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CS 405 Software Business > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

What are the parts of an Investor Pitch?

A

OPS - OSP - W - TA - C

} Open
} Propose the Problem
} Show the Solution (Demo)
} Outline the Opportunity
} State the Strategy (Customer Acquisition)
} Present the Pivots
} Why Not to Buy
} Tout the Team
} Angle the Ask
} Close
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2
Q

True or False.
In an investor pitch, while you are explaining the pain you are trying to solve, you need to give as much details as possible and spend most of your time in this step.

A

FALSE! In a pitch, you need to be concise and to the point when identifying the pain you are trying to solve.

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3
Q

In an investor pitch, what is the Show your Solution step about?

A

It is about showing how you are better, faster, and/or cheaper than your competitors. You need to SHOW not TELL.

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4
Q

In an investor pitch, what is the Traction step about?

A

It is about showing what has been accomplished. For example, how many visitors have we received? How many active users do we have? How many customers? How much revenue? etc…
These is where you show the conversion rates: from every x visitors we get y customers `

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5
Q

In an investor pitch, what is the Outline Opportunity step about?

A

In this step, we define our customer and show the market size.

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6
Q

What is TAM?

A

It stands for Total Addressable market, and it is the Total possible demand for our product

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7
Q

What is SAM?

A

It stands for Served Addressable market, and it is the size of market we could acquire based on our business model.

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8
Q

What is SOM?

A

It stands for Share of Market, and is the size of market we could acquire based on PRACTICAL LIMITS of our business model.

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9
Q

In an investor pitch, what is the State the Strategy step about?

A

In this step we explain our operations and customer acquisition plans, and we also share what our sales channel will be.

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10
Q

In an investor pitch, what is the Financial step about?

A

In this step we show the 12 months of the pro forma (cashflow), and we talk about the following years.

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11
Q

What are the four actions involved in a pivot?

A

◦ We thought this:
◦ We tested by:
◦ We learned this:
◦ We made this pivot:

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12
Q

What should be brought up when making the ‘ask’ in the final part of the investor pitch?

A

State the amount of money you are seeking
State the investment vehicle
State how the funds will be used
State the money raised so far and the key investors

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13
Q

Brand

A

The entire experience your prospects and customers have with your company.

Includes:
◦ Logo (slogan, color palette)
◦ The images you convey
◦ The messages you deliver on your website, proposals and sales materials
◦ The way your employees interact with customers

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14
Q

Pricing

A

Price represents the value of the product perceived by the customer

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15
Q

What are some economic factor that affect pricing?

A
  1. Competition
  2. Demand
  3. Costs
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16
Q

Elasticity Formula

A

% Change in Quantity / % Change in Price

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17
Q

Break-Even-Point Formula

A

Fixed Costs / (Unit Price – Avg Variable Cost)

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18
Q

What is the Break Even Point?

A

Point at which Total Revenue = Total Costs

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19
Q

What are some Pricing Strategies?

A

Cost-Plus Pricing
◦ Price = Cost + Markup

Target-Return Pricing
◦ Price = (Fixed Costs + Target Return) / Units Sold + Variable Cost/Unit

Value-Based Pricing
◦ Price = Amount customer is willing to pay

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20
Q

What are the three most common type of Business Structures?

A
  • Sole Proprietorship
  • Partnership
  • Corporation
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21
Q

What are the three types of corporations?

A

• C Corporation
– regular corporation, separate legal and tax entity
• S Corporation
– Separate legal entity, but not a separate tax entity
– Limited liability of a corporation
– Taxed to owners like a partnership
• Limited-Liability Corporation (LLC)
– Limited liability without S Corp restrictions
– Most popular form for startups

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22
Q

What are some characteristics of a Sole Proprietorship?

A
  • Owned and operated by one person
  • Business license from the city
  • Simple to setup, operate, and close
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23
Q

Advantages of a Sole Proprietorship?

A
  • Independence
  • Easy to setup and close
  • Taxed to owner
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24
Q

Disadvantages of a Sole Propietorship?

A
  • Unlimited Liability
  • Limited resources
  • Lack of continuity
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25
Q

By whom are Partnerships owned and operated by?

A

Two or more people

26
Q

What are the two types of Partnerships?

A

– General Partners - unlimited liability

– Limited Partners – liability limited to amount of investment

27
Q

Advantages of a Partnership?

A

• Pooled talent and
resources
• Easy to form
• Taxed to owners

28
Q

Disadvantages of a Partnership?

A 
• Unlimited Liability
• Potential for
management conflict
• Transfer of ownership
issues
29
Q

Characteristics of a Corporation?

