Startup Voice: raising capital

Showing posts with label raising capital. Show all posts

Monday, September 9, 2013

Preparing for a Silicon Valley Fundraising Trip

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

If you are traveling to the Silicon Valley to raise capital for your startup from abroad, you can save yourself a lot of time and make the trip more efficient by preparing thoroughly and doing your homework before the trip. Here are some things that should not be overlooked:

Research. Before your trip, sign up for startup networks, groups and mailing lists, to receive announcements about upcoming events. (This is covered in more detail in the full version of my presentation.) You should know which venture capital firms and super-angels are investing in your space. You should research and consider which strategic investors you should target, if any. Based on your research, prepare a list of 10 to 20 people that you’d like to meet while you are here. This list is aspirational, so if you do not get the opportunity to meet all of them, you have not failed.

LinkedIn. Create a LinkedIn profile, if you don’t already have one. If you have one, check to see if it's time to review and update it. This is your business resume. Most professionals rely on it!

Don’t be lazy – take the time to write-up prior projects and experience, your education, and anything else relevant to what you are doing and to who you are now. This is your chance to tell people what you want them to know about you!

Note that LinkedIn is also a great place to do your own “diligence” about the people you’ll meet while networking, through introductions, or otherwise.

Video Presentation. If you have the resources, create a short video teaser and post it on YouTube or Vimeo for easy sharing with new contacts. A few excellent examples are below. Notice how effective it is if the teaser can demo your product or service. A picture is worth a thousand words. And a video is worth at least a thousand pictures, charts and graphs.

Videos work well to get you a foot in the door (not seal the deal for you). Before an investor takes the time to read your executive summary, in fact, before he even makes the decision about whether it's worth his time to do so, it is helpful if you can get him excited (or at least curious) about your product or service. The way to do it is by offering information in an easy and fun format - video - that appeals to the viewer's emotions, not just his intellect.

Executive Summary / Presentation. VCs don't read business plans. They just don't have enough hours in the day to screen companies based on their business plans, and, frankly, with business at an early stage, a business plan reads more like astrological predictions than fact.

Still, if you are talking to an investor at a networking event, or have been introduced to an investor by email, he will want to see something in writing about your company. You will be expected to send an executive summary (a one-pager that introduces the investor to your company and piques his interest) or, more frequently these days, an investor slide deck (8-10 PowerPoint slides that serve the same purpose but are easier on the eyes).

Instead of trying to work with your team back home when you are already here, faced with a time difference and time pressure, prepare this before you come. You may have to adjust it based on the feedback you receive from investors, but if you have a solid draft, it will make your life easier.

A really well-made executive summary or deck can set apart your startup from the rest and give you a fighting chance at a more involved look from the investor.

You can work with designers and advisors to help solidify your message in your materials. But do not hire someone to write them for you. You have to own your materials, and by that I don't mean the legal sense of ownership, but in the sense that you stand behind each word in that document and, if prompted, can expand in verbal or written format on any of the points made in it!

U.S. Phone Number. With your Google account, you can get a free Google Voice number and set up call-forwarding from that number to your temporary U.S. number.

Google Voice also offers voicemail functionality. Make it easy on your callers - record a greeting with your name and the name of your company, so that they know they reached the right number.

Business Cards. Your business card should be in English and should contain (1) your company name (and if you have not registered the company, the name that you think you will use), (2) your name and title, (3) your corporate domain email address, (4) the address of your physical office (if any), and (5) your U.S. phone number.

Note that you don’t have to spell your name on the card the way it is spelled in your passport. Feel free to spell it in a way that will make it easy for English speakers to read. This will save you time and annoyance, unless, of course, you like correcting people and having off-topic conversations about foreign names, the English language, pronunciation, etc.

Credit Cards. The most common and convenient payment method for most things that you’ll need to buy on your trip will be a credit card. Every online purchase will require it and some merchants (like car rental places) will take your credit card number as a security deposit, even if you pay cash.

When getting ready for your trip, make sure there is money in the account tied to the card that you are taking with you. To really play it safe, take several credit cards tied to accounts at different banks. It is best to call ahead, and let your bank know that you will be in the United States. Sometimes banks will suspect identity theft and block your card, if there is unexpected activity on your card in a foreign jurisdiction. Nothing quite makes travel so uncomfortable, as having your credit cards lock up, when you are relying on them as a primary payment method!

Driver's License. While you are visiting California, you are permitted to drive with your valid foreign license. Make sure to take it with you, as you are packing for your trip, and that it does not expire during your trip (rendering it no longer valid).

Happy company making!

Inna

Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

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Wednesday, September 4, 2013

10 Basic Principles of Effective Networking

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

Networking events are a lot of work. But if you are building up your network, networking at startup events can be a great way to get exposure to a lot of people fast.

