President NW TN Angel Fund, LLC Stand up if you know where you want - PowerPoint PPT Presentation

Frank Holbrook President – NW TN Angel Fund, LLC

Stand up if you know where you want that business to be in 5 years

Stand up if you know where you want that business to be in 10 years

Stand up if you know where you want that business to be in 15 years

Remain standing if you presently have the money – or a sure source of money - to make your business idea happen

George Harrison https://www.youtube.com/watch?v=BldrJGDhIME

October 6 October 13 October 20 October 27 November 3 November 10 William Donnell Chuck Doss Frank Holbrook Dale Lamar Jim Cochran Panel Discussion David Hart Richard Magid Mike Craft David Reed Leader/preneurship Business Formation and Valuation Intellectual Property Due Diligence Making Your Pitch The Power of Strategy

October 20 Frank Holbrook David Hart David Reed Business Formation and Valuation

The goal for tonight is to help equip you with enough background so you can begin to answer an absolutely essential question:

HOW DO YOU STRUCTURE A BUSINESS TO OBTAIN ENOUGH FUNDING TO GET YOU THERE?

To work for your self and have a successful business You must be able to tell and sell your story

That’s another way of saying – perfect your pitch

A simple working definition – Telling your story followed by a monetary ask.

Investor Pitch Template

A lot of considerations No silver bullet in this session

• C corporation • LLP • S corporation • LLLP • LLC • PC • LP • PLLC • GP • Business Trust

2 main considerations to focus on tonight

Scalable Lifestyle

DEBT EQUITY

Scalable Lifestyle  More focused on debt funding –  Pitch is more focused on equity borrowing from bank or other lender. funding  Family and Friends  The lender may also be family or friends  Angels  Venture Capital  Not giving up control by loaning  Public Offering money – not entirely true – covenants and security  Giving up some level of control – usually in a staged fashion

Scalable Lifestyle  Will be solely responsible for  Still responsible for tactical decisions management and management  Will use equity to obtain assistance decisions both at the with strategic decisions  Tactical level (Day to day)  Strategic level (Vision)

Is the investor betting on the jockey or the horse? Do you have the complete skill set to take the business from concept to final execution?

Scalable Lifestyle  Will pay for professional services in  Will pay for professional services in equity cash  Mentoring  Accounting  Legal  Business Expertise

The Legal Analogy – The contingent fee case

 Investors sometimes refer to it as a “Pro Forma Cap Table”  Cap Tables should quantify your ownership  Polestar: Negotiation of Pre-money valuation (PMV) is really negotiation of your ownership  Ownership percentage is a function of PMV and Aggregate Dollars Invested (ADI).  Key Formula: (ADI) ÷ (PMV + ADI) = Ownership Percentage  For venture investments, your ownership percentage = the percentage resulting from this basic formula.

High level overview to illustrate several points: Operation of Cap Table Dilution of control Importance of Premarket Valuation Importance of Option Pool

% of % of Fully Common Fully Diluted Stockholders Common Diluted Stock Shares Stock Equity Founder 1 1,000,000 50% 1,000,000 50% Founder 2 1,000,000 50% 1,000,000 50% Option Pool - 0% - 0% Total Fully Diluted 2,000,000 100% 2,000,000 100%

 Assume you’re at some stage in the business development and you’re now seeking equity funding.  How much money are you going to get for funding?  How much equity (ownership) do you have to give up to get that funding.  Next slides are examples  Keep this concept in mind as you listen to the next half of presentation by Dave Hart and David Reed. This is context for their discussion

 Initial issuance of common stock in equal shares to founders  Pre-money valuation of $3,000,000  Aggregate investment by angels of $1,000,0000 in Series Seed Preferred Stock  Post-money options + pool of 15% of capitalization  Post-money value of $4,000,000

