Startup Funding: FAQ

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Startup funding F.A.Q. Image source Volodymyr Nesterenko, Digital Future

Transcript of Startup Funding: FAQ

Startup funding F.A.Q.

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Volodymyr Nesterenko, Digital Future

Whatever I do, I end up in Investments

Managing Partner @ Digital Future Digital Future is the most active Ukrainian VC firm

Closed 11 deals in 2016, $4M+ invested

About me

When to raise moneyHow much to raise

What valuation to expectWhich investors to approach

Debt or EquityCan I get paid my past cost

Do I need a legal entityWhat is Term Sheet and do I need it

Questions

When to raise money?

When there is no other choice You know how to use it and prove you can do it

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When to raise money?

When there is no other choice You know how to use it and prove you can do it

You have at least 6 months of runway

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Runway: how many months a company can operate without new financing at the current level of cash burn

Cash burn: monthly net cash outflow

Mailchimp: The most known bootstrapped company

Founded in 2007, never raised venture capital $300M+ annual revenue, 550+ employees

How much to raise?

The round should cover 12-18m runway If less: out of cash => depressed valuation (at best)

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How much to raise?

The round should cover 12-18m runway If less: out of cash => depressed valuation (at best)

If more: selling your stake too cheap

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How much to raise?

The round should cover 12-18m runway If less: out of cash => depressed valuation (at best)

If more: selling your stake too cheap Mind investors’ ticket

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The one promising an investor min 10x return over 5-7y

What valuation to expect?

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The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method

What valuation to expect?

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The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method Investors also check valuations vs potential exit value

What valuation to expect?

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The one promising an investor min 10x return over 5-7y Using revenue multiples is the most common method Investors also check valuations vs potential exit value If it’s $50M, they’re unlikely to accept valuation >$5M

What valuation to expect?

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Revenue multiple: a benchmark ratio that is used to measure a company's value based on its annual sales;

expressed in ‘times revenue’: 3x, 5x, 10x ... Multiples depend on industry averages, growth and margins

Which investors to approach?

Most appropriate for your stage

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Which investors to approach?

Most appropriate for your stageSeed and earlier stages: raise where the money is

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Which investors to approach?

Most appropriate for your stageSeed and earlier stages: raise where the money is

Late seed, venture stages: raise where the revenue is

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Which investors to approach?

Most appropriate for your stageSeed and earlier stages: raise where the money is

Late seed, venture stages: raise where the revenue is Seek VCs which can bring clients and other investors

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Debt or Equity?

They both suck Selling equity is better for a founder

But it steals much time and costs money

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Debt or Equity?

They both suck Selling equity is better for a founder

But it steals much time and costs money That’s why we use convertibles and SAFEs at early stages

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Convertible note SAFE* Preferred stock Common stock

Class debt derivative equity equity

Ownership no no yes yes

Voting rights no no no yes

Asset claim priority 1 1 2 3

Maturity yes no no no

Interest yes/no no no no

Valuation yes** yes**/no yes yes

* Simple Agreement for Future Equity; it is neither equity, nor debt, as it doesn’t have any maturity or interest;** So-called ‘valuation cap’ -- maximum valuation, at which the underlying amount will be converted into equity; actual equity round valuation can be lower (or higher)

Can I get paid my past cost?

Never ask this ^^^ question Yes, you can. If it’s not your personal debt

To repay personal debt, sell your own shares(be prepared for low valuation)

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Do I need a legal entity?

YES - at any stage later than Friends & Family

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Do I need a legal entity?

YES - at any stage later than Friends & Family Register where your clients are

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Do I need a legal entity?

YES - at any stage later than Friends & Family Register where your clients are

LLC is just fine until you need to issue shares

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Do I need a legal entity?

YES - at any stage later than Friends & Family Register where your clients are

LLC is just fine until you need to issue shares Corp - for raising equity and for SAFEs

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What is Term Sheet and do I need it?

The summary of key terms of a future binding agreement

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What is Term Sheet and do I need it?

The summary of key terms of a future binding agreement Needed to save time & money for everybody

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What is Term Sheet and do I need it?

The summary of key terms of a future binding agreement Needed to save time & money for everybody

Normally used by professional VCs

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What is Term Sheet and do I need it?

The summary of key terms of a future binding agreement Needed to save time & money for everybody

Normally used by professional VCs This is an investor’s document

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