Because networking is hard work, if you are going to do it, you might as well make the most of it. My suggestions are based solely on my own personal experience and reflect either what has worked for me or my observations of the behavior of others. There may be other effective networking tactics, so if you are feeling anxious about this, read a few more articles (or books) for a deeper dive.

1. Set the Right Goals. Make sure you set the right goals and expectations for yourself when you go out to network. Chances are that you will not meet and win over an investor at a networking event (unless the event is a pitch competition than you win, and frequently not even then).

What you should really be hoping to do is to ingratiate yourself with three to five well-connected individuals, who will make introductions for you to people in their network. Note that the people that you get introduced to may not be your investors either.

The goal of networking is to grow your network because you never know where your investors, customers, or even future employees may come from. Approach networking with an open mind, and good things will come!

2. Dress to Impress. When you go to events, you want to be memorable, stand out in the crowd. That way, when someone you spoke to for a few minutes wants to introduce you to someone else at the event, he can find you again in the crowd. As with anything, you have to be careful not to overdo this, because if you are too outlandish in your wardrobe, you might be memorable, but it won’t score you any points. The trick is to stand out in a positive way.

At the very least, if you have a T-shirt with your company’s logo, wear that. It may not be very original, but it will be a good conversation starter, and people with a visual memory are more likely to remember the name of your company if it’s written across your chest.

3. Don’t Forget Your Business Cards. Business cards are cheap, so stock up and bring enough. Sure, if you run out, you can add the person you are speaking with on LinkedIn during the conversation or take his card and write your name on the back of it. But coming unprepared does not characterize you well, and if there is at least a small chance someone will keep your pretty business card around and will remember about you some time in the future when it could be advantageous to you, you can be sure they'll toss your info scribbled on the back of their card. LinkedIn is pretty good, but unless you have a stellar memory for names, it can be hard to find the contact that you need among your 500+ contact list. So, personally, I prefer cards.

But don't mistake the exercise of handing out cards for networking. If you hand out your cards like they are on fire, but don't cement it with at least 3-5 minutes of solid conversation with the folks you gave the card to, you may as well have thrown them in the trash.

4. Forget Your Comfort Zone. Networking is not comfortable. It would be easy if relevant contacts would line up to meet with us in an orderly fashion when we show up at an event. In fact, that’s not what happens at all. You are lucky if you are approached by another networker looking to strike up conversation. More frequently, you find yourself in a room surrounded by small groups deeply immersed in their own private conversations. Those small groups look intimidating.

But if you stay within your comfort zone and hover in the corner, waiting to be approached, which might be your natural inclination, you will be wasting precious time. So try to make eye-contact with someone in a group, to see if they’ll welcome you to join them, or just shamelessly insert yourself into a group and when there is a pause in conversation, extend your hand and introduce yourself. At a networking event, no one will think worse of you for doing so. Sometimes, the topic of discussion will be so narrow that after a few uncomfortable minutes you will decide to leave to look for another place to park, but the more polite networkers will attempt to integrate the newcomer into their conversation.

5. Stay Positive. If you want to leave a positive impression, you have to radiate positive energy. If you complain about your suppliers and customers, or put down your partners, employees or investors, it leaves a bad taste with the person you are speaking to. So focus on the positives. Be that person that everyone will enjoy talking to!

6. Keep Conversation Light. If you want to make more than a single connection at an event, you will need to move fairly quickly from one conversation to the next. Keep in mind that no matter how passionately you feel about public policy or politics, a tech networking event is not the place to get entangled in a heated debate, whether about the conflict in the Middle East, the shortcomings of the Obama administration, a woman's right to abortion, the right to bear arms, or U.S. world domination. In general stay away from religion and politics, unless it is to say that you are hoping that the Startup Visa initiative passes, which is a pretty safe bet. Finally, remember to smile! There is nothing as disarming as a genuine smile, so it is going to be your best networking weapon!

7. Listen First. When you engage in a one-on-one conversation with someone at a networking event, even if you are burning to proselytize anyone who will listen to the cause of your amazing company, recognize that everyone there has a story.

If you practice active listening – paying close attention to what the other person is saying, reading their body language, asking follow up questions, sharing information that they may consider valuable, and looking for ways you could help – you will find people more interested in your story, and willing to help, whether with advice, introductions, or empathy.

8. Don’t Be a Salesman. Think about how you feel when you are approached by a salesman. What’s your first reaction? I know mine is, “No, thank you!” The last thing you want to do at a networking event is to be perceived as a salesman. Instead, you want to be seen initially as someone who is easy and interesting to talk to and eventually, as a good long-term contact.

9. Follow Up. You have to follow up, if you don’t want all that networking to have been in vain.

If you promised to send your executive summary, do so within a few hours of the meeting, if you can, and within 24 hours at most. If the person you talked to promised to send you something, follow up with them after the meeting and remind them. They have busy lives, so take the initiative!

