A course presented and New York City Entrepreneur Week about understanding your investor.

1. K N O W I N G Y O U R F U N D I N G S O U R C E
U N D E R S T A N D I N G Y O U R I N V E S T O R
F A C I L I T A T E D B Y :
E R I C B A U M – S O L I D E A
J E E V A N P A D I Y A R – T H E C O N N E C T O R S G R O U P
G U E S T S P E A K E R :
J O E D A N I E L S – F U L B R I G H T & J A W O R S K I
Course 2

2. Agenda
2
◊ Introduction
◊ Key Providers of Venture Capital
◊ The Financing Lifecycle
◊ Understanding Investor Types And Requirements
◊ Planning for Funding
◊ Managing Investor Relations
◊ Ticking Time Bombs of a Term Sheet – Guest Speaker

3. Putting the Pieces Together
3
*How to stand out in the
eyes of an Angel*
*How to speak
the language and
get what you
want*
*Getting into the head
of an investor*
*How to transform your
idea into a reality*
*How to assemble and
benefit from a team
of high-powered
experts*
*Finding funding in
hard to reach places*
*How to have your cake
and share it too*
1 3

4. Introducing the Players
4
FFF
Angel
Venture Capital
(VC)
Strategic Partner
“Friends, Family, and Fools” who provide individual contributions for
seed funding
Fills the gap in financing between FFF and venture capital; high net
worth individuals where investment can range from a few thousand
dollars to a million dollars
Type of private equity capital provided to early-stage, high-potential
growth companies; usually do not consider investments under $1-2
million
Companies that make investments for strategic benefit or alignment; in
some instances, subsidiaries of large corporations that are established
to make venture capital investments (Corporate VCs)
Bank
Cheaper source of capital than angel investors, but usually not available
for early-stage ventures

5. The Financing Life Cycle
5
Revenue
Time
FFF, Angels
Seed Capital:
Low level financing
needed to prove a new
idea, design prototype,
etc
1st Round: Early sales, marketing, & manufacturing funds
2nd Round: Working capital for companies
with sales growth, but have usually not reach
break even
3rd Round: Typically for market
expansion, acquisition, product dev, etc.
Mezzanine: Intended to finance
the “going public” process
IPO
Early Stage Later Stage (Expansion)
Angels, VCs
VCs, Strategic Partners,
Acquisitions / Mergers
Valley of Death
Break Even

6. Getting Up Close and Personal
6
FFF
“Love Money”
Angel
“Dumb Money”
VC
“Blood Money”
Strategic Partner
Investment
Considerations
Personal /
Relationship-Driven
Emotion over Numbers Technical over Emotion
Strategic Fit / Portfolio
Value
Valuation
Determination
Art Art & Science Mostly Science Revenue Multiple
Level of
Funding
Generally < $500K
for the round
Generally $25K - $250K;
usually < $1M for the round
Generally $1M – $5M;
can be greater
Generally > $5M; varies
Funding Source Own Money Own Money Others’ money (LPs) Company’s’ money
Time to Close Quickly Few Weeks / Months Longer Process Longest Process
Term Sheet
Driven By
Entrepreneur
Entrepreneur usually
determines offering round
terms, but super angels may
play more active role
VCs dictate terms and
prepare term sheet
(generally take 30-40% of
ownership)
Terms negotiated between
company and strategic
partner
Interesting Stats:
• Angel investment accounts in total for almost as much money invested annually as all venture capital funds
combined, but into more than ten times as many companies ($26 billion vs. $30.69 billion in the US in 2007, into 57,000
companies vs. 3,918 companies).
• Of the US companies that received angel funding in 2007, the average capital raised was about $450,000.

7. Finding the Right Fit
7
FFF Angel VC Strategic Partner
• Easy to find
• More lenient due
diligence / required
documentation
• Immediate source of
funds
• More emphasis on
personal relationship /
credibility
• Limited oversight
• Can fill investment gap
between FFF and VC
• Moderate due diligence
requirements
• Often more flexible / lenient
terms
• More permissive investors
• Can provide valuable
management advice and
contacts
• Shorter process to close funds
• Can provide large sums of
financing (i.e., >$1M)
• Extensive network of
contacts and alliances
• Provide strategic, financial,
and operational advice
• Can help identify and
facilitate acquisition / IPOs
• Makes it easier to secure
further funding
• Ability to access /
leverage new capabilities
and resources
• Established assets
• Shared risk
• Name brand recognition
and credibility
• Potentially built-in
customer base
• Difficult to raise larger
sums of money
• Mixes business and
personal life
• May not be as well
connected or value-
adding as other types
• May not be accredited
investors
• Harder to find; meet
through referrals,
conferences, etc.
• Limited capital capacity
• No national reputation to
leverage
• Less follow-on money
compared to institutional
sources
• Can be a long and complex
process to secure a deal
• Dictate harder terms and
pricing
• Usually want greater
ownership stake or control
of business; likely to want to
influence strategic direction
• Sacrifice of some control
and flexibility (e.g.
exclusivity)
• Business strategy /
direction may have to
change to align with
partner
• Success depends on
ability to develop and
manage relationship
AdvantagesDisadvantages

