Are you investment ready?Jeff Harriman, Capital Markets Specialist

Agenda:

• Types of capital• What do investors look for in you?• What should you look for in an investor?• Raising capital process – intro• Importance of books and records

discussion incl.:• Structure, IP, presentation skills, pitch• Financials, valuation, & term sheet

Vocabulary

• Accredited Investor Term Sheet• Exemptions Redemption Feature• Tranches Venture Capitalist• Seed round Due Diligence• Mezzanine First round• Bootstrap Intellectual property• Cap table Patent• Angel Articles of Incorporation

Types of capital

The life cycle of a business involves a number of stages of growth and development. Investors refer to the types of capital by the term that describes these stages of growth in a business, e.g. ‘start-up’. Funding can also be referred to as stages, rounds or tranches, e.g. ‘first round’ or ‘early stage’.

Types of capital

• Pre-seed/R&D:– Expand the concept– Advance product development

• Seed:– Continued research and product

development

Types of capital

• Start-up:– The company is being set up or in business for

a short time– No commercial product– No track record

• Expansion/Mezzanine:– The company is established– Requires capital for further growth and

expansion– The company may or may not have made a

profit at this stage

What do investors look for in you?• Is the company being set up or in business for a

short time?• Business opportunity in superior product• High growth potential• Global prospects• Sustainable competitive advantage• Quality management team• Previous investors• Existing customers and partners• Realistic and alternative exit strategies• Professional business practices

What do investors look for in you?

No track record• Passion• Openness• Trust• Understanding of what the companies

goals are• Can your innovation be patented?

What should you look for in an investor?Know what attributes you are looking for in an investor:• Passive vs. active• Mentor/board member vs. hands-on management role• Industry knowledge – expertise in your field• Track record as investor• Trustworthy (get referrals from other investee companies)• Contacts and networks• Long term relationship – someone you get along with• Capacity for follow-on funding• Enthusiastic• Ethical

Process of raising capital

The capital raising process is a long one, usually taking 3-6+ months. A fairly formal process is followed. Business angels tend to be quicker and more relaxed about this process.

Process of raising capital• Introduction to venture capitalist or business angel• First meeting – produce your executive summary• Site inspection – Investment brief submitted• Introduction to the management team – sign confidentiality

agreement • Business plan submitted• Valuation• Negotiation and acceptance of the term sheet• Due diligence and documentation • First round received• Follow-up funding • Exit

Let’s get to it

• Preparation• Structure• Intellectual property• Pitch• Financials• Valuation• Due diligence• Term sheet• Presentation

Preparation

• What is needed• What format• Anticipation• Follow-up• When do you become an annoyance

Structure

• Articles of incorporation• Issued and authorized• Shareholders agreement• Employment contracts• How many shareholders?• Minute books• Share structure

Intellectual property

• Patents, trademarks and trade secrets• Licensing arrangements• Who developed?• Defensibility• Contractors • IP Muggings

Pitch

• Develop a pitch• Adapt it to the audience• Practice, practice, practice• Listen to others• Record yourself• Ask for advice• Keep it brief

Financials

• Historic financials are what they are• Analyze your balance sheet• What are industry norms?• How are your ratios?• Are they realistic?• Put yourself in their shoes

Financials

• Cash flow statements• 13 to 20-week projections• Ability to meet obligations• Sales funnel that has been qualified and

weighted• Where is the risk?• Do your financials actually tell the story you

wish to tell?

Due diligence

• Cash flow statements• Preparing for the inquisition• Make it a business process• Aids in preparing a business for sale• Gives investors comfort• A very valuable exercise

Stages of due diligence

• Deal screening• Interest assessment• Letter of interest• Detailed due diligence• Term sheet• Final legal documentation• Cashing the cheque

Valuation

• Valuation in early stage is a negotiation• Realism• Selling the future• IRRs• Venture capital method• Scorecard method

Valuation

• The best way to cut your ROI in ½ is by investing at 2X the valuation

• Valuations <$2Million are less likely to have any down rounds

• Investing at the right valuation is better protection than anti-dilution

• Local valuations are primary consideration but all markets are affected by national trends

• Follow-on investors are not always local• Entrepreneurs have limited knowledge of

valuation

Term sheet

• Lays out deal structure• Is generally open to negotiation• Is not a letter of commitment• May have additional hurdles to

overcome• Many different formats

Term sheet

The investment agreement:• Sets out the terms – “we will invest $ into

your company in exchange for % of the company”

• Sets out the conditions precedent – “Here are the things that have to happen between now and when we close in order for us to close.”

• Defines the close – “Here are all the other things we need in place in order to close.”

What Many Angels insists on• Price protection• Redemption feature• Board seat• Drag along, tag along rights• Right of first refusal on selling of shares• Conversion of shareholder loans• Financial reporting and access rights• Tax credit application• Confidentiality• Other legal stuff…

Raising capital is a humbling experience. It can be a lot like banging your head against a wall…repeatedly. After a while you get numb to the pain and focus on success…If you survive.

Thank you for your participation!

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• Contact FCNB– 866 933-2222 (toll free in NB)– 506 658-3060