A

• Business entity separate from its owners and
managers
• Owners own stock (shares) in the corporation
• Generally larger than other forms
• Separate Legal and Tax Entity
• Shareholders
– Ultimate owners, elect Board of Directors
• Board of Directors
– Have management and control of corporation
– Elected by shareholders
• Officers
– Appointed by Board of Directors
– Represent and operate the company
• Charter (aka Articles of Incorporation)
– Issued by a state
– Name & address of incorporators
– Purpose
– Authorized stock, classes, rights of stockholders
• Bylaws
– Rules and regulations by which it operates
• Minute Book
• May be just one person

30
Q

Advantages of a Corporation

A

Limited liability
• Increased access to
resources
• Transfer of ownership

31
Q

Disadvantages of a Corporation

A
  • Expensive to start
  • Complex to maintain
  • Double Taxation
32
Q

What is a Capitalization Table?

A

• Also called a “Cap Table“
• Table showing the total amount of the
various securities issued by a firm.
• Lists the amount of investment obtained
from each source and the securities
distributed
– Common and Preferred shares, Options, Warrants, etc.
– Shows respective ownership percentages.

33
Q

Post-money Valuation Formula

A

Pre-money Valuation + Investment

34
Q

Share price Formula

A

Investment / number of shares to Investors

35
Q

Market Cap Formula

A

total num of Shares * Share price

36
Q

Ownership % Formula

A

Shares owned / total outstanding Shares

37
Q

What are some ways to get funding?

A

Bootstrapping
Friends and Family
Loans (from banks, SBA)
Grants (Federal and State)

38
Q

What are some sources of debt capital?

A

Commercial Banks
Bonds
Credit Unions
Insurance Companies

39
Q

What is a SBA Loan?

A

It is a loan given by the Small Business Administration to small businesses.

40
Q

What is a Term Sheet?

A

A short and readable summary of the key terms of an
equity financing, typically addresses the following issues like:
◦ Company Valuation, Company Ownership
◦ Liquidation Preferences
◦ Lock-Up Provisions
◦ Additions to Management Team, Employment
◦ Anti Dilution Rights, Tag Along and Drag Along Rights
◦ Right of First Refusal
◦ Confidentiality and IP Agreements
◦ Redemption Rights, Registration Rights, Information and Rights such as:
◦ Voting Rights, Board Positions
◦ Stock Conversion, Vesting Periods
◦ Use of Proceeds
◦ Stock Options Pool
◦ Warranties

41
Q

What is a Convertible Note?

A 
Loan with an interest rate
◦ Usually 4-8%, 12-24 months
} Can be repaid with money
} or exchanged for stock of the company at
the option of the lender (investor).
42
Q

Steps on working a convertible Note exercise:

A
  1. Decide to use the cap or not. How to decide: if conversion cap is less than the Round A valuation, USE the CAP, else DO NOT, use the discount instead.
  2. If taking the discount the new valuation will be the Round A valuation - Discount (% of Round A valuation), if not taking the discount, the valuation will stay the same.
  3. Divide the investment (Amount of note) by the new valuation.
  4. The answer to #3 will give the % of the company the investor will own.
43
Q

Convertible Notes Problem:
Note Terms:
◦ $100,000 note, 6% interest, 24 months,
20% discount, conversion cap of $2,500,000
} If A Round valuation = $1,250,000 (post)

A

Use the Cap? - No ($1.25M < $2.5M)
◦ Take the discount - $1.25M - 20% = $1M
◦ Divide Investment by Valuation (100K/1M)
◦ Investor gets 10% of the company

44
Q

Convertible Notes Problem #2:
Note Terms:
◦ $100,000 note, 6% interest, 24 months,
20% discount, conversion cap of $2,500,000
} If A Round valuation = $5,000,000 (post)

A

Use the Cap? – Yes ($2.5M < $5M)
◦ No discount (when using the Cap)
◦ Divide Investment by Valuation (100K/2.5M)
◦ Investor gets 4% of the company

45
Q

Convertible Notes advantages and disadvantages

A 
Advantages
◦ Postpones valuation question
◦ Less due diligence
◦ Less documentation = lower legal costs
◦ Speed
} Disadvantages
◦ Debt, must be repaid
46
Q

Equity Capital

A

Represents the personal investment of the
owner(s) in the business.
} Is called risk capital because investors
assume the risk of losing their money if
the business fails.
} Does not have to be repaid with interest
like a loan does.
} Means that an entrepreneur must give up
some ownership in the company to outside
investors.

47
Q

Sources of Equity Financing

A 
Personal savings
} Friends and family members
} Angels
} Partners
} Corporations
} Venture capital companies
} Public stock sale
48
Q

Common Stock

A

} Right to receive dividends
} Voting rights
} Liquidation - last in line

49
Q

Preferred Stock

A 
Preferred dividends – paid before common
◦ Declared rate – 4-10%
} Liquidation preference – usually 1x
} Usually has RFR, Tag/Drag Along,
Anti-Dilution
50
Q

Steps for working a Liquidation Preference exercise:

A

It all depends on the scenario:
AND Scenario: The investor gets both Preferred Stock Value and Converts to Common
EITHER-OR Scenario: The investor gets either Preferred Stock Value OR Converts to Common.

