This is very similar to a concept we work with, which is how to think like an investor. In this case, how to think like a potential advisor/mentor/board member. Think about your company from their point of you, not yours. Don’t approach them because they’d be perfect to help you, do so when you know how to explain to them how your company would be a perfect fit for them.
We’re creating a Financial Modeling feature, and looking for people to try it out and give us feedback. To see an example, go to https://app.startupspot.com/#firm=159&view=finances.
I just posted a video which shows off our product.
Here’s the video with a transcript (there’s also closed captioning in YouTube):
“Hi, this is Andrew with StartupSpot and I’m going to give you a quick tour of what we do.”
“We have educational resources, blog posts, and videos to help first time entrepreneurs and investors navigate the world of startup financing.”
“Let’s create an account on our web app. Select the Create Account button there, and then I’ll use Example McTesterstein as my display name, [email protected] as the email address, and some random secure password.”
“From here, clicking on the StartupSpot logo goes to the app’s home page where I can see recent activity in the system, my list of company profiles, and my list of financing scenarios.”
“I’ll create a new company profile, call it McTesterstein Inc. put it in the Broadcast Media industry. If I set a public email it both shows it on the company profile page and uses any Gravatar associated with that email throughout the web app.”
“Next I’m going to go to the cap table and create a couple of founders, Founder 1 will have 750,000 shares and Founder 2 will have 250,000 shares.”
“Then I’ll add a financing round. You can edit any items in blue inline in the cap table, I’ll change the name of the round to Seed and the date to September. You can also change the type of stock using that drop down menu.”
“To edit the nitty gritty details for the round, click the edit link which navigates to the round editing page.”
“Here you can edit the term sheet for the round, any section with ‘OR’s means there are multiple ways of expressing the same value, and you can pick which one best suits your needs. For example, you can change either the pre-money valuation, or the price per share, or the percentage of the company owned by round investors post equity.”
“Now I’ll add an investor for the Seed round, we’ll use Investor 1, and they will put in $250,000.”
“Next we’ll show an investor with convertible debt that converts into that Seed round. So we’ll create the convertible debt, then we’ll say that they put their money back in in March, select the investor, and in this particular case we’ll do Investor 2, and they put in $100,000 with a $5,000,000 valuation cap (5,000,000) and 8% interest.”
“We’ll have them converted to the Seed round on the date of the seed funding so that will be Sept 28th and at a 20% discount to the price.”
“Go back to the cap table and you can see the convertible debt now shows up on the cap table.”
“Everything I’ve shown so far is free for any company profile, for paid accounts you can also track option pools, warrants, and restricted stock, as well as the ability to see all the changes made to the company, who made them, where, and exactly what the change was. The subscription page will give you information on the company’s current subscription status.”
“The next feature I want to show is our most powerful, so we’ll go back to the home page and its the financing scenarios. So every account gets one for free, we’ll create My First Scenario.”
“And I’ll add an exit to it, set the date for the exit to be 18 months from the previous round of financing, and the amount of the exit to be a 50% increase from the previous round’s pre-money valuation.”
“You can also have the exit calculate the amount needed to get a return from an investment, all the investments for a round, or an investor by editing in the context of a company.”
“You can have liabilities, adjustments, fees, and carve outs, and you can change the payout schedule.”
“Now I’m going to apply this scenario to my company which will show me the cap table with the historical information shown as before and the scenario with the light blue background.”
“As you can see our scenario exit amount is 50% greater than the Seed pre-money valuation.”
“From here we can look at the waterfall view of the exit and see where the money is going and why, including the liquidation payout for the Seed round investors since they got participating preferred stock.”
“I’ll go back to the app’s home page to look at one of our example companies, SuperCorp, go into the cap table, and apply my scenario to this company as well. As you can see the exit is $30,000,000 in this case, 50% greater than the Series C valuation of $20,000,000. In many parts of our cap table you can get tooltips that show more details about what is going on.”
“To remove a scenario in this view, click on the X to the right of its name.”
“Now I will apply one of StartupSpot’s example scenarios, this one has a round of financing as well as an exit. And then I’ll apply our exit scenario as well, which will replace the example scenario’s exit with my scenario’s exit. Above the rounds and exits we show which scenario they belong to.”
