The Investment DealStages of FinancingSeed CapitalStartup CapitalSubsequent-Stage FinancingEquity FinancingInvestment-Deal TermsLoan Terms from BanksLoan Terms (cont.)Non-Collateral Loans from BanksExit StrategyAny Questions?The Investment DealMHR 423Fall 2003Stages 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 publicSeed 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 prototypeStartup CapitalTypically funded by venture capitalists or angel investorsRequire ROIs of 40-200%Proceeds typically used forMarketingOperations (production)Continued R&DStaffingSubsequent-Stage FinancingTypically provided by venture capitalists, investors, investment banks, corporationsMultiple investors common (to share risk or if large investment required)Required ROIs in the 25-100% rangeProceeds typically used for marketing, systems, new product development, expansion, and brand developmentEquity 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Capital requestedPercentage of the company given in exchangeUses of the proceedsExit strategy (how would the investment be recouped, and when?)Other conditionsLoan Terms from BanksHow much money is needed?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 conditionsLoan 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 recorded and agreed upon (both parties sign)Non-Collateral Loans from BanksConditions 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, and no criminal recordExit StrategyThis is when everyone “cashes out”Often at an IPO (initial public offering)Company goes publicEquity financing received from the publicCould be acquired by a companyBusiness plan must estimate whenProceeds go to the owners in proportion to the number of shares they ownAny