Upload
the-capital-network
View
680
Download
0
Embed Size (px)
DESCRIPTION
Funding Options Deep Dive - Eq
Citation preview
Funding Options for High Growth Companies
September 5, 2012
Today’s Experts • Jeremy Halpern
– Partner, Nu8er McClennen & Fish LLP – Director, MassVentures
– Director, The Capital Network – Angel Investor – Former entrepreneur
– Geek
• Ben Li8auer – Member, Launchpad Ventures – Advisory Board, The Capital Network – Member, Walnut Ventures – Member, Boston Harbor Angels – Director, Lots of Startups – Former Entrepreneur – Geek 2
Funding the Company
Jeremy Halpern Nu8er McClennen & Fish LLP
[email protected] @startupboston
Ben Li8auer [email protected]
vizibility.com/li8auer @li8web
Funding the Company
Assuming you plan to be a “high growth” company…
What are your funding opXons?
Entrepreneurship comes in many types
5
NORMAL GROWTH COMPANY
HIGH GROWTH COMPANY
EXTREME HIGH GROWTH COMPANY
SOCIAL VENTURE COMPANY
• Includes all service businesses
• Exploiting a local market need
• Team has ‘great jobs’
• Growth by adding resources one by one
• Exit will be based on value of cash flow (mature biz.)
• Growth profile ultra-scalable
• Team focus is exit • Revenue $40M+
with lots of room for growth (5 yr.)
• Based on $20M+ investment
• Exit targeted to IPO or by ‘large’ M&A event
• Goal is to fulfill a social need
• Has mission orientation
• Team needs to support mission
• Growth profile often one resource at a time
• Exit …much harder to find fit
• Company can grow fast (on-line) or has a scalable system
• Team often motivated by exit
• $10m revenue in 5 yrs & market size allows significant additional growth
• Capital efficient total investment$2-4M
• Exit by M&A
Close Up: Extreme High Growth vs High Growth
6
Capital Needs
Time
High Risk
Low Risk
Formal Venture Capital
M&A or IPO
Crystallize Ideas
Demonstrate Product
Early Scaling Growth
Sustained Growth
Angel Group (or Micro-cap) Syndication
Angels or Accelerators or Micro-cap
funds Angels or Accelerators or Micro-cap
funds Business Angels
Market Entry
M&A
Later VC Rounds
Extreme High
Growth High Growth
Friends, Family & Founders
Friends, Family & Founders
High Growth Company CharacterisXcs
7
• DisrupXve InnovaXon with Strong value proposiXon – CorrelaXon between Large Unmet Need : SoluXon
• High Margin Product (RaXo of Revenue : COGS) – SomeXmes Massive Volume Products where innovaXon is incremental
• High Rate of Revenue Growth over sustained period • Scalable (Fixed cost is a low percent of Revenue)
• No major barriers to conXnued growth (ex. blocking IP; geography; regulatory)
• Repeatable sales and distribuXon model with many credit worthy customers
• Large Total Addressable Market (TAM)
• Defensible innovaXon able to withstand compeXXon and changing condiXons
• [Capital efficient]
Return on Equity Return on Debt Income High Return
NON PROFIT ORGANIZATION
Capital Source View
8
Debt- Pay it back Fixed Amounts
Equity – Ownership stake % of Future Value
Charity $$
Impact / Tax Write off
NORMAL GROWTH COMPANY
HIGH GROWTH
(COMPANY)
EXTREME HIGH GROWTH (COMPANY)
Risk / Return
SOCIAL VENTURE COMPANY
Match Funding Sources
9
NORMAL GROWTH COMPANY
HIGH GROWTH COMPANY
EXTREME HIGH GROWTH COMPANY
SOCIAL VENTURE COMPANY
• Friends family, founders
• Debt Bank and other
• (Future) Crowd funding (portal style)
Early on • Accelerators • Individual Angels • Micro Cap VCs • Seed from VC Later stages • Venture Funds • Strategic VCs • Angel
Syndication
• Friends family, founders
• Charity$$ • Crowds (Kick-
starter) • Impact Angels • (Future)
Crowd funding (portal style)
• Angels • Angel Groups • Angel Group
Syndication • Angel List • Micro-cap Funds • (Future) Crowd
funding (portal style)
• Increasingly Strategic Corporate VCs
Non-‐Equity Sources
10
• Accelerators (some)
• Kickstarter type donaXons
