L1 - Startups Flashcards
(36 cards)
How many stages are there?
7
What are the stages?
1: Seed and Development
2: Growth
3: Establishment (minority investments not VC)
4: Expansion (expansion of business)
5: Maturity and possible Exit
6: Listed Company
7: Takeover and Integration
5 Steps to launch for a startup
- Protect intellectual property
- Seek input and network
- Plan the business
- Negotiate the license or option agreement
- Purse Funding
How to protect intellectual property rights?
File a patent application on the invention before it comes public. A major asset of a startup company is its intellectual property. After public disclosure, obtaining a patent, particularly outside the US, may no longer be possible.
How to seek input and network?
Identify a mentor and work with him regularly, network with like-minded entrepreneurs, review ideas with potential investors, and evaluate the commercial aspects with potential customers.
How to plan the business?
Develop an understanding of the market potential, competition, funding needs, and path to productization and profitability.
How to negotiate the license or option agreement?
Obtain a license or option agreement from Harvard to demonstrate to potential investors that the company has secured the rights to the technology.
How to pursue funding?
Commercializing technology typically requires external capital. Introduce the company to venture capitalists, angel investors, and, perhaps, friends and family.
5 Funding sources
Organic growth
Friends and family
Small business innovation research
Angel investors
Venture Capitalists
What is organic growth?
Grow the business slowly based on sales without the need to raise external fund
What is small business innovation research?
Apply for research grants. Almost every country provides grants for small business innovation research projects.
Equity
Ownership interest of the company that is held by various parties. The investor group will typically want 40% to 60% of the company.
Ownership compared to control
Equity investors are generally in control of the company. Provisions in the investment documents usually give the investors authority over certain decisions, such as whether to accept an acquisition offer, even if they have less than 50% of the outstanding shares.
outstanding shares
Authorized shares are the maximum number of shares a company is allowed to issue to investors, as laid out in its articles of incorporation. Outstanding shares are the actual shares issued or sold to investors from the available number of authorized shares.
How much is the founders’ total equity after the first round of financing normally?
After the first round of financing, the founders’ total equity percentage is often diluted to less than 50%.
option pool
a percentage of stock options set aside for special purposes. Sometimes, investors require that about 20% of the company’s options be reserved to attract key employees.
pre- and post-money valuation
The company’s pre-money valuation is its value before an investment is made. Pre-money valuation must be reasonable. Post-money valuation is the pre-money valuation plus the amount invested.
What is the post-money valuation if investors want to have 60% of the company and pre-money valuation is 2m?
For example, if investors valuation: provide $3 million and the pre-money valuation is $2 million, the post-money valuation is $5 million. In this example, the investors have 60 percent of the equity.
Convertible debt
Funding that can be converted into shares at a later funding round. Sometimes convertible debt is a good funding alternative. However, the company immediately has debt on the balance sheet, and a valuation still must be set in case additional funding rounds are not needed.
–> Downside protection and upside potential
What is a shareholder loan?
Debt & equity simultaneously. Debt-like form of financing provided by shareholder. Junior debt. If this loan belongs to shareholders it could be treated as equity. Common for young companies to create a tax shield. Shareholders can extend the loan in distressed or near-default situations to save the company.
A shareholder loan is financing provided to a company by its shareholders and represents debt for the business. Although shareholders are tied to the company, the Internal Revenue Service advises that shareholder loans must be given with the same terms that would exist in a loan between two independent parties. This includes having a fair market value interest rate.
A company can write off the shareholder loan interest payments, which is a benefit of going this route. However, if the interest rate charged is below fair market value, the difference between the two is considered income and taxed accordingly.
Preferred shares compared to common shares
Investors typically take preferred shares, and the founders and employees hold common shares. Preferred shareholders may have additional rights. For example preferred shareholders have the right to get a multiple of their investments back before any distribution to the shareholders.
preferred shareholders (investors) invested $5 million, they hold 50 shares:
percent of the equity, have a 1X preference, and the startup is sold for $25 million.
How is the distribution?
In this case, the investors will first get $5 million, and then the remaining $20 million is split according to the equity percentage of the shareholders: $10 million to the investors, and $10 million to the common shareholders.
What is anti-dilution?
Protection against future financing when the value of the company decreases (down-round). Anti-dilution ensures that equity stakes do not drop below a certain percentage.
There is share and economic dilution.
What is the most common anti-dillution
The most common is weighted average anti-dilution.