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  • Raising Venture Capital for the Serious Entrepreneur Pt. 3

    Yes, you can get your financing, but your can also get “hosed” by someone looking for short-term gains – so see what Berkery says, yet still, do your own due-diligence.

    This is the last installment of Raising Capital for the Serious Entrepreneur, by Dermot Berkery. In this section, Berkery illustrates how to close – how to prepare your portfolio and align your interests with the funder’s interests – hopefully without giving up too much equity in return for funding.

    This is the trick part, because yes you can get your financing, but your can also get “hosed,” by someone looking for short-term gains – so see what Berkery says, yet still, do your own due-diligence.

    1.      Big companies buy small companies because they are better at innovation than big companies are.

    2.      The greatest cost to a small business is distribution.

    3.      What each side tries to achieve in a term sheet:

    Investor’s get the following:

    a.       Maximize the upside in the event of an exit.

    b.      Protect the investment if the company performs poorly.

    c.       Retain vetoes over actions that could affect the investor’s position.

    d.      Force the company to pursue liquidity after the investors have been involved for a considerable amount of time.

    e.       Ensure the founders and key investors are locked into the company.

    Entrepreneurs get the following:

    a)      Sufficient capital to reach the next stepping-stone.

    b)      Give up as few levers of control of the company’s actions as possible.

    c)      Protect the personal position of the entrepreneur, in the event the investor’s perceive the entrepreneur to be surplus to the company’s requirements at some point.

    4.      Map-out all penalties on founders and management, and those for investor’s (restricted transactions/protective covenants).

    5.      Entrepreneurs should seek common cause with the lead investor(s) to limit the number of vetoes.

    6.      Align the interests of founders/management and investor’s:

    a.       Reward the founders and key executives for value creation.

    b.      Ensure the founders do not try to sell the company before the investors are ready.

    c.       Tie the key people long enough to give the company a good chance to succeed.

    d.      Ensure that the full energy of the founders and key executives is committed to the venture rather than any other activities.

    7.      It’s not unusual for the founder(s) to hold a 50-70% or more of the equity after the seed or Series A found financing.

    8.      Vesting period is usually four to five years.

    9.      Term Sheet:

    a.       What is each investor aiming to achieve with the term sheet?

    b.      What terms should the CEO negotiate with investors – what should you be aiming for?

    Sample Term Sheet:

    a)      Investor.

    b)      Ownership percentage  in new venture.

    c)      Investing instrument: common, preferred stock etc.

    d)     Vesting options – 50% up front, remaining 50% over four years.

    e)      Decision rights – normal vetoes: rights of refusal to sell company, influence over products and services.

    f)       Other factors – their expertise for technical knowledge – their success rate – what added value do they bring beside financing.

    Good luck.

    Calvin Wilson
    Founder and CEO
    Upstart: Business and Management for 20-40 Year Old Professionals

    Filed Under: Startup/Entrepreneur


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