April, 2008 1 FINANCE 101 FOR START-UPs April 18, 2008 Robert S. Smith Principal – Bridgepoint Consulting, LLC

April, 2008April, 2008 11

FINANCE 101 FOR START-UPsFINANCE 101 FOR START-UPs

April 18, 2008April 18, 2008

Robert S. Smith

Principal – Bridgepoint Consulting, LLC


AGENDAAGENDA

Potholes to Avoid When Building Your CompanyPotholes to Avoid When Building Your Company

Relying on advice from neighbors and college buddiesRelying on advice from neighbors and college buddies

Take money from just anyoneTake money from just anyone

No need to understand differences in equity transactionsNo need to understand differences in equity transactions

Accounting/finance is not important to an early-stage companyAccounting/finance is not important to an early-stage company

Financial Section of Investor Pitch is not importantFinancial Section of Investor Pitch is not important

Deal Terms Are Not ImportantDeal Terms Are Not Important


Potholes to Avoid When Building Potholes to Avoid When Building Your CompanyYour Company

Relying on advice from neighbors and college buddies (unless Relying on advice from neighbors and college buddies (unless you live next door to John Thornton or went to college with you live next door to John Thornton or went to college with Jimmy Treybig!)Jimmy Treybig!)

Get quality advice on all aspects of your businessGet quality advice on all aspects of your business• LegalLegal• FinancialFinancial

Seek advice from someone other than your Seek advice from someone other than your

investor to structure your investmentinvestor to structure your investment Find a mentor who can help youFind a mentor who can help you



Take money from Take money from justjust anyone anyone Different investors have different motivations, Different investors have different motivations,

know what your investors are looking for!know what your investors are looking for! Early-stage financing optionsEarly-stage financing options

Friends & FamilyFriends & Family

PROS

• Less valuation sensitive

• Can be more reliable

CONS

• Not as much business help

• May want to be more involved

• Can be less reliable funding source

• Can be uncomfortable at Thanksgiving if investment does not work out




know what your investors are looking for!know what your investors are looking for! Early-stage financing optionsEarly-stage financing options

AngelsAngels

PROS

• Can provide business help

• Can intro to follow-on investors

CONS

• Pockets aren’t as deep

• Rolodexes may be limited

• Can be emotional investors




know what your investors are looking for know what your investors are looking for Early-stage financing optionsEarly-stage financing options

Venture CapitalVenture Capital

PROS

• Significant business help

• Professional investors, so they can stick with you thru the difficult times

• Extensive rolodexes

CONS

• Valuation sensitive

• They have high expectations so management must deliver

• Their only goal is to make money





Corporate investorsCorporate investors

PROS

• Can provide strategic help

•Can be less valuation sensitive

• Can bring credibility in market

CONS

• Can influence product direction from broader market to their application

• Often investment is tied to an individual within corporation and if something happens to that champion enthusiasm can wane





Boot StrapBoot Strap

PROS

• Hold onto ownership until more value is created

• Less time spent on money raising activities

• Obtain potential customer input during product development

CONS

• Growth can be much slower due to cash constraints

• Miss advice from “smart” investors



No need to understand differences in equity transactionsNo need to understand differences in equity transactions Common stock vs. Preferred stockCommon stock vs. Preferred stock Authorized shares vs. outstanding sharesAuthorized shares vs. outstanding shares Founders’ stockFounders’ stock Right of first refusalRight of first refusal

Keep good documentation of all equity transactions

April, 2008April, 2008 1010


Accounting/finance is not important to an early-stage Accounting/finance is not important to an early-stage companycompany

Business model is very important to investorsBusiness model is very important to investors

Budget should be conservativeBudget should be conservative

Budget should be based upon timing future Budget should be based upon timing future

fundings at appropriate inflection pointsfundings at appropriate inflection points

Keep accurate accounting recordsKeep accurate accounting records

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Finance Section of Investor Pitch is not importantFinance Section of Investor Pitch is not important Don’t inundate with information (Executive Summary and Don’t inundate with information (Executive Summary and

PowerPoint to start with) – they won’t read the full plan until PowerPoint to start with) – they won’t read the full plan until much latermuch later

One slide addressing funding history, current headcount and One slide addressing funding history, current headcount and cash burn, and current cash balancecash burn, and current cash balance

One slide address forecasted P&L, cash flows – preferred One slide address forecasted P&L, cash flows – preferred format is Q1’07, Q2’07, Q3’07, Q4’07, FY’07 total, FY’08 format is Q1’07, Q2’07, Q3’07, Q4’07, FY’07 total, FY’08 total, FY’09 total – nothing more than 3 years outtotal, FY’09 total – nothing more than 3 years out

Always have backup detail available supporting market size, Always have backup detail available supporting market size, statistics, competition, etc. statistics, competition, etc.

Don’t be overly optimistic – don’t over-promise and under-Don’t be overly optimistic – don’t over-promise and under-deliver.deliver.

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Deal terms are not importantDeal terms are not important Avoid setting valuation too early in your history – use Avoid setting valuation too early in your history – use

convertible bridge debt and warrantsconvertible bridge debt and warrants Set option pool percentage high enough to attract team gaps Set option pool percentage high enough to attract team gaps

– be honest about gaps in team– be honest about gaps in team Try to avoid liquidation preference above 1x Try to avoid liquidation preference above 1x You don’t have to surrender control on Series A round, but You don’t have to surrender control on Series A round, but

that shouldn’t be the driving factorthat shouldn’t be the driving factor Anti-dilution protection unavoidable, but aim for pro rata Anti-dilution protection unavoidable, but aim for pro rata

rather than full ratchetrather than full ratchet Founders’ stock will typically vest over 3-4 yearsFounders’ stock will typically vest over 3-4 years

April, 2008April, 2008 1313


Thank you for your attentionThank you for your attention

Documents

April, 2008 1 FINANCE 101 FOR START-UPs April 18, 2008 Robert S. Smith Principal – Bridgepoint Consulting, LLC