When you are networking, you are building up your social capital, so don’t just be dependable when it can stand to benefit you. If you promised a networking contact to send the name of an app that slipped your mind during the conversation or to make an intro to a good web designer, do it.

The greatest value of networking is in the long-term connections that you form. For this reason, strong follow up is essential. Invite contacts that you make at a networking event that you would like to make a more permanent part of your network to meet with you for coffee sometime that week. Almost no one will turn down a coffee offer, unless (a) it’s a VC, or (b) you are perceived as a salesman.

10. Have Patience! Have patience with the process and try to enjoy it! Networking does not produce immediate rewards, but it does pay off in the long-run!

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Monday, September 2, 2013

The Right Time to Fundraise in the Silicon Valley

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

The Silicon Valley is a fantastic place to visit almost any time of year. We have great weather here year-round, many tourist attractions within a stone’s throw of one another, and fantastic sights for the nature enthusiast.

But if your goal is to travel to the Silicon Valley with the goal of raising venture capital for your foreign-based startup, to avoid disappointment, set the right expectations, and make the most out of your trip, consider whether your startup is primed and ready for this step.

Ripe for US Fundraising. The best time for a foreign startup to come to the Silicon Valley to raise venture capital is when it can make the following statements truthfully:

We raised a small seed round of capital with a local venture capital firm and angels
We have publicly launched our product in our country
Our product has gained significant traction in our domestic market
We are ready to launch our product on the US market
We are opening an office in the US that will be handling US operations and marketing
Our management team has already relocated to the US (or is relocating to the US within 3-6 months)
Our CEO reads, writes and speaks fluent English and is able to present our company to US investors, strategic partners, and clients in a clear, competent and confident manner.

Almost There. If a startup meets some (maybe 4-5) but not all of the criteria above, it does not mean that the founders should not come to the Silicon Valley to fundraise. But it does increase the likelihood that this is going to be the first of several trips. A startup at that stage may still be able to successfully raise capital from Silicon Valley VCs, but it may easily take 6 to 12 months or longer and multiple trips to get to a term sheet.

Raising money in the Silicon Valley is difficult, even for companies that fit all of the criteria above. So a company that does not, has a greater hurdle to overcome. Still, I believe the preliminary trip, if approached correctly, with due preparation, forethought, and the right expectations, can be instrumental in laying the groundwork for a future financing by giving the founder an opportunity to establish contacts, by growing the founder’s professional network in the Silicon Valley, and by clarifying areas of improvement in the startup’s fundraising position.

More Work to Do at Home. A startup that either has not launched a product, or has launched a product but it has not seen significant adoption domestically, and that has not received support from its local investors, has more work to do at home before venturing out to fundraise internationally. That is not to say that such startups should not attend international conferences or take business development trips, whether to the Silicon Valley or elsewhere. I just think it will be more productive to realize that it may be too early to be fundraising abroad in earnest, so the trip, if taken, should have other purposes and expectations attached to it in the founders’ minds.

The Chief Executive Officer. To state the obvious, the right CEO makes the difference between a startup that gets venture capital funding and one that does not. As we said above, to be successful at raising capital in the United States, the foreign CEO has to have fluent written and conversational English, though he or she may speak with an accent and many do. The CEO must also have the personal and business skills that make him or her a good person to represent the startup in investor meetings.

But what if the CEO does not have good English? Unfortunately, neither engaging translators to assist in pitch meetings, nor hiring U.S. promoters or U.S. investor relations specialists to help with fundraising, actually works.

Ultimately, the investors have to believe that the core team has what it takes to succeed, and if the investors have a language barrier with the CEO, they will simply not have sufficient basis to form that belief. The solution is one that is true for all companies, local or foreign – if the CEO is not the man (or woman) for the job, find a CEO who is!

In startups, one of the founders is the CEO by necessity. Sometimes it is the right fit. And at other times it is not. Sometimes it is the right fit for the country, where the startup is based, but not for the U.S. Any company that hopes to be successful must recognize wherein lie its team’s weaknesses and fill them with new hires. If the current CEO will not be able to fundraise successfully in the U.S., the startup should entertain the idea of recruiting a U.S.-based CEO or another CEO in their country with solid “western” experience. In that situation, the current CEO can take another title, whether it is President, Chief Technology Officer, Chief Financial Officer, or whatever else best fits his or her strengths. Unfortunately, relinquishing the helm can be a major pain point for founders. I am sure some of my readers are wincing as they read this advice.

