,750€ 69,250€ 322,000€ 2,103,000€ 6,145,000€ Gross Profit -€ 43,500€ 114,000€ 536,000€ 3,684,000€ 10,560,000€ Gross Profit Margin 63% 62% 62% 64% 63%

Research & Development -€ 225,000€ 225,000€ 225,000€ 450,000€ 1,250,000€ Selling, General, and Administrative -€ 15,000€ 40,000€ 80,000€ 180,000€ 300,000€ Non Recurring -€ -€ -€ -€ -€ -€ Depreciation Expense -€ 25,000€ 25,000€ 25,000€ 25,000€ 25,000€ Amortisation Expense -€ 2,500€ 2,500€ 2,500€ 2,500€ 2,500€ Others -€ 8,000€ 8,000€ 25,000€ 50,000€ 85,000€ Operating Income or Loss -€ 232,000-€ 186,500-€ 178,500€ 2,976,500€ 8,897,500€ Operating Margin -335% -102% 21% 51% 53%

Total Other Income / Expenses Net -€ -€ -€ -€ -€ -€ Earnings Before Interest and Tax -€ 232,000-€ 186,500-€ 178,500€ 2,976,500€ 8,897,500€

Interest Expense -€ 4,125€ 11,250€ 11,250€ 11,250€ 11,250€ Income Before Tax -€ 236,125-€ 197,750-€ 167,250€ 2,965,250€ 8,886,250€ Accumulated Loss Carryover -€ -€ 236,125€ 433,875€ 266,625€ -€

Income Tax Expense -€ -€ -€ -€ 809,588€ 2,665,875€ Net Income -€ 236,125-€ 197,750-€ 167,250€ 2,155,663€ 6,220,375€ Profit Margin -341% -108% 19% 37% 37%

Balance SheetLine Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5AssetsCurrent Assets Cash and Cash Equivalents 1,250,000€ 456,375€ 221,125€ 390,875€ 683,000€ 666,250€ Accounts Receivable -€ 50,000€ 150,000€ 200,000€ 225,000€ 250,000€ Inventory -€ 100,000€ 200,000€ 250,000€ 300,000€ 350,000€ Total Current Assets 1,250,000€ 606,375€ 571,125€ 840,875€ 1,208,000€ 1,266,250€ Long Term Assets Capital Assets -€ 500,000.00€ 500,000.00€ 500,000.00€ 500,000.00€ 500,000.00€ Accumulated Depreciation -€ 25,000.00-€ 50,000.00-€ 75,000.00-€ 100,000.00-€ 125,000.00-€ Intangible Assets -€ 25,000.00€ 25,000.00€ 25,000.00€ 25,000.00€ 25,000.00€ Accumulated Ammortisation -€ 2,500.00-€ 5,000.00-€ 7,500.00-€ 10,000.00-€ 12,500.00-€ Total Long Term Assets -€ 497,500€ 470,000€ 442,500€ 415,000€ 387,500€ Total Assets 1,250,000€ 1,103,875€ 1,041,125€ 1,283,375€ 1,623,000€ 1,653,750€

LiabilitiesCurrent Liabilities Accounts Payable -€ 35,000.00€ 75,000.00€ 150,000.00€ 200,000.00€ 250,000.00€ Other Current Liabilities -€ -€ -€ -€ -€ -€ Total Current Liabilities -€ 35,000€ 75,000€ 150,000€ 200,000€ 250,000€ Long Term Liabilities Bank Debt -€ 55,000€ 150,000€ 150,000€ 150,000€ 150,000€ Total Long Term Liabilities -€ 55,000€ 150,000€ 150,000€ 150,000€ 150,000€ Total Liabilities -€ 90,000€ 225,000€ 300,000€ 350,000€ 400,000€

EquityPreferred Stock (Investor) 1,250,000€ 1,250,000€ 1,250,000€ 1,250,000€ 1,250,000€ 1,250,000€ Common Stock (Owner) -€ -€ -€ -€ -€ -€ Retained Earnings -€ 236,125-€ 433,875-€ 266,625-€ 23,000€ 3,750€ Total Equity 1,250,000€ 1,013,875€ 816,125€ 983,375€ 1,273,000€ 1,253,750€

Statement of Cash FlowsLine Item Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Net Income -€ 236,125-€ 197,750-€ 167,250€ 2,155,663€ 6,220,375€ Operating ActivitiesDepreciation & Amortisation -€ 27,500€ 27,500€ 27,500€ 27,500€ 27,500€ Adjustments to Net Income -€ -€ -€ -€ -€ -€ Changes in Account Receivables -€ 50,000-€ 100,000-€ 50,000-€ 25,000-€ 25,000-€ Changes in Inventory -€ 100,000-€ 100,000-€ 50,000-€ 50,000-€ 50,000-€ Changes in Current Liabilities -€ 35,000€ 40,000€ 75,000€ 50,000€ 50,000€ Total Cashflow from Operating Activities -€ 323,625-€ 330,250-€ 169,750€ 2,158,163€ 6,222,875€

