Exam 3

Question 1

What are the parts of an Investor Pitch?

Answer 1

OPS - OSP - W - TA - C

} Open
} Propose the Problem
} Show the Solution (Demo)
} Outline the Opportunity
} State the Strategy (Customer Acquisition)
} Present the Pivots
} Why Not to Buy
} Tout the Team
} Angle the Ask
} Close

Question 2

True or False.
In an investor pitch, while you are explaining the pain you are trying to solve, you need to give as much details as possible and spend most of your time in this step.

Answer 2

FALSE! In a pitch, you need to be concise and to the point when identifying the pain you are trying to solve.

Question 3

In an investor pitch, what is the Show your Solution step about?

Answer 3

It is about showing how you are better, faster, and/or cheaper than your competitors. You need to SHOW not TELL.

Question 4

In an investor pitch, what is the Traction step about?

Answer 4

It is about showing what has been accomplished. For example, how many visitors have we received? How many active users do we have? How many customers? How much revenue? etc…
These is where you show the conversion rates: from every x visitors we get y customers `

Question 5

In an investor pitch, what is the Outline Opportunity step about?

Answer 5

In this step, we define our customer and show the market size.

Question 6

What is TAM?

Answer 6

It stands for Total Addressable market, and it is the Total possible demand for our product

Question 7

What is SAM?

Answer 7

It stands for Served Addressable market, and it is the size of market we could acquire based on our business model.

Question 8

What is SOM?

Answer 8

It stands for Share of Market, and is the size of market we could acquire based on PRACTICAL LIMITS of our business model.

Question 9

In an investor pitch, what is the State the Strategy step about?

Answer 9

In this step we explain our operations and customer acquisition plans, and we also share what our sales channel will be.

Question 10

In an investor pitch, what is the Financial step about?

Answer 10

In this step we show the 12 months of the pro forma (cashflow), and we talk about the following years.

Question 11

What are the four actions involved in a pivot?

Answer 11

◦ We thought this:
◦ We tested by:
◦ We learned this:
◦ We made this pivot:

Question 12

What should be brought up when making the ‘ask’ in the final part of the investor pitch?

Answer 12

State the amount of money you are seeking
State the investment vehicle
State how the funds will be used
State the money raised so far and the key investors

Question 13

Brand

Answer 13

The entire experience your prospects and customers have with your company.

Includes:
◦ Logo (slogan, color palette)
◦ The images you convey
◦ The messages you deliver on your website, proposals and sales materials
◦ The way your employees interact with customers

Question 14

Pricing

Answer 14

Price represents the value of the product perceived by the customer

Question 15

What are some economic factor that affect pricing?

Answer 15

1. Competition
2. Demand
3. Costs

Question 16

Elasticity Formula

Answer 16

% Change in Quantity / % Change in Price

Question 17

Break-Even-Point Formula

Answer 17

Fixed Costs / (Unit Price – Avg Variable Cost)

Question 18

What is the Break Even Point?

Answer 18

Point at which Total Revenue = Total Costs

Question 19

What are some Pricing Strategies?

Answer 19

Cost-Plus Pricing
◦ Price = Cost + Markup

Target-Return Pricing
◦ Price = (Fixed Costs + Target Return) / Units Sold + Variable Cost/Unit

Value-Based Pricing
◦ Price = Amount customer is willing to pay

Question 20

What are the three most common type of Business Structures?

Answer 20

• Sole Proprietorship
• Partnership
• Corporation

Question 21

What are the three types of corporations?

Answer 21

• C Corporation
– regular corporation, separate legal and tax entity
• S Corporation
– Separate legal entity, but not a separate tax entity
– Limited liability of a corporation
– Taxed to owners like a partnership
• Limited-Liability Corporation (LLC)
– Limited liability without S Corp restrictions
– Most popular form for startups

Question 22

What are some characteristics of a Sole Proprietorship?

Answer 22

• Owned and operated by one person
• Business license from the city
• Simple to setup, operate, and close

Question 23

Advantages of a Sole Proprietorship?

Answer 23

• Independence
• Easy to setup and close
• Taxed to owner

Question 24

Disadvantages of a Sole Propietorship?

Answer 24

• Unlimited Liability
• Limited resources
• Lack of continuity

Question 25

By whom are Partnerships owned and operated by?

Answer 25

Two or more people

Question 26

What are the two types of Partnerships?

Answer 26

– General Partners - unlimited liability | – Limited Partners – liability limited to amount of investment

Question 27

Advantages of a Partnership?

Answer 27

• Pooled talent and resources • Easy to form • Taxed to owners

Question 28

Disadvantages of a Partnership?

