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The Investment Deal. Dr. Stan Abraham MHR 423 Spring 2010. Stages of Financing. Early-stage financing (highest risk) Seed capital – to prove the concept is viable Startup capital – to make the business operational Expansion financing (lower risk)

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the investment deal

The Investment Deal

Dr. Stan Abraham

MHR 423

Spring 2010

stages of financing
Stages of Financing
  • Early-stage financing (highest risk)
    • Seed capital – to prove the concept is viable
    • Startup capital – to make the business operational
  • Expansion financing (lower risk)
    • Second-stage financing – first commercial sales
    • Third-stage financing – rapid expansion
    • Fourth-stage financing – to go public
seed capital
Seed Capital
  • Highest risk (no assurance of success, long time before revenues are achieved)
  • Sources typically include relatives and entrepreneur’s own capital
  • Needed typically for R&D
    • To prove the concept
    • To develop a working prototype
  • VCs won’t invest at this stage
    • Biotech companies were an exception
startup capital
Startup Capital
  • Typically funded by venture capitalists or angel investors
    • They require ROIs of 40-200%
    • High ROI required in part to offset an average 80% failure rate
  • Proceeds typically used for
    • Marketing (expansion)
    • Operations or production (expansion)
    • Continued R&D
    • Staffing
subsequent stage financing
Subsequent-Stage Financing
  • Typically provided by venture capitalists, investors, investment banks, corporations
  • Multiple investors common (to share risk when investment required is too large )
  • Required ROIs in the 25-100% range
  • Proceeds typically used for marketing, systems, new product development, expansion, and brand development
equity financing
Equity Financing
  • Company must be valued first (value is often estimated) so a value can be placed on the shares owned by the investor
  • The investor gets
    • An equity stake in the company (percentage is negotiated)
    • A seat on the board of directors
  • Investment does not have to be paid back
  • Risk is borne by the investor(s)
  • Investment is for a limited time (about four years)
investment deal terms
Investment-Deal Terms
  • Capital requested
  • Percentage of the company given in exchange
  • Uses of the proceeds
  • Exit strategy (how would the investment be recouped and when?)
  • Other conditions
    • For example, stock buybacks based on achieving agreed upon performance milestones
will an investor invest
Will an Investor Invest?
  • Depends on how attractive the deal is
  • Depends on how strong the business model is
    • And how well margins can be sustained
  • Depends on the level of trust the entrepreneur can command (usually more with more experience) (chemistry)
  • Depends on how seductively the business plan is written
loan terms from banks
Loan Terms from Banks
  • Loan amount
  • For how long? When will it be repaid?
  • At what monthly payment? What interest rate?
  • What is offered as collateral?
  • When is the money needed and when will the first payment begin?
  • Other conditions (e.g., need for a co-signer)
loan terms cont
Loan Terms (cont.)
  • Investors or relatives – not just banks – can also lend you money
  • Offer an interest rate that would induce them to lend (double the bank’s?)
  • Negotiate the term of the loan and how it would be repaid
    • No collateral is typically required
  • Make sure the terms of the loan are put in writing and agreed upon (both parties sign)
if a bank turns you down
If a Bank Turns You Down
  • It’s not the end of the world
  • There are thousands of other banks to approach
    • Some of them will need you more than you need them
    • When you find them, you will have some bargaining power
    • Negotiate good loan terms
non collateral loans from banks
Non-Collateral Loans from Banks

Conditions that must be met

  • Company must have been in business three years
    • Two of those years must have shown a profit
  • Principal must have good character, credit rating, and no criminal record
exit strategy
Exit Strategy
  • This is when everyone “cashes out”
    • Often at an IPO (initial public offering)
      • Company goes public
      • Equity financing received from the public offering pays off the owners and investors of record
    • Could be when acquired by another company
  • Business plan must indicate when this might happen
  • Proceeds go to the owners in proportion to the number of shares they own