• Pre-‐orders from end-‐customers • Credit from vendors
• Strategic VCs • Strategic NREs • DistribuXon Contracts
Common Theme: Providing early cash in exchange for a be8er commercial opportunity
Equity Sources
11
• Accelerators (some)
• Friends & Family
Common Theme: SupporXng success of the entrepreneur; business terms vary
• Portal Funding
• Early Angels • Super Angels
• Angel Groups
• Micro VC
• TradiXonal VC (1st Round)
Common Theme: All are looking for
– sale (or IPO) of the Company at 4-‐10 x original investment
– Capital gains treatment on all sale proceeds – PreferenXal treatment on subopXmal exit versus the founders
Sources of Equity Capital
Must have exits for equity model to work!! – 2011 US IPOs -‐ $36B – 2011 US M&A -‐ $57B – 2011 US Private Equity -‐$35B
• Exit sources extremely variable … health of economy • All exits: indicaXve of future cash flow or market control
Idea Stage • Friends family, founders
• Grants • Crowds (Kick-‐ starter)
Demonstrate Product & Market Interest • Accelerators • Individual Angels • Angel Groups • Accelerators • Micro Cap VCs
Market Entry & Early Growth • Crowdfunding (portal style) • Angel Groups • Angel Group SyndicaSon • Angel List • Micro-‐cap Funds
Early Scaling Growth • Most Venture Funds
• Angel SyndicaSon
Repeatable Growth • Most Venture Funds
• Strategic VCs • Angel SyndicaSon
• Private Equity
High Growth Capital by Stage &Amount
13
Venture Stage
Investment Size
Friends & Family
Vendors
Angels
Traditional VC
Angel Groups
Corporate Venturing
Grants
Customers
Crowdfunding
Portal Funding
AngelList
Micro VC
Equipment Financing
Founder
Capital Sources: Size & Cost
Investment Size
Investment “Cost”
Traditional VC
Micro VC
Equipment Financing
Angel Groups Angels
AngelList
Corporate / Strategic Venture
Customers
Portal Funding
Vendors
Founder Friends & Family
Crowdfunding
Grants
Venture Debt Bank
Loans
Personal Loans
Private Equity
So What is Equity Anyway?
15
• Stock = right to residual economic interests upon sale/liquidaXon + stockholder voXng rights (usually limited to Board of Directors and Sale of the Company)
• Preferred Stock = right to be paid before Common Stock ParXcipaXng = original investment PLUS a pro rata share of remainder Non-‐ParXcipaXng = original investment OR a pro rata share
• Common Stock = whatever is lev aver all other creditors and preferred stockholders are paid
• Dividend = a right to an addiXonal amount upon liquidaXon measured as a funcXon of Xme x percentage of original investment . Ex. 6.0% per annum
• OpSons / Warrants = Contracts allowing holder to purchase an amount of stock in the future at a pre-‐determined price
• Control Rights = Statutory and Contractual
Equity Type Comparisons
16
Solo Angel Super Angel Angel Group MicroVC VC
ValuaXons High relaXve to stage
High relaXve to stage
Low relaXve to stage
Low relaXve to stage
Medium
Type -‐ Likely (less likely)
Common (Warrants)
Conv Note (Preferred)
Preferred (Conv Note)
Preferred (Conv Note)
Preferred
Board Seat Maybe 1 or none 1-‐2 of 5 +/-‐ Observer
1 of 5 +/-‐ Observer
1-‐2 of 5 +/-‐ Observer
Audited Financials
No No No (reviewed) Yes Yes
NegaXve Covenants
No SomeXmes Yes Yes Yes
PreempXve Rights
No SomeXmes Yes Yes Yes
VerXcal ExperXse
SomeXmes Rarely Some Usually Always
Equity Type Comparisons
17
Solo Angel Super Angel Angel Group MicroVC VC
Exit Horizon (from $ in)
7 years 5 years 4 years 5 -‐7 years 4-‐5 years
Exit Range $20m+ $40m+ $50m+ $100m+ $250m+
Structure of an Equity Deal
18
• Company and Investors agree on a “pre-‐money valuaXon” (PM) which leads to a price per share
• Investors put in $X • Investors then own: X / (X + PM) of the company
Example: PM = $1M X = $0.5M Investors own 0.5/1.5 = 33%
Remember: New issuance NOT transfer
Understand the Funding Path
19
• We’re talking about 1st funding here • What is the probable complete funding picture?