8. Managing Expectations
8
Risks Calculated Risks
FFF Angel VC Strategic Partner
Round Invested
(Typically)
Pre-Seed Seed Round 1 and after Round 2-3
Relative
Investment Risk
Highest Lowest
Pre-Money
Valuation
<$1M $1M - $3M >$5M >$10M
Typical Return
Expectation
Varies greatly based on structure
(e.g., equity vs. debt); equity can
typically yield greater than 25X
20X+ 15-20X+ 4-6X

9. What it Takes to Get to the Table
9
FFF Angel VC Strategic Partner
Business Concept
Executive Summary
High Level Business Model
Realistic Exit Strategy
Cap Table & Offering Docs
Detailed Business Plan
Prior Capital Investment
Management Team vs.
Entrepreneur
Board Seat
Prototype
Established Path to
Monetization
Established Product with
Traction
History of Sales Growth
TypicalRequirements
As you move across the spectrum of investor type, there are increasing
requirements placed on entrepreneurs to secure funding.

10. It’s a Balancing Act
10
CostofCapital
Funding Round
Earlier funding rounds are more
expensive than later rounds; cost of
capital decreases as company matures
A If You Raise Too Much
• Start-up tend to overspend when they
have extra cash
• Leads to complacency / inefficiency
• Increased dilution for entrepreneur
and investors
BIf You Raise Too Little
• Management attention continually focuses
on funding instead of the business
• Risk of future down rounds if capital needs
become critical
• Could run out of cash
“When in doubt, take a little more”

11. Getting It Right
11
1 When financing, don’t think about just the current round.
What will your capital needs be over the next 3-5 years?
What capital do you require if you hit your milestones and sales targets?
What capital would you need / want if you didn’t hit the targets expected?
How does each setback or milestone achieved affect your financing roadmap?
Planning funding rounds is not a series of one-off activities - successful entrepreneurs
develop a 3-5 year funding plan or roadmap to avoid major pitfalls.
2 Look out for the warning signs!
Have you thought about the upfront inventory cost if you start growing quickly?
Have you modeled scaling up for success (people, system, office space, operations)?
Do you have adequate operating cash flow to cover AR cycles?
If the macro environment or your business softens more than expected, do you have
enough contingency built in?
It’s OK to be wrong, but need to make a good faith effort to not mislead investors.

12. 12
1 Make a commitment to connecting with investors and keeping them in the loop
• Publish at least a quarterly status report highlight key accomplishments, upcoming
milestones, funding status, issues / challenges, financial metrics
• Conduct a quarterly investor conference call to discuss key events and Q/A
• Forward relevant industry articles, press, etc.
• Be accessible and responsive to questions (during good times and bad)
Your investors can be your champion or cheerleader – enable them to help you, not hinder.
2 Communicate your unique selling proposition – the “investable idea”
• Have meaningful and credible investment messages that sell benefits, not just features
• Remind investors why they should put money in your idea vs. all the other options out there
3 Remember it is not about “stock promotion” - investor confidence is hard won,
but easily lost
• Don’t over-promise and under-deliver
• Manage expectations appropriately
BUT
Managing the Investor Relationship

13. Managing the Investor Relationship
13
5 Focus on building your reputation and credibility
• What investors think of you – whether they believe in you and will give you the benefit of
the doubt – can be critical to managing adverse situations
• CGE&Y study found that intangible assets such as brand and reputation affects up to 35% of
a company’s valuation
4 Do your investor research
• Understand what your investors care about and their different goals, styles, and preferences
• Understand the gap between perception and reality – what investors really think about you
vs. what you believe they think about you
• Know the market sentiment on key issues affecting valuation
Investors can be fickle! Long-term success depends on addressing investor
concerns and building confidence in your company.
REMEMBER:
6 Know how to protect yourself
• Beware of repurchase rights
• Using right of first refusal can be a strategic asset

14. “Term Sheet Ticking Time Bombs”
Guest Speaker: Joe Daniels Fulbright & Jaworski
14
Avoiding Legal Pitfalls

15. T H A N K Y O U
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Questions