Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Many startups use profit sharing to fund their business. 

It is important that everyone involved has a very clear understanding of how “profit” is calculated.

There are three locations in the startup’s profit and loss to dip in and take out a “share” to pay back an F&F investor. They are as follows: 

1. Top-line revenue is the most often used.
2. Gross profit is the revenue minus the cost of goods sold or what it cost to make the product. 
3. Net profit is the revenue minus the cost of goods sold and expenses.

To know how much profit to share, you must first build a financial model.

Another key issue is when to start payments to the investors.  

You could set a timeframe such as 3 to 6 months out, or upon closing a customer sale 

You could set a specific amount of revenue or profit or whenever you are able to payback.

There needs to be a limit to the amount of profit sharing. It could be a specific dollar amount or a time limit.


Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Many startups raise funding from family and friends on their first round to get the startup going.

Before launching, make sure you do the following: 

Co-founders should agree on the equity split for each one and document the ownership agreement legally.

Intellectual property (IP) needs to be assigned to the startup, including programming code, product designs, product trademarks, and domain names.

If you are hiring employees you need to establish a stock-incentive plan to enhance their compensation package.

You are accepting investment funds so you need a legal entity. You’ll setup either an LLC or a C-Corp. For an LLC, you give membership units for an LLC, and shares for a C-Corp.

You are starting a business so you’ll need a business bank account. For this you’ll need a Federal Tax ID (also called an EIN) to complete the process.


Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Many startups use loans to fund their business. Here are a few ways to set up a payment structure and schedule. For payment structure you can use:

Interest-only payments -- in the beginning the startup only pays out the interest and later pays the original loan.

Deferred start of payments -- you may consider starting payments 6 to 12 months after the loan is taken to give the startup time to build product and close customers. 

Pay back when you can -- this is the easiest of all payment options which gives the startup lots of freedom in paying back, by deferring the start to some date in the future.

You will need to determine how much will be paid when the payments start so you can create an amortization schedule.

Once you’ve decided on the loan amount, the interest rate, term, and payment schedule, you can plug those numbers into an amortization calculator to create a schedule of payments needed over the life of the loan.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Many startups raise funding from family and friends on their first round to get the startup going.

For those considering family-and-friends funding, think about the profile of the type of investor you need.

Clearly, the person has sufficient money and can afford to lose some of it with no impact on his or her lifestyle.

Also, consider how well connected they are.

Can they help make a deal with a key customer?

Do they have industry or domain expertise?

Do they have startup or business experience?

Are they an accredited investor?

Are they an active or passive investor?

These are just some of the questions you’ll need to answer to know if they are a fit for your deal.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
-----
For more episodes from Investor Connect, please visit the site at: http://investorconnect.org

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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

I’m often asked if you should you take money from family and friends to fund your startup.

Outside investors will look at family-and-friends funding as a sign of support for your business.  

If your family and friends won’t invest, why should the outside investor invest?

Many startups are reluctant to take family-and-friends funding because Thanksgiving turkey tastes different if things don’t work out.

In addition, there’s valuation. I’ve seen some startups give their family a special valuation because well, they’re family.

This becomes a problem later when raising follow-on funding from outside investors. You have to give them the same valuation or higher, or your family loses their equity position.

My recommendation is to take family-and-friends funding as a show of support.

But only as a donation and only in $10K amounts from each person.

Offer to pay them back by supporting their project in the same way when the time comes.


Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
-----
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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Targeting investors for your fund and getting buy in is a key step in raising a fund. 

Potential investors include family offices, high net-worth individuals (HNI), and angel investors. 

Larger, institutional investors such as pension funds, are typically not interested in unproven fund managers and rarely go below $50M funds. 

Institutional investors look for a prior track record and have minimum investments that would put their investment above a limit on how much of the fund their investment takes. This is typically around 20%.

You could engage a placement agent whose fee is usually in the range of 2 to 3 percent.

You can also use meetings with investors before the fundraise to see how the market will respond.  

The key to launching the fund is to secure an anchor investor who will allow you to use their name. 

This gives the fundraise momentum as the initial funds are secured.

The most common question will be about past performance. If you have led funds in the past then you have a track record to present. If not, then if you invested as an angel investor in numerous startups then that too could give you a performance record. Be sure to highlight any investments that resulted in a successful exit.

If you were an operator of a company with a successful track record, that could be used as well. 


Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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In this episode, Hall welcomes Eric Berman, Co-chair and President of Element 8 (E8) Ventures, an angel, impact-investing group who invest for profit with a purpose.

E8 is an international, Seattle-based community whose mission is to accelerate the transition to a prosperous and cleaner world by investing in and fostering emerging cleantech enterprises. Its flexible, investor-centric platform supports different types of investors and asset classes, including direct angel for-profit investing, pooled investing in expertly managed VC funds such as the E8 Fund and via syndication.

E8 members have invested $39.3 million over 14 years, in over 90 different companies.

Eric worked with Microsoft through most of the 90s and then Expedia, but decided after many years that he wanted to work in the environmental sector where he had a huge passion for the environment and renewable energy.

He speaks about the evolution of angel investing in cleantech specifically and gives advice to both investors and startups.

Visit E8 Angels at www.e8angels.com/ 

Eric can be contacted via LinkedIn at www.linkedin.com/in/erberman/ and via email at ericbe@hothpark.com.

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

So what is growth equity?

Growth equity refers to investing in a company at later rounds such as Series C or D.

These companies typically have $3-5M of revenue and are beginning to start the scale process. 

Growth equity venture firms look for a company that will become a market leader. 

A typical ROI is in the 3-5X range.  

Private equity is not typically in the picture yet as they look for profit, which for startups doesn’t yet exist.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
-----
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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

As a startup, it’s helpful to understand the VC investor you are talking to and how they make money.

In venture capital, there’s two ways to make money.

First, VCs typically take one third of the equity for their investment.

In rough numbers, the VCs take the amount to be raised and double it for a pre-money valuation. The VC receives equity ownership of investment, divided by post-money valuation.

As an example:

Say you are raising $1M. The VC will turn that into a $2M pre-money and then add the $1M investment to reach a $3M post-money valuation. The investor receives Investment divided by the post-money which is 33% of the equity. That’s how much equity the startup gives to the VC for the funding.

Second, the VC charges their investor, called Limited Partners, a fee and carry -- most often 2% fee and a 20% carry.

VCs have limited bandwidth and can only take on a certain number of deals. They look for startups that will agree to these terms as it prioritizes the most profitable deals to pursue.

The better the deals they attract, the more they can charge their LP investors.


Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
-----
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Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

The Returns on a Fund are based on the power law which means that the Pareto Principle applies: The bulk of returns come from just a few of the companies.

Out of ten investments, one will be a home run, two to three will be small returns, and the rest will be losses. 

Some use the J-curve to show the returns. The returns in the early days are negative because the losses typically happen first. The winners come later. The shape of the returns curve looks like the letter J when plotted on a graph.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
-----
For more episodes from Investor Connect, please visit the site at: http://investorconnect.org

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