– This is only funding – Another small round then probable small exit – Big money needed before exit
• Each funding event should occur at an “inflecXon point” – Hopefully at a point where risk is removed – Increased PM = so-‐called “up round”
Understand the Funding Path, cont.
20
• What if things aren’t going so well? – Flat or decreased PM = so-‐called “down round”
• More money coming in without increased PM means everyone gets diluted, but…
• Depending on anX-‐diluXon provision entrepreneur may carry more burden than the investors
What about ConverXble Debt?
21
• Many seed-‐stage companies use an instrument called ConverXble Debt. Huh?
• ConverXble debt is not tradiXonal bank debt • Converts exist for two major reasons
– Investors and Entrepreneurs find it hard to agree on a PM valuaXon
– SomeXmes quicker and cheaper to document than equity deals (but not really)
ConverXble Debt provides OpXonality
22
• ConverSble Debt = unsecured debt obligaXon of the Company that may be converted into equity of the Company.
• Conversion Trigger = Qualified Financing usually at some minimum amount of funds (ex. $500,000)
• If Notes stays as Debt = Get back principal and interest ahead of other equity (behind other creditors typically)
• If Notes Convert = Convert amount of debt and interest into equity at the valuaXon in the next round
• aver applicaXon of a Discount (oven 5 – 20%) • subject to a maximum valuaXon amount (the “Cap”)
Basic Structure of ConverXble Debt
23
• Investor loans $ to Company an#cipa#ng another round of funding • Investment accrues small interest • When the funding occurs, investment + interest convert to equity,
usually at a discount (5-‐20% typically)
Example: • Investors loan $200K to Company • 20% discount • As of conversion, interest of $10k has accrued • Next Round PM = $2m • Conversion Amount = 1/(1 -‐ 0.2)* $210k = $262,500
At Conversion, Noteholders receive 262.5K / (PM + 262.5K + New Money)
ConverXble Debt – ComplicaXons!
24
• What if only a li8le money comes in? • When does the debt convert?
• What happens if PM of next round is huge?
• Does the investor have any say in things? • What if there is an equity investment that doesn’t trigger conversion?
• What happens if it never converts?
• What happens if Company gets bought?
ConverXble Debt – SoluXons?
25
• Caps and Floors – May defeat purpose with signaling
• Default conversion price and security at maturity
• Open round, minimum close
• Quick sale preferences (ex. 2x) • Governance provisions • Careful a8enXon to conversion condiXons
ConverXble Debt – Worse than Equity?
26
• MulXple liquidaXon preference (circa 2008) – Ex. $500k of Notes with cap at $2m PM – Next Round at $6m PM – Issue Noteholders 3x number of shares – 3x shares equals 3x liquidaXon preference!!
• Without a floor, effecXvely Full Ratchet AnX-‐diluXon
• Preference Overhang – In prior example Noteholders bought $262,500 of preference for
$200,000. – All other Series A Holders bought 1:1 preference
• Not Just a Price Adjustment
www.TheCapitalNetwork.org
Upcoming Programs
28
Sep 13 Funding OpXons Deep Dive: Consumer Products Companies
Sep 18 Financial ProjecXons for PresentaXons
Oct 16 Building a High Growth Business for Angel and Venture Capital
Oct 24 Structuring Founder RelaXonships: Stockholder Agreements & Choice of EnXty
Nov 5 Mobile Fast Track