The Bottom Line. If the founders of a startup believe they absolutely must raise capital in the United States, and if, after honestly assessing the strengths and weaknesses of the current team, they realize that they do not have the right candidate among them for the job, then they have to reconcile themselves to the difficult reality that such candidate must be found elsewhere. The same, incidentally, goes for filling any other holes that stand in the way of a startup’s success in raising capital in the United States – these holes must be (a) identified, (b) evaluated, and (c) resolved, preferably prior to the founders investing very heavily into their U.S. fundraising efforts.

However, it may also be the case that, despite some initial flirtation with the idea of coming to the United States to raise capital, the founders will ultimately decide that their chances of raising funds domestically, or in Europe, or in Asia will be better than in the United States and will come at a lower cost (emotional, financial, temporal).

There may be a lot of investment capital aggregated in the Silicon Valley, but there are oh so many contenders from all over the world all vying for it!

Disclaimer. Regardless of how well-positioned your startup may be to raise capital, be prepared for the process, almost invariably, to be more frustrating, more disruptive to your business processes, and to take longer, than you expect. There is no guarantee that the process, even when it is well-executed, will result in raising VC capital in the Silicon Valley.

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Monday, August 5, 2013

Who Prepares a Financing Term Sheet - the Startup or the Investor?

Frequently, a startup that is starting the fundraising process feels that it should prepare a term sheet to take to prospective investors. Whether this is necessary and serves it well depends on two key factors (a) the type of investor that it is targeting, and (b) the stage/type of financing.

Type of Investor: Angels vs. VCs

Generally speaking, if a company is targeting angel investors, and especially if the idea is to get a group of angel investors to participate on substantially the same terms, it is fairly typical to approach these investors with a company-prepared term sheet.

Note, however, that in a bridge (convertible note) financing, and if the amount requested from each angel investor is small, it may be prudent to skip the term sheet step altogether, and to present investors with a draft convertible promissory note instead of a term sheet. This can save time and costs. In an equity financing, the simplest of which are still more complex than an average bridge financing, a term sheet may be unavoidable.

Approaching venture capital firms with a term sheet, unless it's for a follow-on financing on terms from the previous round, is unlikely to be beneficial. In fact, if anything, it might hurt the startup: the venture capital firm that will lead the round will prepare its own term sheet, but if the startups presented its own term sheet with concessions (investor-favorable terms), those investor favorable terms are very likely to be incorporated into the term sheet ultimately presented by the venture capital firm, even though it may not be a standard term for that stage of financing for the fund.

Stage of Financing: First Financing vs. Successive Financing

In the context of a rolling bridge financing, once the first investor has invested, the terms of that investment can be used as a benchmark with other investors that the startup targets. If there is a shift in leverage, making it easier to the startup to raise money (as it gains traction, for instance), the terms might stay substantially, but not exactly the same, with the valuation cap increasing or falling away entirely, as an example.

The first time that a company raises funding through the sale of equity (stock financing), negotiating the right terms is of utmost importance. The bulk of the terms will stay the same, or get worse, through successive rounds. The only term that will, hopefully, improve is valuation. But the control terms will, at best, stay the same, and very commonly will get more complicated and cumbersome as more investors are involved.

When a startup is doing well, and has supportive existing venture capital investors, who are going to invest in the new round, it is quite typical for the startup to mark-up the term sheet from the last round of financing and to use that as the starting point for negotiations with the new investor. The support of the existing investor cannot be understated in this situation. When Accel, Kleiner Perkins, Sequoia or Andreessen Horowitz (it certainly helps to have a first tier VC as an investor) tell the new investor that they like the terms from the prior round and expect them to stay substantially the same in this round, that's what happens.

Where Does a Startup Get a Term Sheet?

Of course, your attorney will be happy to provide you with a term sheet, drafted for your specific needs. No amount of reading insightful blog posts, such as this one, will fully replace consulting with a knowledgeable startup attorney. But if you are not going to be using your attorney for this, or if you would just like to educate yourself about term sheets before talking to an attorney or to investors, here are some resources:

The Series Seed term sheet is a good template for a very simple first equity financing. If your investors agree to it, you can save yourself time and money by using the other Series Seed forms as well, which are much simpler than, for instance, the NVCA form documents and better tailored to a financing involving angel investors and a small amount of capital.

Wilson Sonsini has done a good deed and created online term sheet generators for convertible note financings and equity financings. In order to generate a term sheet using one of these generators, you have to answer a number of questions, some of which may be difficult if you are not at ease with the vocabulary and the nuances of financings. However, at the very least, it's a good way to see what questions you should be asking yourself and your investors about the terms of your transaction.

Not to be outdone by Wilson Sonsini, Orrick also has put out its term sheet creators for convertible note financings and preferred stock financings. If you try both Orrick's and Wilson Sonsini's, let me know in comments which one you like better and why.