“Now I’ll close the example scenario and we’re back to just the example company and my scenario there.”
“Finally I want to show you our settings page, you can get a link to Gravatar, to manage your Gravatar on our system. See how many scenarios you own and be able to buy more, change your password, and manage your email addresses. Thank you so much for watching this video. If you have any questions, get ahold of me at [email protected] Thank you.”
I went through our previous videos and added the transcripts to YouTube, which then converted them into really nice closed captions. I’m really impressed with how easy it was, and thanks to Roy Leban of Puzzazz for letting me know about it.
My next screencast is on Option Pool Creation.
We’re posting these videos in our StartupSpot YouTube Channel, and below is the video with a transcript:
“Hi, this is Andrew with StartupSpot and today’s topic is Option Pool Creation.”
“So there are two main ways of creating your option pool, the first is pre-money, and the second is post-money. Pre-money comes from the pre-money owners of the company, so if we have a three million dollar pre-money valuation and a three million dollar investment normally that is split 50/50 between the founders and investor.”
“But when you have a pre-money option pool creation the entire option pool is taken from the existing investors or the founders. So here the founder now get 40%, the investor 50 and the option pool is clearly comes out the founders. If this was done post-money, the dilution is shared between the two and each get 5% off, so 45, 45, and 10.”
“Let’s take a look at this in the screencast example I did before, with the pre-money valuation company. And what we’re going to do first is we’ll just change the name to something more generic, like screencast example. I’m also going to mark this as a public company which means that you can also go to this url.”
“So let’s put in a 10% option. And you’ll notice that if I make this post-money, the price per share is the same as it was before, one dollar per share. If I change it to pre-money, it now adjusts that price per share to a little over 88 cents. This it how it basically works, is it adjusts the price per share to bump up the investors shares to the correct percentage.”
“If you have any questions, comments, or requests for topics let us know at StartupSpot.com, you can email me directly at [email protected], or my twitter which is @myShoggoth. Thank you.”
At the same valuation, a larger investment is going to get a bigger chunk of the company, but it is also going to increase the post-money valuation dollar for dollar that is invested. We can use the same graphical example for this as we did for Pre-Money Valuation:
Pre-Money Valuation Example
Option Pool Creation
The other term that directly affects the size of each slice of the pie is how the Option Pool is created.
The Option Pool is a set of shares set aside for Option Grants, usually used as an incentive for employees to tie part of their longer term compensation to the success of the company.
There are two ways to create an option pool during a round of financing. The first is to create the pool from the Pre-Money Side, which means the new shares for the option pool are only diluting existing shareholders and not the new investment. The second is to create it from the Post-Money Side so the dilution is shared between existing shareholders and the new investments.
Option Pool Creation Example
Last week I tried something new – I made a screencast to explain pre-money valuation. Not the most difficult of subjects, which was good because it still took a lot of time to come up with something I didn’t mind having others look at.
I’ve already received some great feedback and I’d love more. I will do more of these screencasts, and they should get better each time.
We’re posting these videos in our StartupSpot YouTube Channel, and below is the video with a transcript:
“Hello, this is Andrew with StartupSpot and I’m going to explain Pre-Money Valuation.”
“The Pre-Money Valuation for a company is the value before a round of investment. So what is the complete value of that company at that time before the money from the investor comes in.”
“In this case we have three million dollar pre-money valuation, then the investor puts in two million dollars. The split is that the founders or anybody that had ownership of the company before the investment is sixty percent and the investors then taking forty percent of the company.”
“If we change this to two million dollars with a two million dollar investment, its fifty fifty.”
“You can play around with these numbers and see what would happen with different investment levels and different pre-money valuations.”
“To look at it a different way, first I’m going to create a company profile for this. Just change the name to Pre-Money Valuation Example, leave the rest of it blank. And let’s go to the cap table.”
“We’re going to create two founder investors, and generically name them Founder 1 with 750,000 shares, and Founder 2 with 250,000 shares. That makes the math work out really nicely, since there’s a total of one million shares pre-money.”
“Next we’re going to add a Seed Round, a Seed Round is usually the first round of investment, either friends and family or angel investors or a combination of the two.”
