| Investors, which can include wealthy individuals, | | | | of the exit strategy. Many tactics are available to |
| strategic alliances, financial institutions, venture capital | | | | provide this benefit to potential investors. |
| firms, stock brokerage houses, etc., want to know, | | | | 5. If the firm fails, what are my liquidation rights and |
| among other things, six basic things about your | | | | lien positions on assets? |
| capitalization plan: | | | | While this is an outcome we do not like to discuss, |
| 1. Who are you? | | | | start-ups are risky. On average, 85% of start-up and |
| Including your management team's background in the | | | | early stage companies fail within their first five years, |
| business plan or prospectus. More experienced | | | | and 50% of the remaining firms will simply survive |
| management teams have a greater probability of | | | | providing little or no return. By providing a secured |
| raising capital. Do what you can to form an | | | | position on assets for the investors, and |
| experienced board of directors, executive officers or | | | | subordinating your equity in case of liquidation, you |
| at least an ancillary advisory board. They should also | | | | can offer the investor some protection. |
| be able to give you some capital contacts of their | | | | 6. How much will I earn? |
| own. | | | | Few business plans and securities offering documents |
| 2. What will you do with my investment? | | | | include rate of return projections. A prospective |
| A detailed "Use of Proceeds" statement should be | | | | investor will want to know the current value of the |
| included in the business plan and must be included in a | | | | company based on realistic future financial |
| securities offering document. | | | | projections. These include realistic annual earnings |
| 3. How safe is my investment? | | | | growth, realistic gross and net operating margins, as |
| This generally difficult to answer in a sufficiently | | | | well as increasing capital budgets. Many securities |
| assuring manner. Generally, entrepreneurs will attempt | | | | attorneys are reluctant to project a rate of return, |
| to sell less than controlling interest in their firm for a | | | | because they fear that you'll be sued if you don't hit |
| substantial amount of equity capital. For instance, | | | | those numbers. Proper disclaimers provide sufficient |
| they may attempt to sell 20% of the equity interest | | | | legal protection against this occurrence. |
| in a start-up or early stage enterprise for, let's say $1 | | | | Well-prepared pro forma financial projections provide |
| million. A sophisticated investor would realize that, by | | | | prospective investors with:o A thorough "Use of |
| investing, he or she would be valuing the company | | | | Proceeds" statement. (Required by federal securities |
| for $5 million (if $1 million is only 20% of the worth of | | | | law.)o Realistic cash flow projections and analysis, and |
| the company). Generally, there are no other tangible | | | | exit strategieso EBIT, Key Ratios, Annualized |
| assets in the company, including the entrepreneur's | | | | Compounded Rate-of-Return Projectionso Current |
| cash. Obviously, this is not a safe situation for the | | | | Company Valuation, Current Pricing of the Company's |
| investor. | | | | Securitieso Growth planning, and Future Private, as |
| 4. How do I get my investment back? | | | | well as, Public Valuation of the Company |
| Exit strategies generally need to be specified rather | | | | With this information to work with, investors can |
| early in the company's life. Although IPO's or sales of | | | | make a decision on a venture with as much |
| the company may seem attractive, those strategies | | | | confidence as one can in trying to predict future |
| are not guaranteed and therefore should not be part | | | | events. |