Answer 28

``` • Unlimited Liability • Potential for management conflict • Transfer of ownership issues ```

Question 29

Characteristics of a Corporation?

Answer 29

• Business entity separate from its owners and managers • Owners own stock (shares) in the corporation • Generally larger than other forms • Separate Legal and Tax Entity • Shareholders – Ultimate owners, elect Board of Directors • Board of Directors – Have management and control of corporation – Elected by shareholders • Officers – Appointed by Board of Directors – Represent and operate the company • Charter (aka Articles of Incorporation) – Issued by a state – Name & address of incorporators – Purpose – Authorized stock, classes, rights of stockholders • Bylaws – Rules and regulations by which it operates • Minute Book • May be just one person

Question 30

Advantages of a Corporation

Answer 30

Limited liability • Increased access to resources • Transfer of ownership

Question 31

Disadvantages of a Corporation

Answer 31

* Expensive to start * Complex to maintain * Double Taxation

Question 32

What is a Capitalization Table?

Answer 32

• Also called a "Cap Table“ • Table showing the total amount of the various securities issued by a firm. • Lists the amount of investment obtained from each source and the securities distributed – Common and Preferred shares, Options, Warrants, etc. – Shows respective ownership percentages.

Question 33

Post-money Valuation Formula

Answer 33

Pre-money Valuation + Investment

Question 34

Share price Formula

Answer 34

Investment / number of shares to Investors

Question 35

Market Cap Formula

Answer 35

total num of Shares * Share price

Question 36

Ownership % Formula

Answer 36

Shares owned / total outstanding Shares

Question 37

What are some ways to get funding?

Answer 37

Bootstrapping Friends and Family Loans (from banks, SBA) Grants (Federal and State)

Question 38

What are some sources of debt capital?

Answer 38

Commercial Banks Bonds Credit Unions Insurance Companies

Question 39

What is a SBA Loan?

Answer 39

It is a loan given by the Small Business Administration to small businesses.

Question 40

What is a Term Sheet?

Answer 40

A short and readable summary of the key terms of an equity financing, typically addresses the following issues like: ◦ Company Valuation, Company Ownership ◦ Liquidation Preferences ◦ Lock-Up Provisions ◦ Additions to Management Team, Employment ◦ Anti Dilution Rights, Tag Along and Drag Along Rights ◦ Right of First Refusal ◦ Confidentiality and IP Agreements ◦ Redemption Rights, Registration Rights, Information and Rights such as: ◦ Voting Rights, Board Positions ◦ Stock Conversion, Vesting Periods ◦ Use of Proceeds ◦ Stock Options Pool ◦ Warranties

Question 41

What is a Convertible Note?

Answer 41

``` Loan with an interest rate ◦ Usually 4-8%, 12-24 months } Can be repaid with money } or exchanged for stock of the company at the option of the lender (investor). ```

Question 42

Steps on working a convertible Note exercise:

Answer 42

1. Decide to use the cap or not. How to decide: if conversion cap is less than the Round A valuation, USE the CAP, else DO NOT, use the discount instead. 2. If taking the discount the new valuation will be the Round A valuation - Discount (% of Round A valuation), if not taking the discount, the valuation will stay the same. 3. Divide the investment (Amount of note) by the new valuation. 4. The answer to #3 will give the % of the company the investor will own.

Question 43

Convertible Notes Problem: Note Terms: ◦ $100,000 note, 6% interest, 24 months, 20% discount, conversion cap of $2,500,000 } If A Round valuation = $1,250,000 (post)

Answer 43

Use the Cap? - No ($1.25M < $2.5M) ◦ Take the discount - $1.25M - 20% = $1M ◦ Divide Investment by Valuation (100K/1M) ◦ Investor gets 10% of the company

Question 44

Convertible Notes Problem #2: Note Terms: ◦ $100,000 note, 6% interest, 24 months, 20% discount, conversion cap of $2,500,000 } If A Round valuation = $5,000,000 (post)

Answer 44

Use the Cap? – Yes ($2.5M < $5M) ◦ No discount (when using the Cap) ◦ Divide Investment by Valuation (100K/2.5M) ◦ Investor gets 4% of the company

Question 45

Convertible Notes advantages and disadvantages

Answer 45

``` Advantages ◦ Postpones valuation question ◦ Less due diligence ◦ Less documentation = lower legal costs ◦ Speed } Disadvantages ◦ Debt, must be repaid ```

Question 46

Equity Capital

Answer 46

Represents the personal investment of the owner(s) in the business. } Is called risk capital because investors assume the risk of losing their money if the business fails. } Does not have to be repaid with interest like a loan does. } Means that an entrepreneur must give up some ownership in the company to outside investors.

Question 47

Sources of Equity Financing

Answer 47

``` Personal savings } Friends and family members } Angels } Partners } Corporations } Venture capital companies } Public stock sale ```

