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VC Secrets: How to Structure Your Deal

From: Venture Planning Associates Inc. <Expert-zine@VenturePlan.com>
Date: Fri, 7 Nov 2003 00:39:17 -0500
Message-ID: <73960-22003115753917750@mail3.autocontactor.com>
To: site-comments@w3.org

Dear ,

As promised, here is your new issue of the Expert-zine.

     * How to Structure Your Deal *

     By William F. (Bill) McCready
     Founder/CEO Venture Planning Associates, Inc.

'Deal Structure' refers to the financial plan for your
business and the scenarios you develop BEFORE you talk
to investors that put you in a fair negotiating position. 

From startup to IPO, MOST COMPANIES NEED FUNDING MORE
THAN ONCE. 

The obvious times are during the research and development,
seed capital and startup stages. But what about acquisitions, expansion, or going
public? At almost each rung of the
entrepreneurial ladder the need for capital must be addressed. 

DEAL STRUCTURE SECRETS

What's the secret to obtaining capital from outside sources
when you need it? A key element of the process is your DEAL
STRUCTURE. The structure of your investment opportunity must
show a potential investor the benefits of taking a risk on you,
rather than your competitor down the street.

Your deal structure sets OPTIMUM DEBT and EQUITY RATIOS, and
is determined by the type of financing you are seeking or have obtained, the
stage of development, goals for your venture, 
and your exit strategy. 

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SIX CRITICAL DEAL STRUCTURE CONSIDERATIONS

1. You contribute 20%. 
   Let's say you're looking for $1,000,000. If your company
   is a startup (the most difficult to fund), in investor will
   expect you to contribute 20% of that amount, in terms of
   energy, efforts and cash. 

2. Value of investment dollars.
   An individual investing $1,000,000 in your project will have
   had to earn $2,000,000 in pre-tax dollars in order to make
   the investment amount available to you. 

3. Competition for investment capital.
   Financiers have many opportunities to invest their money. At
   any given time, real estate, the stock market, and other
   ventures will be vying for their attention and capital. If
   you were the investor, you would most likely be looking for
   the most attractive deal, offering the best return, balanced
   against the level of risk involved. 

4. Opportunity cost. 
   In addition to the actual investment, investors look at the
   opportunity cost. Could they have tied up their money in a
   safer or more profitable investment? 

5. Early investor return of capital.
   All deals should be structured so that investors get a
   return on capital ASAP! They want to be assured that they
   will get the money they invest back before you get your
   new Mercedes. 

6. Keeping control.
   It's not uncommon for a major impasse to occur when the
   entrepreneur is faced with the fact that investors want a
   larger portion of the company in return for their investment
   than the entrepreneur is willing to give. 

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*** ================================================ ***
 
OTHER CONSIDERATIONS

It can be a shock and a deal breaker for the less
sophisticated entrepreneur who is not prepared for this. Making
the deal structure an integral part of the business plan 
serves as advance warning that the entrepreneur knows the
investment value of the business.

- More than stock.
   In addition to a portion of the company's stock, some
   investors will also want to participate in the  
   financial management, marketing or other vital areas of
   your company. Entrepreneurs should welcome the involvement
   of a professional with entrepreneurial experience to
   assist them. 

- Tax and legal considerations including state securities laws.
   When forming your company, study the benefits and drawbacks
   of the different types of company structure. Your CPA can
   assist you by explaining the differences between LLC
   (Limited Liability Company), S Corp., Sub S Corp., and
   C Corp. 

THE ART of the DEAL

The Art of the Deal is to have your parameters set before you
meet with in investor or venture capital company, rather than
asking 'how much will you give me for x% of the company”. Think
of it the same as getting an airplane ticket: you pay a fixed
fee for a trip, that is based on current market conditions,
price wars, and seat class and selection.

When you have thoroughly developed your business plan and
understand the true value of money versus your idea, you can
often come to a fair valuation and negotiating position. It is
best to suggest an investment scenario based on your current
business plan and assumptions that returns a 40% compounded
return over five years.

While you cannot guarantee a return, that size of return
provides for the risk, opportunity cost and potential loss of investment that
investors are used to accepting. 
You must have prepared various scenarios of your plan for
contingencies and arrived at this percentage of stock for
investment using some type of weighted average of value. 

Armed with the right information, you will have much more
confidence in the outcome. You will not 'dive for the check at
any cost', and you will show your company to be sophisticated
beyond 90% of other capital seeking companies.

*** ===== SAMPLE BUSINESS PLANS and WORKSHEETS ===== ***

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*** ================================================ ***

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Copyright 2002 Venture Planning Associates, Inc. All Rights Reserved





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Received on Friday, 7 November 2003 00:34:02 GMT

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