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Tuesday, July 23, 2013

Effect on Startups of SEC Changes Eliminating the Prohibition on General Solicitation in Certain Offerings

[A Russian-language version of this article may be found on Firrma.ru]

In April 2012, Congress passed the much-awaited Jumpstart Our Business Startups Act (JOBS Act), which directed the SEC to draft regulations removing the prohibition on general solicitation and general advertising for securities offerings relying on Rule 506, provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.

On July 10, 2013, more than a year later, the SEC has finally issued the final rules that will implement the JOBS Act legislation.

Securities Laws Overview. Under the current U.S. federal securities laws, companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Rule 506 of Regulation D is the most widely-used exemption from registration. In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of "accredited investors" and up to 35 non-accredited investors.

"Accredited investors," as defined in Rule 501 of Regulation D, are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels. A person qualifies as an "accredited investor" if he or she has either (a) an individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or (b) an individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Changes to Rule 506 Generally. The final rules approved by the SEC make changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that (a) the issuer takes reasonable steps to verify that the investors are "accredited investors"; and (b) all purchasers of the securities qualify as "accredited investors" or the issuer reasonably believes that the investors so qualify at the time of the sale of the securities. In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities, if general solicitation or general advertising is used as a means of capital raising. Nevertheless, issuers conducting Rule 506 offerings without the use of general solicitation or general advertising may continue to conduct securities offerings in the same manner as they did previously and aren't subject to the new verification rule.

Changes to Form D Filing. Prior to new regulations going into effect, an issuer selling securities using Rule 506 was required to file a Form D no later than 15 calendar days after the first sale of securities in an offering. Under the new rules, issuers that intend to engage in general solicitation as part of a Rule 506 offering would be required to file the Form D (a) at least 15 calendar days before engaging in general solicitation for the offering and (b) within 30 days after completing an offering to update the information contained in the Form D and indicate that the offering has ended.

The scope of Form D is also being expanded to include such additional information as:

identification of the issuer's website;

expanded information on the issuer;

the offered securities;

the types of investors in the offering;

the use of proceeds from the offering;

information on the types of general solicitation used; and

the methods used to verify the accredited investor status of investors.

Solicitation Materials. Under the new rules, as part of SEC's monitoring process, issuers will be required to submit written general solicitation materials used in the offering on the SEC website. Materials submitted in this manner would not be available to the general public.

Verification of Accredited Investor Status. The final rules provide a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors. For instance, an issuer may review copies of any IRS form that reports the income of the purchaser and obtain a written representation that the purchaser will likely continue to earn the necessary income in the current year. Alternatively, an issuer may receive a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.

Disqualification for Bad Acts. A restriction in the new rules states that an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event." Persons covered by the rule include directors and certain officers, 20% beneficial owners, promoters, and persons compensated for soliciting investors. A "disqualifying event" may be a criminal conviction in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries within 10 years of the proposed sale of securities, or other types of misconduct relating to the securities and trading markets. However, an exception from disqualification exists when the issuer can show it did not know and, in the exercise of reasonable care, could not have known, that a covered person with a disqualifying event participated in the offering.

Disqualification for Failure to Make Timely Filings. An issuer is disqualified from using the Rule 506 exemption in any new offering if the issuer or its affiliates did not comply with the Form D filing requirements in a Rule 506 offering. The disqualification would continue for one year beginning after the required Form D filings are made.

Impact of Changes on Startups. The JOBS Act sought to make it easier for a company to find investors and thereby raise capital. Have the regulations that have been adopted by the SEC faithfully followed legislative intent, improving the capital raising experience for companies? Only time will provide us with a definitive answer, but in the meantime, here are some factors that will weigh on the success of the legislation as a game-changer in the industry:

Demand by Investors: whether there in fact exists a large pool of "accredited investors" who would invest (more frequently and in greater amounts than they are currently) given better access to a pipeline of private offerings;

Longevity: whether, even if there is an initial spike in investments by new accredited investors, the novelty and excitement will not wear off, especially as initial investor optimism faces the harsh realities of investing in early-stage emerging technology companies;

Non-Accredited Investors: whether the "either/or" nature of the new rules, preventing companies from engaging in general solicitation along-side other fundraising activities, potentially to non-accredited investors, will cause companies not to take full advantage of the new rules;

Compliance Hardships: whether the requirements for additional filings (e.g., expanded Form D, solicitation materials), state securities laws, as well as the burden placed on the companies to reasonably ascertain the status of their investors as "accredited investors," coupled with disqualification from use of the exemption for failure to timely file, will hamper widespread use of general solicitation as a means of raising capital;

Publicity: whether the public disclosures which would be made in the solicitation materials and the associated loss of stealth-mode advantage will have a chilling effect on early-stage companies;

