Funding for innovative startups - Part 5 of 5

SESSION FIVE:
ADVANCED FUNDING & WRAP-UP
Benno Groosman MScBA – www.groosman.co –Athens, June 7, 2016 –

MASTERCLASS FUNDING FOR
INNOVATIVE STARTUPS
Benno Groosman MScBA – www.groosman.co –Athens, June 7, 2016 –

MASTERCLASS SCHEDULE
 Session 1: Introduction to funding language + business
planning;
 Session 2: Determining funding need + milestone-based
funding;
 Session 3: Building your financial investment plan;
 Session 4: Investor readiness;
 Session 5: Advanced funding and wrap-up.
FUNDING MASTERCLASS www.groosman.co

INTHIS PRESENTATION
Scope
More term sheet (economic & control)
What investors look for
Negotiation
Summary & wrap-up
Other resources

SCOPE
Funding needs focus
You can’t “try to raise money” or “do it in your
free time”
Make an investment strategy, stick to the
strategy and dedicate time for finding investors
and closing the deal
Know the investment terminology and process

TERM SHEET
In a term sheet the startup and investor agree on
economics and define legal control over the
company.
See also session 4 for many of these terms:
http://www.slideshare.net/benno_groosman/fundi
ng-for-innovative-startups-part-4-of-5

TERM SHEET (ECONOMIC)
PRICE PER SHARE
Technically an investor buys shares in your startup with
his investment
The valuation can be postmoney or premoney: ask!
Postmoney:
 €1M investment at €4M valuation gives investor 25% equity
 €1 / €4 = 0.25 = 25%
Premoney:
 €1M investment at €4M valuation gives investor 2o% equity
 €1 / (€1 + €4) = 0.2 = 20%

OPTION POOL
The startup can make an option pool, to reward
employees or advisors (typically 5-20% equity)
It’s important to
determine if this pool will be allocated before or after
the investment
and how the founders/investor will dilute their equity in
future occasions

LIQUIDATION PREFERENCE (1)
In the case of liquidation the proceeds can be divided
between the founders and investors in different ways.
Liquidation can be: merger, acquisition, sale of voting
control, sale of almost all the assets, etc.
This is being defined in this part of the termsheet

Many investors will claim the nominal value of the
shares + dividend to start. Extra participation rights
apply too:
Full participation
Capped participation
No participation

Assume the purchase price of the venture is €10M and
there’s only one investor who invested €1M at a €3M
postmoney valuation.
Full participating: investor will get first his €1M and then 1/3
of the remaining €9M = €4M in total.
Nonparticipating: investor will get 1/3 of €10M = €31/3M
Capped participation (preference): in case of for example a
3x cap the investor will get maximum 3x €1M = €3M

VESTING
Vested stock will only be fully transferred to a founder after
he or she stayed in the company for a few years (typically 4).
In case of 4 years, this can be done for example with 25% of
your equity after completing the first year (cliff) and pro rato
on a montly basis for 36 the months after.
What happens in case of an early merger?

VESTING (MERGER)
Single-trigger acceleration:
Automated accelerated vesting upon a merger
(founder/employee will vest his shares)
Double-trigger acceleration:
Extra on the single-trigger, the second trigger is the
founder/employee to be fired (for example) in order to vest
accelerated.The buying party hereby has more security the key
people will stay with the company (which can increase the
valuation for the other shareholders too)

ANTI DILUTION
Antidilution protects the investor for a lower future
valuation.This lower future valuation could otherwise give a
new investor a bigger part of the equity, at a lower price (and
thereby diluting the shares of the previous investor).
If the price is lower, in the case of an anti dilution term, all the
share distribution will take place as if it was at the stock price
of the first investment.

TERM SHEET (CONTROL)
Board of directors: investor can appoint
members of the board
Protective provisions: veto on decisions or
with large majority (>70% voting rights)

TERM SHEET (CONTROL)
Drag-along: obligation for other shareholders
to sell their shares when other shareholders
sell, so they can be dragged in a complete sell
of the company
Tag-along: right to join other shareholders
when they are selling their shares, the other
shareholder can tag-along on the success of
the other

TERM SHEET (OTHER)
 Redemption rights: investor can sell his shares back to the company
to protect downside risk
 Dividend
 Information rights: time frames and standards for the startup to
deliver future (financial) information to the investor
 Right of first refusal: shareholder first has to try to sell to other
shareholders
 Voting rights
 Founders activities/time: usually 100% of professional time founder
has to go to the startup

WHAT INVESTORS ASSESS ON
 Team (experience, expertise, complementarity)
 Product/market fit
 Intellectual Property
 Traction
 Revenues
 Match with fund
 Manageable risks
 Stage

NEGOTIATION
First, you negotiate for your company! Some
personal goals can conflict with what’s best for
your venture.
The best result is getting a balanced and fair deal
that you understand, while maintaining a good
relationship with the investor.

NEGOTIATION
Prepare the necessary documentation (business
plan and more), the right support (experienced
people), and know what you want to achieve.
Have a plan B. Many (if not most) deals never
happen.
Realize that in a new round, you’ll negotiate new
terms (triggered by the new investor).

NEGOTIATION
www.linkedin.com/pulse/
negotiation-frank-chen

NEGOTIATION

OTHER RESOURCES ON FUNDING
Online:
www.crunchbase.com
www.askthevc.com
www.groosman.co / www.slideshare.net/benno_groosman
Books:
 Venture deals (be smarter than your lawyer and venture capitalist), Brad
Feld & Jason Mendelson *
 The Art of Startup Fundraising: Pitching Investors, Negotiating the Deal,
and Everything Else Entrepreneurs Need to Know, Alejandro Cremades
 * this 5th Masterclass was partly inspired on this book

SUMMARY MASTERCLASS
Session 1: Introduction to funding language +
business planning;
Session 2: Determining funding need + milestone-
based funding;
Session 3: Building your financial investment plan;
Session 4: Investor readiness;
Session 5: Advanced funding and wrap-up.

FOLLOW ME
Benno Groosman MScBA
Experienced startup entrepreneur
www.groosman.co

Funding for innovative startups - Part 5 of 5

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