Series Seed Preferred - Pro Forma Capitalization Table updated 10/20/2016 Series Seed % of Fully Diluted Shares % of Fully Diluted Stockholders Common Stock Preferred Common Stock Equity Financing Founder 1 1,000,000 50.00% - 1,000,000 30.00% Founder 2 1,000,000 50.00% - 1,000,000 30.00% Series Seed Preferred Investors - 0.00% 833,333 833,333 25.00% Option Pool Increase - 0.00% 500,000 15.00% Total Fully Diluted 2,000,000 100.00% 833,333 3,333,333 100.00%

Calculation of Total Number of Shares: Step 1: Founders' Pre-Money Interest 100% minus Required Ownership % of Seed Investors 25% Subtotal 75% minus Option Pool 15% Founders' Portion of Post-Money Capitalization 60% Step 2: Founder 1 Shares 1,000,000 Founder 2 Shares 1,000,000 Total Founders' Shares Pre-Money 2,000,000 divided by Founders' Portion of Post-Money Capitalization 60% Total Number of Shares on a Post-Money Basis 3,333,333 Calculation of Series Seed Investor Shares: Total Number of Shares on a Post-Money Basis 3,333,333 multiplied by Required Ownership % of Seed Investors 25% Total Number of Series Seed Shares Post-Closing 833,333 Calculation of Option Pool Shares: Total Number of Shares on a Post-Money Basis 3,333,333 multiplied by Required Option Pool % Post-Closing 15% Total Number of Shares Subject to Options in Option Pool 500,000

 Pre-money valuation of $10,000,000 (increase in valuation of $6 million from prior round)  Aggregate investment by institutional investors of $8,000,0000 in Series A Preferred Stock  Conversion of $2,000,000 of outstanding bridge debt based on the price per share of Series A Preferred  Total proceeds from investment and bridge conversion of $10,000,000  Warrants for 100,000 shares of Common Stock issued to bridge note holders issued on a pre-money basis  Post-money options + pool of 20% of capitalization  Post-money value of $20,000,000  Series A Preferred “non - participating” preferred  Senior in priority to Series Seed Preferred

Series A Preferred - Pro Forma Capitalization Table updated 10/20/2016 % of Series Seed Fully % of Fully Series A % of Fully Common Fully Diluted Stockholders Common Preferred Diluted Diluted Preferred Diluted Stock Shares Stock Financing Shares Equity Financing Equity Founder 1 1,000,000 50.00% - 1,000,000 30.00% - 1,000,000 10.23% Founder 2 1,000,000 50.00% - 1,000,000 30.00% - 1,000,000 10.23% Series Seed Preferred Investors - 0.00% 833,333 833,333 25.00% - 833,333 8.52% Series A Preferred Investors (New Cash) - 0.00% - - 0.00% 3,911,111 3,911,111 40.00% Series A Preferred Investors (Bridge Conversion) 977,778 977,778 10.00% Warrants Issued to Bridge Note Holders - 0.00% - - 0.00% 100,000 1.02% Pre-Money Option Pool / Options Granted - 0.00% - 500,000 15.00% - 500,000 5.11% Increase in Option Pool - 0.00% - - 0.00% 1,455,556 14.89% Total Fully Diluted 2,000,000 100.00% 833,333 3,333,333 100.00% 4,888,889 9,777,778 100.00%

One: Know where you’re going Is your business idea lifestyle or scalable?

Two: Know what your pitch is supposed to do – Tell the story Monetary ask What is the quid pro quo? Latin: “What for what” or “something for something”

Three: Understand that you may have to surrender some degree of control You may surrender control for capital You may surrender control to get a needed skill set Which is more important – the jockey or the horse?

The King of Nothing When I was seventeen I dreamed of being king and Having everything I wanted But that was long ago and My dreams did not unfold So I'm still the king of nothing Seals And Crofts

Four: Premarket valuation is a moving target – it changes depending where you are on the timeline of your business development

(CUE THE WILD APPALAUSE)