Involvement by Sophisticated Investors: whether sophisticated investors, such as VCs and super-angels, will engage in, or be deterred from, participating as investors in offerings through open solicitation;

Later Stage Follow On Rounds: whether successful later-stage startups will consider this an appealing alternative to additional rounds of venture capital or institutional investment;

New Investments Instruments and Goals: whether access to different types of investors than typical market players will allow previously "unfundable" companies to raise capital - e.g. LLCs, companies with solid revenues, but no exit opportunity, etc.;

Higher Valuations: whether increased competition for companies that stand-out in the open fundraising process will drive valuations, such that this will be the preferred means of raising capital even for companies that have access to venture capital money; and

Crowdfunding: whether the successes of crowd-funding platforms like Kickstarter and Indiegogo will be repeated on a larger scale with equity investment in the mix.

The rule amendments become effective on September 23, 2013 (60 days after publication in the Federal Register).

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Sunday, January 20, 2013

Roadmap to Finding Venture Capital Investors

Many of our clients begin working with us when they are raising capital. Often they have raised some initial capital from angel investors in their country and are now looking to raise their next round from institutional investors in the United States.

And while some of the companies we work with are founded by very savvy business people, who could teach all of us a few things about raising capital, others are started by brilliant engineers with ground-breaking technology, but who don’t know how to approach the search for investment capital, in a new country in some cases. If you think you might be in that second category, here’s a roadmap that we’ve seen work well.

Build First. You should build as much as you can, and go as far as you can go with your company, using bootstrap funds or angel investment before you try to raise venture capital.

Likelihood of Success. If you have a product and some initial traction, you will have a far better story to tell the investors than if you just have a great idea or you are several months into developing a prototype. As you may have heard, there are many great ideas, some of them very similar even, and what makes a difference is execution. The better that you are able to demonstrate the ability of your team to execute, the more likely it is that you will get venture funding. Also, if you have skin in the game (bootstrap funds) and have attracted angel funding (friend and family), there is a greater chance that the investors will take you seriously than someone who can’t even convince those close to him to invest and who isn’t willing to risk any of his own money.
Valuation. The earlier that an entrepreneur brings in outside investment, the lower a valuation he can expect to receive, and therefore, the higher a percentage of his company he will have to give up for the same investment amount. Certainly a founder shouldn’t get obsessive about his ownership stake in the company in a way that will impede his ability to attract a strong team or investors. And certainly it is better to have a smaller percent of a larger (more valuable) pie than a greater percentage of a smaller pie. But if the founder has the resources to get more done prior to going out for capital, it is the smart thing to do in term of maximizing both control and ownership.

Get Organized. In preparation for raising capital, you should get your corporate house in order.

Why? Being organized will show the investors that you are serious about your venture and you understand the rules of engagement. It will avoid conflicts about ownership of intellectual property and equity, which can destroy a young company and the prospects of getting funding. Finally, it will streamline the investment process and the investors’ due diligence review when you do find those willing investors, because you won’t have to do last minute corporate clean-up, scrambling to organize at the last minute.
What to Do. If you haven’t already done so, you should (1) incorporate your company, (2) distribute equity interests in accordance with promises you made to your existing team and early investors, and (3) make sure that all intellectual property belongs to the company (and not individually to members of the team). An attorney experienced in working with startups will be able to walk you through everything that you need.

Research & Presentation Materials. To secure VC meetings and to succeed in them you have to be prepared. If a VC knows more about your space than you do, he will never invest. So make sure you do the research.

What should I research? For sure, know the size of your market. Know who the players are, both as far as your competition goes and your potential strategic partners. Know what market share your competitors hold, exits your competitors have had, what funding they have raised, and at what valuations. Know your monetization model (even if you pivot later as many companies do). And finally, know the investors in your space, their strengths, their specializations, their reputation, and the stage at which they like to invest. When you meet with investors, they will invariably ask why you are interested in getting funded by their fund, and you had better have a good, very specific answer!
Materials. Once your research is done, prepare an executive summary, a slide deck to take into meetings, and if you have the resources, a short video that demos your product. The video is to send together with your executive summary to investors. In this day and age of information overload, it will be hard to get an investor to read any materials you send with any amount of attention. Videos have a way of engaging the viewer and elicit an emotional response. Once thus engaged, there is a good chance that your executive summary will get a more thorough review.

Introductions. To get meetings with VCs, try to obtain warm introductions to the investors who invest in your space and in companies at your stage from your network. If your network doesn’t have the right contacts, don’t be shy and grow your network. Go to industry events. Read articles by industry savants and try to engage with them by commenting on their posts or sending them emails. Perhaps you will even be able to bring a few of them on as advisors. Talk to your lawyers, your accountants, your bankers. Utilize tools available to you, like alumni network groups, LinkedIn, or Facebook. Sometimes cold emails to a fund work, but that is the exception rather than the rule. Note that the best-regarded and most effective intros are from entrepreneurs that the VC has already funded. VCs are very busy people with a lot of noise being directed their way. So do what you can to make sure your executive summary gets placed at the top of the pile to the folks that you want to see it.

