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B: M&A > L1 - Startups > Flashcards

L1 - Startups Flashcards

1
Q

How many stages are there?

A

7

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2
Q

What are the stages?

A

1: Seed and Development
2: Growth
3: Establishment (minority investments not VC)
4: Expansion (expansion of business)
5: Maturity and possible Exit
6: Listed Company
7: Takeover and Integration

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3
Q

5 Steps to launch for a startup

A
  1. Protect intellectual property
  2. Seek input and network
  3. Plan the business
  4. Negotiate the license or option agreement
  5. Purse Funding
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4
Q

How to protect intellectual property rights?

A

File a patent application on the invention before it comes public. A major asset of a startup company is its intellectual property. After public disclosure, obtaining a patent, particularly outside the US, may no longer be possible.

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5
Q

How to seek input and network?

A

Identify a mentor and work with him regularly, network with like-minded entrepreneurs, review ideas with potential investors, and evaluate the commercial aspects with potential customers.

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6
Q

How to plan the business?

A

Develop an understanding of the market potential, competition, funding needs, and path to productization and profitability.

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7
Q

How to negotiate the license or option agreement?

A

Obtain a license or option agreement from Harvard to demonstrate to potential investors that the company has secured the rights to the technology.

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8
Q

How to pursue funding?

A

Commercializing technology typically requires external capital. Introduce the company to venture capitalists, angel investors, and, perhaps, friends and family.

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9
Q

5 Funding sources

A

Organic growth
Friends and family
Small business innovation research
Angel investors
Venture Capitalists

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10
Q

What is organic growth?

A

Grow the business slowly based on sales without the need to raise external fund

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11
Q

What is small business innovation research?

A

Apply for research grants. Almost every country provides grants for small business innovation research projects.

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12
Q

Equity

A

Ownership interest of the company that is held by various parties. The investor group will typically want 40% to 60% of the company.

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13
Q

Ownership compared to control

A

Equity investors are generally in control of the company. Provisions in the investment documents usually give the investors authority over certain decisions, such as whether to accept an acquisition offer, even if they have less than 50% of the outstanding shares.

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14
Q

outstanding shares

A

Authorized shares are the maximum number of shares a company is allowed to issue to investors, as laid out in its articles of incorporation. Outstanding shares are the actual shares issued or sold to investors from the available number of authorized shares.

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15
Q

How much is the founders’ total equity after the first round of financing normally?

A

After the first round of financing, the founders’ total equity percentage is often diluted to less than 50%.

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16
Q

option pool

A

a percentage of stock options set aside for special purposes. Sometimes, investors require that about 20% of the company’s options be reserved to attract key employees.

17
Q

pre- and post-money valuation

A

The company’s pre-money valuation is its value before an investment is made. Pre-money valuation must be reasonable. Post-money valuation is the pre-money valuation plus the amount invested.

18
Q

What is the post-money valuation if investors want to have 60% of the company and pre-money valuation is 2m?

A

For example, if investors valuation: provide $3 million and the pre-money valuation is $2 million, the post-money valuation is $5 million. In this example, the investors have 60 percent of the equity.

19
Q

Convertible debt

A

Funding that can be converted into shares at a later funding round. Sometimes convertible debt is a good funding alternative. However, the company immediately has debt on the balance sheet, and a valuation still must be set in case additional funding rounds are not needed.

–> Downside protection and upside potential

20
Q

What is a shareholder loan?

A

Debt & equity simultaneously. Debt-like form of financing provided by shareholder. Junior debt. If this loan belongs to shareholders it could be treated as equity. Common for young companies to create a tax shield. Shareholders can extend the loan in distressed or near-default situations to save the company.

A shareholder loan is financing provided to a company by its shareholders and represents debt for the business. Although shareholders are tied to the company, the Internal Revenue Service advises that shareholder loans must be given with the same terms that would exist in a loan between two independent parties. This includes having a fair market value interest rate.

A company can write off the shareholder loan interest payments, which is a benefit of going this route. However, if the interest rate charged is below fair market value, the difference between the two is considered income and taxed accordingly.

21
Q

Preferred shares compared to common shares

A

Investors typically take preferred shares, and the founders and employees hold common shares. Preferred shareholders may have additional rights. For example preferred shareholders have the right to get a multiple of their investments back before any distribution to the shareholders.

22
Q

preferred shareholders (investors) invested $5 million, they hold 50 shares:
percent of the equity, have a 1X preference, and the startup is sold for $25 million.

How is the distribution?

A

In this case, the investors will first get $5 million, and then the remaining $20 million is split according to the equity percentage of the shareholders: $10 million to the investors, and $10 million to the common shareholders.

23
Q

What is anti-dilution?

A

Protection against future financing when the value of the company decreases (down-round). Anti-dilution ensures that equity stakes do not drop below a certain percentage.

There is share and economic dilution.

24
Q

What is the most common anti-dillution

A

The most common is weighted average anti-dilution.

25
Q

Highest level of protection in anti-dillution?

A

Full ratchet protection may also be use at times, and provides investors with the highest level of protection.

26
Q

full ratchet

A

A full ratchet protects early-stage investors by ensuring that their percentage ownership is not diminished by future rounds of fundraising. This provision also offers a level of cost protection should the pricing of future rounds be lower than that of the initial round.

There are some caveats, though. Offering these assurances to early-stage investors can be quite expensive from the perspective of company founders or investors participating in later rounds of fundraising.

Essentially, the existence of a full ratchet provision can make it difficult for the company to attract new rounds of investment. For this reason, full ratchet provisions are usually only kept in force for a limited period of time.

27
Q

Advantages AG

A
  • no liability of shareholders
  • low formal requirements for subscription and transfer of shares
  • marketability
28
Q

subscribed shares

A

Subscribed shares are shares that investors have promised to buy. These shares are usually subscribed as part of an initial public offering (IPO). Underwriters often promise to deliver a certain number of subscribed shares prior to the IPO. The subscribers are usually large institutional investors and banks.

29
Q

Cons of AG

A
  • min share capital 50k
  • formation cost 705€
  • obligatory supervisory board
  • strict formal requirements
  • independence of institutions/ bodies –> no right of instruction
30
Q

Pros GmbH

A
  • in principle no liability of shareholders
  • high flexibility at drafting of statute (articles of incorporation)
  • control capabilities for shareholders by instructing management
31
Q

Cons of GmbH

A
  • min share capital 25k
  • formation costs approx. 500 upwards
  • transfer and subscription of shares only in notarial form
32
Q

UG pros

A
  • no liability of shareholders
  • cost-efficient foundation
  • min share capital 1 euro
  • elimination of special provisions for the UG from the increase of the share capital to 25000 € or more.
33
Q

share capital meaning

A

Share capital is the money a company raises by issuing common or preferred stock. The amount of share capital or equity financing a company has can change over time with additional public offerings.

34
Q

UG cons

A
  • special obligations to formation of reserves
  • creditor receives a low liable capital
35
Q

Eng. Ltd. pros

A
  • no liability of shareholders
  • cost-effective, quick foundation
  • no minimal capital requirements
  • no minimal capital requirements
  • transfer of shares without notarial certification
36
Q

cons of Eng. Ltd.

A
  • higher running costs
  • higher consulting fees
  • higher risk of liability of shareholders
  • negative image in business

B: M&A (4 decks)

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