BUS 314 Lecture Notes - Lecture 4: Restricted Stock, Cash Flow

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10/22/2016
Reading How Smart Startups Survive Investor Due Diligence
Due Diligence check is basically a final integrity check on all aspects of the business and
the team.
Due Diligence always involves on site visits, informal discussions with any or all
members of the team, vendors and good customers as well as bad.
If thee’s a ioguees ithi the opa it’s highl likel thigs ill e
terminated
Key personnel reviews occur since investors are mainly investing in the people. They
look at their background, commitment, and experience.
Status of the solution, investors are looking for every great and everything wrong with
the company.
Review of opportunity and segmentation take place because investors are normally
looking for a double on their return. Based on any recent changes in trends, in economic
conditions and customer feedback data.
Traction in the marketplace, Sales and distribution channel activity will be analyzed, as
well as cost of customer acquisition, to make an independent assessment of your
financial projections.
1. Make sure the whole team is up to date on the plan: Make sure all business processes
are documented and integrated. If everyone has a different view of reality, you have no
reality.
2. Take time to review and resolves any personnel distractions: Be sure to let the investor
know of any possible changes or problems that have risen during the due diligence
phase.
3. Communicate what is happening and why to everyone: Make sure your team is aware
of the due diligence process occurring. Let them know the pros and cons of external
investment.
4. Visit Reference Customers, Partners, and Vendors: Make sure that everybody
associated to your company are satisfied and within great standing. If there are any
issues that a’t e esoled iediatel, e sue to let the iestos ko.
Due Diligence Presentation
- Being able to understand People, Product, Market, Deal
- Prepare by keeping the team up to date.
- Inestos ill eie ou tea’s pesoel
- Communicate the process and all expectations.
- Make sure that customers, vendors, and partners relationships are in good standing.
Investors will look at these things.
- What Investors are looking for:
o Key personnel review. (like a job interview and prior associates)
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o Status of the solution (current problems your company are solving and how
ou’e dealig ith it)
o Review of opportunity and segmentation. (Look at growth potential, forecasting
models, current economic status, customer feedback)
o Traction in the marketplace (Looks at your current competitors, cost acquisition
of customers, etc)
- Data Room (where you have all your documents)
- Capitalization Tables
o Breaks down who the owners are.
o Who have stakes in the business.
o Rounds of investment
Lecture The Capitalization Table
- Financial history will also be looked at during due diligence process
What is the Cap Table?
- Cap table shows company ownership
- By security class, round and fully diluted
- Fully diluted includes all securities including common shares, preferred share, options
(issued and available) and warrants.
- Fully Diluted: means all outstanding options and warrants are awarded and exercised.
- Class of Security: Options, Vesting, Warrants
o Warrants: An option to buy a common share, usually offered to outsiders.
Tacked on as a loan from the lender. Lenders are less likely to call off a loan if
the’e a shaeholde i the opa.
Event or time based vesting. Typical timeline is 2 years.
Almost always have accelerate vesting.
i.e. take o a little det eause ou’e ofotale ou’ll e ale to pa
it through your cash flow. (Never want to raise equity to pay debt)
Investors will ask for a 2% warrant, i.e for every 100$ they give you they
get a 2% warrant which is 2$
o Options:
Has an exercise price, which is the price you have to pay to acquire the
share. Exercise price typically = Value Today because the invidual gets
taxed, if the recipient gets charged lower than the price they are taxed, if
the recipient gets the value toda the ae’t taed fo that auisitio
but only the future.
If an option is i the oey, it means the option is above value
pie. If the option is under the water it’s eause it’s oth less tha
hat it’s eig sold fo.
Puts Call Option, is the right to sell a share (only w/ public companies)
First needs to be created, which is called issue. Create a stock option pool
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