On EITHER-OR scenario:
The investor can get whatever the multiple of their investment made as agreed on the non-participating liquidation preference (Preferred Stock Value option),
OR
The investor can convert to Common Stock, that is the percentage agreed (company ownership percentage) of whatever is left after the Preferred Stock Value is issued,

AND Scenario:
Similar as EITHER-OR scenario, but investor gets both, the Preferred Stock Value and the percentage agreed on whatever is left in Common.

51
Q

Liquidation Pref. Example 1:

Investor invests $1,000,000 for 50% of the
company
} 2x non‐participating liquidation preference.
} “Either-or” scenario, investor gets either
Preferred Stock value or Converts to Common

A 
$2,000,000 exit:
◦ Investor elects to take preference
◦ Investor gets $2M, Common get $0
◦ $3,000,000 exit:
◦ Investor elects to take preference
◦ Investor gets $2M, Common gets $1M
◦ $5,000,000 exit:
◦ Investor elects to convert to Common
◦ Investor get $2.5M, Common gets $2.5M
52
Q

Liquidation Pref. Example 2:

} Investor invests $1,000,000 for 50% of the
company
} 2x participating liquidation preference.
} “And” scenario, investor gets both
Preferred Stock value and Converts to Common

A

$2,000,000 exit:
◦ Investor takes preference
◦ Investor gets $2M, Common get $0
◦ $3,000,000 exit:
◦ Investor takes preference and converts to Common
◦ Investor gets $2M preference + $500K of Common
◦ Common gets $500K
◦ $5,000,000 exit:
◦ Investor takes preference and converts to Common
◦ Investor gets $2M preference + $1.5M of Common
◦ Common gets $1.5M

53
Q

What makes a successful IPO Candidate?

A 
Consistently high growth rates
} Strong record of earnings
} 3 to 5 years of audited financial
statements that meet or exceed SEC
standards
} Solid position in a rapidly growing
industry
} Sound management team with experience
and a strong board of directors
54
Q

Deduction

A

An amount you can deduct from your
gross income to enable you to reduce
your taxable income.

55
Q

What are the min and max INDIVIDUAL tax brackets?

A

10% - 35%

56
Q

TRUE OR FALSE: One of the best tax shelters under
our current tax code is owning a
business.

A

TRUE

57
Q

What are the min and max CORPORATE tax brackets?

A

15% - 34%

58
Q

What are the most common payroll taxes?

A 
} Social Security Tax
◦ 6.2% employee / 6.2% employer
} Medicare Tax
◦ 1.45% employee / 1.45% employer
} Unemployment Tax
◦ Federal and State, employer only
59
Q

What are the elements of a contract?

A

Contract – agreement enforceable by law
} Legality
◦ must intend to accomplish a legal purpose
} Capacity
◦ Must have legal capacity to enter into contract
} Agreement
◦ legitimate offer and a legitimate acceptance
} Consideration
◦ Something of value exchanged between parties

60
Q

What are the most common intellectual proprty?

A

Patents
Copyrights
Trademarks

61
Q

When to use an attorney?

A

To Form the company and to review contracts

62
Q

What are the ten steps for negotiation?

A
  1. Decide on your starting position
    ◦ Your “bottom line,” or lowest point you will accept in the deal
    } 2. Consider the objectives and emotional
    motivation of the other party
    ◦ Put yourself on their side of the table
    } 3. Plan your sequence of proposals and possible
    counter-proposals.
    ◦ Open at the most you can reasonably ask
    ◦ Give yourself room to negotiate
  2. Determining your own motives and objectives
    ◦ What do you expect to gain, why is it important to you?
    ◦ What can you offer to achieve this?
    } 5. Be prepared with information, facts,
    comparable prices or costs, etc.
    ◦ Avoid seeming either uninformed or overly aggressive
    } 6. Let the other party make the first offer
    ◦ Allows you to gauge your response and set the bounds of the
    negotiation to your advantage
    ◦ Other party may open at a more favorable point
  3. Start at a point you have mutually agreed upon
    ◦ something both parties will readily agree to.
    } 8. Establish a position of confidence and authority
    ◦ “I will do this for you, you will do this for me.”
    } 9. Make your incremental proposals
    ◦ Avoid going to your bottom-line.
    } 10. Know when to close the deal
    ◦ When other party accepts, and it is acceptable to you, close and
    sign the agreements.

CS 405 Software Business (2 decks)

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