Question 48

Common Stock

Answer 48

} Right to receive dividends } Voting rights } Liquidation - last in line

Question 49

Preferred Stock

Answer 49

``` Preferred dividends – paid before common ◦ Declared rate – 4-10% } Liquidation preference – usually 1x } Usually has RFR, Tag/Drag Along, Anti-Dilution ```

Question 50

Steps for working a Liquidation Preference exercise:

Answer 50

It all depends on the scenario: AND Scenario: The investor gets both Preferred Stock Value and Converts to Common EITHER-OR Scenario: The investor gets either Preferred Stock Value OR Converts to Common. On EITHER-OR scenario: The investor can get whatever the multiple of their investment made as agreed on the non-participating liquidation preference (Preferred Stock Value option), OR The investor can convert to Common Stock, that is the percentage agreed (company ownership percentage) of whatever is left after the Preferred Stock Value is issued, AND Scenario: Similar as EITHER-OR scenario, but investor gets both, the Preferred Stock Value and the percentage agreed on whatever is left in Common.

Question 51

Liquidation Pref. Example 1: Investor invests $1,000,000 for 50% of the company } 2x non‐participating liquidation preference. } “Either-or” scenario, investor gets either Preferred Stock value or Converts to Common

Answer 51

``` $2,000,000 exit: ◦ Investor elects to take preference ◦ Investor gets $2M, Common get $0 ◦ $3,000,000 exit: ◦ Investor elects to take preference ◦ Investor gets $2M, Common gets $1M ◦ $5,000,000 exit: ◦ Investor elects to convert to Common ◦ Investor get $2.5M, Common gets $2.5M ```

Question 52

Liquidation Pref. Example 2: } Investor invests $1,000,000 for 50% of the company } 2x participating liquidation preference. } “And” scenario, investor gets both Preferred Stock value and Converts to Common

Answer 52

$2,000,000 exit: ◦ Investor takes preference ◦ Investor gets $2M, Common get $0 ◦ $3,000,000 exit: ◦ Investor takes preference and converts to Common ◦ Investor gets $2M preference + $500K of Common ◦ Common gets $500K ◦ $5,000,000 exit: ◦ Investor takes preference and converts to Common ◦ Investor gets $2M preference + $1.5M of Common ◦ Common gets $1.5M

Question 53

What makes a successful IPO Candidate?

Answer 53

``` Consistently high growth rates } Strong record of earnings } 3 to 5 years of audited financial statements that meet or exceed SEC standards } Solid position in a rapidly growing industry } Sound management team with experience and a strong board of directors ```

Question 54

Deduction

Answer 54

An amount you can deduct from your gross income to enable you to reduce your taxable income.

Question 55

What are the min and max INDIVIDUAL tax brackets?

Answer 55

10% - 35%

Question 56

TRUE OR FALSE: One of the best tax shelters under our current tax code is owning a business.

Answer 56

TRUE

Question 57

What are the min and max CORPORATE tax brackets?

Answer 57

15% - 34%

Question 58

What are the most common payroll taxes?

Answer 58

``` } Social Security Tax ◦ 6.2% employee / 6.2% employer } Medicare Tax ◦ 1.45% employee / 1.45% employer } Unemployment Tax ◦ Federal and State, employer only ```

Question 59

What are the elements of a contract?

Answer 59

Contract – agreement enforceable by law } Legality ◦ must intend to accomplish a legal purpose } Capacity ◦ Must have legal capacity to enter into contract } Agreement ◦ legitimate offer and a legitimate acceptance } Consideration ◦ Something of value exchanged between parties

Question 60

What are the most common intellectual proprty?

Answer 60

Patents Copyrights Trademarks

Question 61

When to use an attorney?

Answer 61

To Form the company and to review contracts

Question 62

What are the ten steps for negotiation?

Answer 62

1. Decide on your starting position ◦ Your "bottom line," or lowest point you will accept in the deal } 2. Consider the objectives and emotional motivation of the other party ◦ Put yourself on their side of the table } 3. Plan your sequence of proposals and possible counter-proposals. ◦ Open at the most you can reasonably ask ◦ Give yourself room to negotiate 4. Determining your own motives and objectives ◦ What do you expect to gain, why is it important to you? ◦ What can you offer to achieve this? } 5. Be prepared with information, facts, comparable prices or costs, etc. ◦ Avoid seeming either uninformed or overly aggressive } 6. Let the other party make the first offer ◦ Allows you to gauge your response and set the bounds of the negotiation to your advantage ◦ Other party may open at a more favorable point 7. Start at a point you have mutually agreed upon ◦ something both parties will readily agree to. } 8. Establish a position of confidence and authority ◦ “I will do this for you, you will do this for me.” } 9. Make your incremental proposals ◦ Avoid going to your bottom-line. } 10. Know when to close the deal ◦ When other party accepts, and it is acceptable to you, close and sign the agreements.