“Gonna change this to convertible preferred, which we’ll cover in a later screencast.”
“And add an investor with 200,000 dollars, since the price per share is one dollar, because the pre-money valuation is one million dollars and there’s one million shares, that means that one million divided by one million is one dollar per share.”
“So, two hundred thousand dollars will get you two hundred thousand shares. The post-money valuation then is one point two million, that’s the one million pre-money plus the investment of two hundred thousand, so one million two hundred thousand dollars.”
We’ve been very focused on stability for this release, so no new features to speak of, just quality improvements.
Well… almost. The one new feature is that exit adjustments can now be taken before a specific financing round (instead of at the top of the waterfall). In this case the waterfall would go:
- Normal Adjustments
- Senior Debt
- Subordinated Debt
- Series D
- Adjustment set before Series C
- Series C
- Series B
- Series A
- Fixed a major bug with 30/360 accounting
- Fixed a couple layout bugs when adding an investor and then a round before any investments
- Fixed a bug when an investor’s name was changed before any investments were added for her
- Fixed issues with exits in Summary View
- Show Waterfall link for company exits when that company is shared read-only
- When setting a Scenario Exit to calculate the value based on a multiple of an investor/investment/round it would get in a bad state
- Fixed calculation of As Converted shares for convertible debt
Even given our focus on entrepreneurs, we have interesting current and future value for investors and service providers.
One Location Cap Table Info
Having cap table information in one place, easy to share, have multiple editors, and a full change history are all great reasons to use or push your portfolio companies to use our service. We have heard the story many times of board meetings where 20 minutes are wasted trying to find the correct version of the cap table. Based just on the time of the people involved, a yearly subscription to our premium product would be paid for in just one such meeting.
Sophisticated Financing Scenario Analysis
With access, even read-only, to current cap table information, investors can use our sophisticated Financing Scenarios to analyse their portfolio companies. What kind of exit is required for my investment to make a 10x return? How diluting is the proposed Series B round? What are the ramifications of a down round? These are all straightforward to answer, even across a large portfolio of companies.
Premium company accounts allow subscribing companies to use our advanced features. Investors and Service Providers can sponsor company accounts at a discount while associating themselves with those companies (with an “Account Courtesy” link on their profile). Contact us for pricing and details!
We have a number of ideas of how to add more value here in the future, and we’re looking for feedback and partners to make it happen. Here are a few examples:
Anonymized Financing Data
As we build up a database with tons of detailed financing data, the opportunity to dissect, analyze, mine, and more all show tremendous potential for serious value. What are the common Series A terms for a particular geographical area, for a specific type of company, over the last six months? Given enough data that a specific deal cannot be reverse engineered, we can provide that information.
Contextual Referrals to Service Providers
Because we have a lot of details about the state of a company, we can know what their next steps need to be even before the entrepreneurs. That means we can help them understand what they need to do, by when, and offer them help finding an appropriate service provider to do so. This can range from founding the company, creating a stock plan, to a 403b valuation.
One thing became very clear as part of our redesign/rebranding: Entrepreneurs are our true target audience.
This isn’t really surprising, the business started when Jeff finished MBA school at UNC and looked back at the steep learning curve around Venture Capital and wondered why it was so difficult to learn when the individual pieces were pretty straightforward.
He wanted to make it easier to learn, and thus LearnVC.com was born.
So really, we’re just getting back to our roots.
We offer Educational Resources to make it easier to come up to speed as an entrepreneur. Learn best practices on creating and growing your business, what your financing choices are, how to go about getting investors, and how financing terms work so you’re negotiating on a level playing field.
Once you understand the basics, we have a freemium service to model the ownership structure of your company. You enter founders, angel investors, institutional investors, how much they put in, what terms, and we take care of the equations so you can spend your time making better decisions rather than fighting Excel (or paying someone else to do it). We also make it easy to share your information, revoke access, model possible financing scenarios, etc.
When your company is farther along and you have a stock option plan you need to track, you want to know who made what changes to the cap table when, you want to track restricted stock and warrants, etc. you can get a company subscription for a very reasonable price.
Our goal is to offer tools and resources for entrepreneurs to help them be successful, including our freemium company ownership modeling tool to pay for the rest.