In detail, this Founder’s Pocket Guide helps startup founders learn:
• What convertible debt is and how it can be an important fundraising structure.
• Key terms and definitions associated with convertible debt, such as conversion triggers, valuation caps, and conversion discounts.
• Key advantages and disadvantages of using convertible debt as a funding structure.
• How investors view the convertible debt, and what their expectations are for early-stage investment deals.
• Simple math for calculating the impact of conversion discount rates and resulting equity ownership on conversion.
• Example convertible debt deals illustrating how convertible debt benefits both founders and investors alike.
Much of what we know about corporate finance and mathematical finance derives from a narrow subset of firms: publicly traded corporations. The value functional approach can be readily applied to both large firms and companies that do not issue publicly traded stocks and bonds, cannot borrow without constraints, and often rely upon entrepreneurs to both finance and manage their operations. With historical side notes from an international set of sources and real-world exemplars that run throughout the text, this book is a future-facing resource for scholars in economics and finance, as well as the academically minded valuation practitioner.
This Element is an excerpt from The Truth About Starting a Business (9780137144501), by Bruce R. Barringer. Available in print and digital formats.
Minimizing the cost of launching your business--and then finding the money you do need.
Most prospective business owners worry about whether they’ll be able to raise sufficient funds to start a business. It’s a legitimate concern. But the same business might cost one person $10,000 to start and another person $25,000. The amount needed depends on how a person thinks about money, and how frugal and resourceful that person is. Skimpy finances can be a blessing, not a curse....
· The Startup Valuation Explorer
· Expanded coverage of Valuation Methods
· Responding to investor questions about your valuation
· Understanding option pool impact on your valuation
For many early-stage entrepreneurs assigning a pre-money valuation to your startup is one of the more daunting tasks encountered during the fundraising quest. This guide provides a quick reference to all of the key topics around early-stage startup valuation and provides step-by-step examples for several valuation methods.
This Founder’s Pocket Guide helps startup founders learn:
• What a startup valuation is and when you need to start worrying about it.
• Key terms and definitions associated with valuation, such as pre-money, post-money, and dilution.
• How investors view the valuation task, and what their expectations are for early-stage companies.
• How the valuation fits with your target raise amount and resulting founder equity ownership.
• How to do the simple math for calculating valuation percentages.
• How to estimate your company valuation using several accepted methods.• What accounting valuation methods are and why they are not well suited for early-stage startups.
Expanding on these key skills every startup founder should know, this Founder’s Pocket Guide helps you learn how to:
• Build your basic cap table step by step, including founder’s shares, option pools, angel investor rounds, and VC rounds.
• Decipher cap table specific lingo, such as fully-diluted shares outstanding, preferred shares vs. common shares, Series A, Series B, and so on.
• Establish a stock option pool in your cap table and understand the option pool effect on founder dilution.
• Understand the simple math behind cap table formulas and calculations, including calculating fully diluted shares outstanding, investor equity ownership percentages, and share price.
Expanding on these fundraising concepts, this Founder’s Pocket Guide helps startup founders learn:
What a term sheet is and how to summarize the most important deal terms for your fundraising and startup building goals.
How preferred stock shares differ from common shares, with review of how each key preferred share right and preference is tied to the investor’s shares.
Key terms and definitions associated with equity fundraising, such as pre-money valuation, founder dilution, and down round.
How to decipher legalese associated with a term sheet deal, such as pro rata, fully diluted, and pari passu.
The full list of the most common term sheet clauses, their plain English meaning, and their importance to an early-stage investment deal.
Simple math for the key term sheet financial aspects, including calculating fully diluted shares outstanding, investor equity ownership percentages, and the impact of option pools on founder dilution.
Example exit scenarios, showing how term sheet deal points impact how exit proceeds get divided among investors and founders.