Relationship. Once you have had an initial meeting with a VC, don’t expect him to send you a term sheet. Remember that investors are in it for the long-haul. Would you expect a woman to decide to marry you after your first date? Before an investor commits millions of dollars to your venture and before he commits to supporting your company over the next 6, 8, or 10 years, he will want to get to know you as a person. You should want this as well! So treat each meeting as adding valuable connections to your network, connections that you should be willing to work to maintain. Don’t just ask for money. Ask for advice. Even if a VC does not invest in your company in your initial financing round, maintaining a relationship can pay dividends down the road when he invests in the second round or makes a valuable introduction because you’ve been keeping him updated on your progress.

A final note, to keep in mind that only a very, very small number of companies, generally believed to be between 0.1% and 0.2% of the companies that look for VC funding, actually secure an investment. So do the best you can, but have a contingency plan in case it does not pan out. Remember, that many highly successful companies were considered “unfundable” by the venture capital community!

Happy company making!

Inna

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Saturday, March 3, 2012

Cap Tables for Startups

Capitalization tables (referred to in the industry as “cap tables”) are not difficult to grasp. But first-time entrepreneurs are often caught off-guard when they are asked to produce a cap table by a prospective investor (or his lawyer) doing diligence on the company.

In this post, we’ll talk about cap tables, their purpose, and what should be included in a cap table both for internal and external viewing.

1. Purpose of a Cap Table.

A cap table is, first and foremost, an essential internal document of any corporation. It sets out ownership of the corporation, in terms of the numbers of shares (by class and series) and in terms of percentages that those shares translate into. Ownership percentages matter (1) any time a vote of the equity holders is required, (2) for calculation of dividends, and (3) in the event of a sale or liquidation of the company, where they are used to calculate distribution of proceeds.

In addition, a cap table is one of the first documents that a company will be asked to produce in diligence. Prospective investors will request a cap table because they need to understand what the shares they purchase represent in terms of percent ownership of the company. This goes back to voting control and to upside in a sale of the company. Investors (or their analysts) will run waterfall analyses using different potential valuations of the company on a sale to make sure the investment has a realistic chance of being a lucrative one. (Click here for more information about waterfall analysis.) The cap table with waterfall analysis (or with numbers based on future financing rounds) is usually referred to as a pro forma cap table.

2. Structure of a Cap Table.

A cap table is most frequently maintained in Excel, and is structured in several tabs. The first tab is a Cap Summary and looks something like this:

When speaking to prospective investors prior to a signed term sheet, a cap table request can be legitimately satisfied with a PDF of this tab alone. As you can see, the cap summary provides enough detail to enable investors to create pro formas and run waterfall analyses, without giving away potentially confidential or at the very least sensitive ownership information.

The full cap table kept by the company would have additional tabs for each of the issued classes and series of stock (e.g., Common Stock, Series A Preferred Stock, Series B Preferred Stock), a tab for the stock plan, and a tab for outstanding promissory notes with interest calculations, if any. Such tabs would break-down the ownership of the shares by stockholder, include vesting provisions for stock subject to vesting, and list stock certificate numbers and dates of issuance.

Most importantly, these tabs would have percent ownership calculations on a by-class, by-series and on a fully-diluted basis. This becomes especially important when a particular decision of the company requires the consent of the shares comprising at least 50% of the Common Stock, 55% of the Series A Preferred and Series B Preferred voting together as a class, 66 2/3% of the Series A Preferred, and 50% of the Series B Preferred. Having stock ownership laid out in a well-organized, easy-to-understand manner, allows an easy identification of the minimum necessary stockholders necessary to secure the required vote.

Happy company-making to all!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

Saturday, March 26, 2011

Women Entrepreneur Panel

Last week, I was very fortunate to attend a wonderful event graciously organized by the MIT Club of Northern California. As a Cal (UC Berkeley) alumnae through and through (undergraduate and law school), I was nonetheless able to attend, which I appreciated very much. [Is it just me, or does Cal not have a very strong alumni association here? Perhaps it's the home turf problem--we don't feel a need to coalesce because there are so many of us here in Northern California...]

Participating in the panel discussion were Amy Pressman (co-founder of Medallia), Carol Realini (founder of Obopay), and Wendy Lung (of IBM Venture Capital). Moderating the discussion was Sramana Mitra (founder of One Million by One Million).

As usual, I cannot hope to cover everything that was discussed in this very interesting and informative session, so I will try to touch on some of the topics/points, that really stood out to me.

