Diane Mulcahy
Author of
Venturing Forward:
A Practical Guide to Raising Equity Capital in Ireland
Ov e r v i e w
The equity financing cycle Key issues for companies raising equity capital Raising VC:
How VC firms work What is a good VC? The biggest mistakes The biggest myth: VCs are risk takers The biggest worry: Valuation The biggest negotiation: Term Sheets
VCs on Board
T h e Fr a m e w o r k : T h e Eq u i t y Fi n a n c i n g Cy c l e
Entrepreneur
Friends &Family
Angels
VCs
Exit
An Illust rat ion: A m a zo n .c o m Eq u i t y Fi n a n c i n g
Entrepreneur
Friends & Family
Angels
VCs
Exit
Q3, 94: Founder, Jeff Bezos starts Amazon.com, investing $10K and borrowing $44K
Q2, 95: Founder s parents invest a combined $245.5K Q2, 96: Founder s siblings invest $20K
Q4, 95: Two angels invest a total of $54.4K Q1, 96: Angel Syndicate Twenty angels invest an avg. of $46.85K each for a total of $937K
Q2, 96: Two venture capital funds invest $8M
Q2, 97: IPO: 3M shares offered on the Nasdaq, raising $49.1M
Cr i t i c a l Qu e s t i o n s f o r Co m p a n i e s Ra i s i n g A n y Eq u i t y Ca p i t a l
1. Are you Investor-Ready? 2. What is your Financing Strategy? 3. What is your Exit?
Do you meet the criteria of equity investors? Clean corporate structure Management team Compelling business plans and financials
Business plan for raising capital How much capital you need and when Based on milestones, not timeframes Helps to avoid drip feeding
Begin with the end in mind RETURNS drive investors Looking for a mindset, not a promise
H o w V C Fi r m s Wo r k
Professional investors investing OPM
VCs raise money from institutional investors Then invest it in companies
VC Funds
Funds raised every 3-5 years ( vintage year ) Each fund has 10 yr lifespan
How are VCs paid?
Usually two and twenty Management fee (2% of committed capital) Carried interest (20% of profits; 80% goes back to investors)
Wh a t i s a g o o d V C?
VCs serve two masters, so good depends on who you ask VC Performance Investor perspective
Returns (or Exits as a proxy for returns) for the portfolio Deal flow: Attract/see the best deals Put the capital to work
VC Performance
Entrepreneur perspective
Reputation top tier Repeat entrepreneurs Value-add, helpful, experienced ? Industry or entrepreneurial experience ?
Ra i s i n g V C: The biggest m ist ak es
Lack of focus on People People People Insufficient time Failing to generate investor competition Staying domestic Price as the only criteria
Ra i s i n g V C: The biggest m yt h
Myth: VCs are risk-takers Reality: VCs are in the business of identifying and mitigating risk through:
Due diligence Valuation The Term Sheet
Economic protections Control provisions
The VC investment process is slow deliberative, and based on lots of information
Ra i s i n g V C: The biggest w orry
Do your valuation homework Investors begin with a range in mind
Lower it based on due diligence Raise it based on a case or competition
Valuation must be managed through multiple, dependent rounds of financing while considering:
Management ownership levels Ability to attract later investors Beware the unsophisticated investor !
Valuation is, ultimately, what the market will pay
The biggest negot iat ion: The t erm sheet
Abbreviated vs. Industry-standard term sheets Use to negotiate the full deal structure, with legal advice The question of exclusivity Key terms to negotiate (besides price)
Participating Preferred Full-ratchet anti-dilution Large Liquidation Preference Veto/controls
T e r m Sh e e t St r u c t u r e
Economic Protection Security Price per share Dividends Conversion Liquidation Preference Redemption Anti-dilution protection Pre-emptive right Pay to play Representations and Warranties Voting rights Right of first refusal and co-sale Board of Director seat Protective Provisions Information rights Exclusivity Conditions to Closing Control Provision
Negot iat ing Tips
You really do get what you negotiate BUT There are some ways to improve your negotiating position:
Credibility (e.g., serial entrepreneur) Interest from other investors Interest from other investors Interest from other investors Time (ability to walk away) Hot industry/market
The biggest c hallenge: V Cs o n B o a r d
Your new job: Structuring your Board Board structure
Size - 3, then 5 Composition mgmt, investor, non-exec High-profile vs. no profile Term limits
Compensation Reference checking Board
the best way to avoid a bad
The biggest c hallenge: V Cs o n B o a r d (c o n t d )
Your other new job: Leading your Board Successful Board meetings are ones with no surprises making decisions, not trading information Fiduciary responsibility is paramount
Especially when things go wrong What about enlightened self interest?
Run a best-practices Board
Controlled meeting Agendas, Board book, minutes
Can Board performance be evaluated?
Re s o u r c e s o n Ra i s i n g V C
Venturing Forward has:
Term by term explanations and examples Sample term sheet Sample Board agenda, minutes and notices
Industry-standard term sheets and agreements
www.nvca.com www.bvca.co.uk www.eban.org
Board of Directors
www.nacdonline.org