1. Startup Finance An Entrepreneur’s Manual

4. A big undertaking Starting a business is a big commitment Energy & Passion Time Financial resources (yours and your investors) Before thinking of financing, is worth taking a deep breath …

5. Key questions about you Why am doing this Make money Lifestyle “Change the world” How long do you want to commit? What level of financial risk are you prepared to take?

6. Key questions about the business Be honest with yourself about the risks / unknowns Do customers want the product / service? Do you have the competence to build the product and the team Can you monetise the product / service? How competitive is / will the space be? How big can the overall market become?

7. Agenda Important reflections before you start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process

8. Overview of financing options Equity Financing Non-Equity Financing Angel Financing Venture Capital Self Finance / Bootstrapping Private Equity Debt / Bank Finance Public Stock Markets

9. Self financing / bootstrapping Financing growth from previous cashflow and personal funds Obviously need to have cashflows… Most good bootstrapped companies emerge from a service or consulting companies that are productising their offering Pros Bootstrapped companies almost always spend cash more effectively than equity financed companies Already being close to existing customers, give excellent ability to understand problems and define good solutions Cons Resources for product and market dev constrained by cashflows May miss a big opportunity if other players raise finance and invest heavily

10. Debt / bank finance Relatively limited funds will be available ; likely to want security anyway Banks only lend to predictable businesses they can understand If your capital requirements are limited and your business is following a well trodden path, can be a useful source of finance Not particularly useful web or high growth tech industries

11. Pre-requisites Large Potential Market Opportunity Unique Product Or Concept Passionate Founding Team Implications… Need to move rapidly Intense competition likely VC funding supports Hiring Rapid Product Development Partnerships Infrastructure Internationalisation Commercialisation Good reasons to raise equity finance

12. When NOT to raise VC Application is a feature not a product Market size is too small Motivation is not financial Risk is not that you waste time unsuccessfully trying to raise finance … … real danger is that you do succeed in raising VC funds Lose opportunity for small exit which could be personally lucrative Lose opportunity to run lifestyle business Get bound in to 3+ yrs work you may not enjoy

13. Equity Financing Growth Fund Seed Early Stage Series A, (B) Later Stage (B),C,D… Pre-IPO / Buy-out Private Equity Investment Size 0 - €1m €2m-€20m €5m-€20m €30m+ Potential Sources of Funds Grant-funding University seed funds Friends and family Angel Investors (Venture Capital) Venture Capital (Wealthy) Angel investors Venture Capital Specialist Late stage tech investment funds Hedge Funds

14. Agenda Important reflections before you start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process

15. Venture Capital – How the VC makes money Raise fund every 2-4 years Pension funds, financial institutions and specialist “fund of fund” investors Invest money over 3-5 years ~ 1/2 of investments lose money ~ 1/3 of investments break even ~ 1/6 of investments make (lots) of money Very small management fee on funds managed ~ 1-2.5% pa Carry ~ 20-25%x (Total Return – Total Amount Invested)

16. Angels – How the Angel investor makes money Unlike the VC the Angel invests their own money Much smaller absolute returns can be very meaningful to an angel The Angel approach is to invest small amounts at a very early stage / low valuation €50-€250k at valuations of €500k-€4m Two “exits” for angel Firm might be sold quickly for €5-10m or less where the Angel can make 2-5x money Firm raises VC money, after which Angel typically becomes more passive but has built up exposure very cheaply to a venture backed enterprise The key thing when selecting an Angel therefore is whether they can help you raise VC finance See which Angel investors have invested with which VCs

18. Trusted service provider relationships

19. Search / recruiting

20. Branding / PR

21. Finance, etc

22. Exit optimisation

23. Knowledge / contacts with relevant buyers

25. Exceptional

26. Good / credible

27. Mediocre / incomplete

28. Misconception that being good / credible across the board is what VCs look for

29. Can always add credible attributes to the mix later

31. Getting on radar screens Out of the blue email is a longshot Try to build context Analyse portfolio companies – are there any links there? Analyse contact network and advisors Analyse press coverage Participate in blog conversations Attend events and conferences Relevant PR around product also helps VCs spend their time looking for businesses with momentum

32. Agenda Important reflections before you start What are the financing options? How to attract and engage investors? Deal structure and what to expect during the investment process

34. Calls with current / prospective customers or partners

35. Meeting broader team

36. Brainstorming around strategy

37. Identifying key hires post closing

38. Formal presentation to VC partnership

39. Some additional reference calls with partners / customers

40. Personal reference calls

41. Legal / accounting audit (if relevant)

42. Drafting legal documentation2-4 weeks 1-2 Months

43. Types of investment Ordinary Share investment Simplest form, often used by angels All shareholders have similar rights Company Board composed according to Convertible Loan Sometimes used by both Angels and VCs Typically when another financing is anticipated soon Loan will convert (with a discount ~25%) into the next financing round Preferred Share Investment Typical Structure used by VCs and occasionally larger Angels investing as a group

44. Understanding a termsheet – case study Anything between 2 and 15 pages (if points are spelt out in fuller legalise) Sample phrasing is “[XXX fund] proposes to lead a Series A preferred share financing of €5m at a €8m pre-money valuation. As part of the investment process an employee option pool of 15% on a post money basis will be put in place. Typical venture capital terms including participating liquidation preference, etc. etc …” What does it all mean?

45. Case Study – Cap Table

46. but that’s so unfair… Board Representation Liquidation Preference Participation rights Anti-dilution rights Element of reverse vesting Certain control and veto rights Period of exclusivity to close legals Photo Source: Philip Greenspun, MIT Venture Capital – “Typical Deal Terms”

47. Case Study - liquidation preference

48. Case Study - liquidation preference

49. Case Study - liquidation preference

50. Case Study - liquidation preference

51. Case Study - liquidation preference

52. Case Study - Antidilution If a subsequent investment round is done a price lower than the previous investment round then the previous investment round is repriced (more stock issued to Series A) Two flavours Broad-based – Series A price ratchets down based on size of Series B relative to Previous post-money valuation Narrow-based – Series A price ratchets down based on size of Series B relative to Size of Series A Say €5m Series B done at €0.75 per share Broad-based – Series A reprices = €1.00–((5/(5+15.3)*€0.25) = €0.93 Narrow-based – Series A reprices €1.00–((5/(5+5)*€0.25) = €0.875

53. Case Study – Reverse Vesting The value of startup is typically in the promise of future labour from the founders Investors seek to secure this by reverse vesting founder stock, typically over 3 or 4 years For startups typically all founder stock is subject to reverse vesting. For later stage companies perhaps half the stock might be subject to vesting NB – this also protects founders from each other

55. Growth rate

56. Team quality

57. Strategic fit with buyer community

59. Hiring (quality & speed)

60. Partnerships

62. Valuation and dilution at subsequent rounds

63. Option grants% share of business at exit Choosing the right VC - Valuation should not be the decisive factor

64. Key things to consider when choosing an investor Right partner at a fair price vs. Any partner at best price Relationship With key individual(s); and broader team References Speak to other founders Portfolio Relevant experience Non competitive Community you want to be part of Valuation and associated deal terms

65. Thank you Ben Holmes Email: benh@indexventures.com Skype: ben_holmes

66. Artwork – (Transparent Layers)