Investing Activities -€ -€ -€ -€ -€ -€ Capital Expenditures -€ 500,000-€ -€ -€ -€ -€ Investments in Intangible Property -€ 25,000-€ -€ -€ -€ -€ Total Cashflow from Investing Activities -€ 525,000-€ -€ -€ -€ -€

Financing ActivitiesDividends Paid -€ -€ -€ -€ 1,866,038-€ 6,239,625-€ Sale Purchase of Stock 1,250,000€ -€ -€ -€ -€ -€ Net Borrowings -€ 55,000€ 95,000€ -€ -€ -€ Other Cash Flows from Financing Activities -€ -€ -€ -€ -€ -€ Total Cash Flows from Financing Activities 1,250,000€ 55,000€ 95,000€ -€ 1,866,038-€ 6,239,625-€

Change In Cash and Cash Equivalents 1,250,000€ 793,625-€ 235,250-€ 169,750€ 292,125€ 16,750-€

What do you guys think Stelios’s favourite breakfast is?Question #8

Question #8

• Full English Breakfast with imported Cumberland sausages, black pudding, half a roasted tomato, bacon, eggs, and baked beans.

What’s the difference between preferred stock and common stock?Question #9

Question #9

• Liquidation Preference• Preferred Shares, by default, do not participate in the

profits of an enterprise and receive different terms for their repayment and scheduled dividends.• Common stock receive income after Preferred stock,

receiving whatever is left of the profits.

So… does anyone know what non-participating, convertible preferred stock with a 1x liquidation preference is?Question #10

Question #10

• A mouthful• A specific kind of preferred stock that investors in start-

ups want.• Example: The bait-and-switch with regular stock

• You invest €0, Investor invests €1,000,000 for 50%• You sell your company to your buddy for €500,000.• The investor gets 50% of the proceeds, €250,000. You, the founder,

get €250,000. Your buddy gets a company with €1m in the bank for €500,000.

• Who wins? You got €250,000 for nothing, your buddy gets €500,000 for nothing.

• Who loses? The investor! He put in €1m, and gets back €250,000. Bummer!

• This kind of stock is there to protect investors.

Question #10

• 1x Liquidation Preference• If the company liquidates, the investor gets back 100% of his invested

capital before you get back anything.• So in the preceding example, they get back €500,000, you get nothing.

• Convertible• If the company goes well, the investor has the option to convert to

Common Stock which lets them participate in the profits of the company.

• Non-participating• This is actually for you, not the investor – otherwise they would be able

to double-dip and get both their full money back in the event of sale as well as convert to get an additional chunk of the profits.

Does anyone know what an IRR is?Question #11

Question #11

• IRR means Internal Rate of Return.• It’s not the only valuation method, but it is a widely used one.• It is a compounded annual return.

• Ex: You put €1.00 in the bank. With an IRR of 50%, in one year it is worth €1.50. In two years, it is worth €2.25 (The 50% is calculated on the €1.50, meaning it increases by €0.75.)

IRR Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Capital Investment 1,250,000-€ -€ -€ -€ -€ -€ Dividends -€ -€ -€ -€ 1,866,038€ 6,239,625€ Exit Valuation -€ -€ -€ -€ -€ 41,762,500€ Repayment of Liabilities -€ -€ -€ -€ -€ 400,000-€

Cashflows to Investor 1,250,000-€ -€ -€ -€ 559,811€ 14,280,638€ Cashflows to Owner -€ -€ -€ -€ 1,306,226€ 33,321,488€

IRR to Investor 64.82%

Does anyone know what an exit value is?Question #12

Question #12

• Exit value is the value if the company is sold.• Even if you’re not planning on selling your company after 5

years, you should still put an exit value at the end of a 5 year financial projection.• Why? Because otherwise you’re estimating that the company

runs for 5 years and is worth nothing at the end!• The Exit value gives a potential valuation price to show that

there is ongoing value in the firm from year 5 and beyond.• Usually it is a multiple of some metric – in start-ups, it tends to

be revenue or gross profit.

Thanks for coming!

• Check out www.sheffieldfinancialforms.com to find useful templates to help your early stage business!• When you make a billion dollars, remember me! I’m a

financial advisor and can help you invest it! ;-) www.sheffieldinvestments.net• I hope you guys found this stuff useful and my door is

always open to entrepreneurs. If you have any questions, feel free to e-mail me at info@sheffieldinvestments.net.• Q&A ? Got anything on your minds? Now’s the time to

ask!• Have a great rest of the week!

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