Bootstrapping

No one funds concepts anymore. There are no more VC term sheets based solely on a PowerPoint (or a white-board) presentation to be had. That means, a business has to make its bootstrapping dollars stretch to cover product development and even initial customer acquisition.
Bootstrapping is healthy for the business. White we can bemoan the point above ad infinitum, the fact of the matter is that bootstrapping can force a young enterprise to stay narrowly focused on quality and on those things that add value. VC money can be a moral hazard! So easy to spend without any personal accountability. But when the money in play is that of the entrepreneur, his close friends and family, the purse strings stay tight, growth occurs when it is supported by infrastructure, and risks are minimized (as much as they can be in a startup).
Contained growth. In fact, being forced to grow at a slower rate (one supported by the revenues) allows a fledgling company to "catch up" to its growth, building the infrastructure and maintaining the culture.
Simple is better. An entrepreneur's life is hard enough, so whenever possible, the advice of the panelists was, simplify. If your business model can support bootstrapping, it is much simpler to operate without outside capital. The entrepreneur continues to control the board. The consensus required to get big things done is that of a smaller group. The pressures are different--a bootstrapping entrepreneur does not have to have an exit in 8 years.

Early Customer Acquisition

Since, as we said before, it is generally no longer possible to get funded based on a PowerPoint presentation alone, a company needs not just to develop a product, but to prove that there are customers willing to pay for it. The unavailability of funding early on places added significance on early customer acquisition. So what are some effective ways to get early customers?

Alumni networks. Once you identify your ideal customers or the "lead users" for your industry (see a case study out of MIT for a discussion on lead users), look for relevant contacts in your alumni (or other) network.
Customer input. It is essential to engage customers (or prospective customers) early, to take their input. (This is straight out of Steve Blank's The Four Steps to the Epiphany.)
Listening. When you are an evangelist for your new product, there will be plenty of people who have something to say about it. Not all of it will be feedback that is pleasant to the ear; not all of it will be encouraging; and, importantly, not all of it will be constructive. You have to listen to all of it. And you have to filter, based on who the feedback is coming from, their experience, expertise, and credibility. Naturally, feedback from domain experts and customers is more valuable than feedback from your hair stylist. An entrepreneur must develop thick skin and be ready for rejection--entrepreneurship is not a popularity contest.
Utilizing Channel Partners. Building channels is expensive. If you can build channel partnerships (like with IBM), your company valuation goes up. But beware--large channel partners can slow you down as well, as they don't operate in startup mode. It is very important to find stage-appropriate channel partners, starting with younger, more flexible companies to partner with.

Raising Capital

How much? When going out for investment capital, determine how much capital you need, then add a little on top because you are probably a little optimistic.
It's a process. Getting funding is always painful, whether you are a first-time entrepreneur or a seasoned one. The difference is that you can become more efficient about it.
Think outside the box. Sometimes the economy is such, or you are in the kind of market, that tradition VC capital funding is impossible. The trick is, not to get single-threaded about the funding process. Think of alternate funding methods and alternate investors. This can come in the form of institutional investors or channel partners. Stay persistent and creative.

Networking

It is a well-known fact that when it comes to building a business, it's not what you know, it's who you know. In today's world of information excess, the only way to get noticed is via introductions, and the only way to get relevant introductions, is to have a broad, active, and "well-networked" (for lack of a better term) network. How does one go about building a network?

Follow up. Sometimes you think that an introduction to a particular person is going to be determinative, and then nothing comes of it. And at other times, you may get business or referrals or something else extremely valuable to you from someone you had not expected. So, as a rule, follow up with everyone. You never know who your most valuable connections may turn out to be.
Meaningful Connection. It is not enough to swap business cards. We all know where those usually end up. You need to share about yourself--about your passion, your business, maybe something personal, that will stay with the person you are talking to. And, of course, you need to find out about them. Not in a way that's intrusive or obnoxious. Different people will have different comfort levels with sharing. But to the extent that they are willing to share, you should get them to talk and see if there is anything of value that you can offer.
Know what you want. When you are utilizing your network, don't just ask for an introduction. Have specific questions. It's more genuine. And it will yield better results.
No free lunch. This is kind of obvious, but no less important, all the same. You have to give something to get something. When you are networking, don't expect people to just give you business or referrals. Be proactive about offering something to them first (as a gesture of good will), whether access to your network or to information in your possession. Sometimes it's the thought (or the willingness to give) that counts more than what you've actually given.

Overall, this was a very frank and insightful discussion, with some amazing, smart, and very successful female entrepreneurs. I would like to thank the organizers for putting this together and the panelists and moderator for participating.

Inna Efimchik

Emergence Law Group, specializing in assisting emerging technology companies in Silicon Valley and beyond, provides incorporation, financing, and licensing services as well as general corporate counseling.