Alaska Angel Conference 2020 October 23, 2020 What is due - PowerPoint PPT Presentation

Alaska Angel Conference 2020 October 23, 2020 What is due diligence? – Will Fowler, S ignal Rock

How does AAC work?  Alaska Crowdfunding Act makes equity investing accessible to Alaskans  Investors commit $5,500 to an LLC.  Entrepreneurs apply to be a part of a 12-week conference.  Investors learn how to conduct due diligence on applicants.  LLC makes an equity investment in one startup. akangelconference.com @AlaskaAngel

Alaska Angel Conference 2019  Key Accomplishments  Created 10 new angel investors  S ome of those new investors invested an additional $100,000 shortly after the event  Built new networks between investors and entrepreneurs  Helped startups learn about funding options akangelconference.com @AlaskaAngel

AAC 2020 S chedule WORKSHOPS FINAL EVENT SELECTION Oct 9 th – Feb 4 th Oct 9 th – Feb 4 th April 23 rd Wed 5:30- Wed 5:30- Invest $100K+ 7:00pm 7:00pm In Person & In Person & Online Online akangelconference.com @AlaskaAngel

Due e Diligen ence f e for Angel el Inves estors W ill Fowler – Signal Rock Capital

Will F ll Fowle ler Signal al Rock C Cap apital al Founder Idaho S o SBDC Assoc ociate Director or

Will’s B Background a nd and nd Experienc nce GRUBSTAKE S V VE NT NTURE S

Exper erien ence 30+ Holdings 5 Member Managed Funds Administered: Screening, Fund, Syndicate, SPVs SLO Angel Conference SD Angel Conference 2 Accelerator/Incubators

Due e Diligen ence f e for Angel el Invest stors

The Startup up World

How S Startups View ew T Them emsel elves es

How W We e View ew T Them em

Wh What it’s ’s R Really Like

How I Inves estors View ew T Them emsel elves es

How I Inves estors are V e View ewed ed b by Other ers

Wh What it’s ’s R Really Like

The e Most Likel ely O Outcome Is F FAILURE

How d do w we M e Make e Money ey? Exit or Bust

EX EXIT A ”Cash Out” event, where the company is sold privately or publicly

Ang ngel I Inv nvesting ng D Data 70%: Fail or return less than 1X 85%: Of returns come from less than 10% 21%: Average IRR 2.5X: Average Multiple

Dea eal/ Ter erms Vocab

Fundr ndraising ng R Round nd W hen a company wants to raise equity financing – they determine a “ROUND.” Series Seed, Series A, Series B, Series C, etc..

Fundr ndraising ng V Vehi hicle W hen a company wants to raise equity financing – they choose a VEHICLE for that “ROUND.” Stock, Convertible Note, SAFE, KISS, Etc…

Priced R d Round nd / St Stock Shares of a company

Conver ertible e No Note A loan that converts to equity based on predetermined triggers.

SA SAFE Simple Agreement For Future Equity: Much like a convertible note – but lighter.

Why the e Veh ehicle e Matter ers

Taxes s for I Invest stors Tax Exclusion 1202: Any qualified “small business stock” that is held for at least 5 years is EXCLUDED from Capital Gains Tax.

Conver ertibles es Delay the start of the clock for 1202

Priced d Rounds nds c can n be Bet etter er for Inves estors (fol ollow ow y you our m market de demand) nd)

VAL ALUAT ATION Invested amount/Post Money Valuation = Ownership %

Val aluat ation E Exam ample Your Raise: $1M Your PRE money valuation: $3M Your POST money valuation: $4M Total % Sold = $1M/$4M (25% 25%) Lead d INVESTED $100K $100K Total o ownership p = $100K $100K/$4M $4M (2. 2.5% 5%)

DILUTION The amount to which your ownership is reduced by subsequent rounds/vehicles/valuations

Expec ect to be e diluted ed 50%

Dilut ution E Exampl ple Company Raises: $1M Company PRE money valuation: $3M Company POST money valuation: $4M Company is Acquired for $30M Total % Sold = $1M/$4M (25% 25%) You’ve been DILUTED 50% (1.25%) You Invested $100K Return = = $375, $375,000 000 Total ownership = $100K/$4M (2.5%)

Quest stions? s?

The Process ss of Invest sting

Standa ndard P d Process Deal Flow Screening Due Diligence Closing

Deal F l Flo low Incoming Deals to Consider for Investment

Screen eening The “Sniff” Test on whether the opportunity is a good fit.

Du Due Di Diligence In depth look at the company Validate the assumptions of the company Determine major risk factors

Cl Closing Negotiate/Agree on terms Sign Paperwork Send Money Receive Certificate

Du Due Di Diligence

The e purpose e of D Due e Diligen ence To identify risks To understand the team To validate the startup assumptions/assertions

What do Y You Need eed to Bel eliev eve e is T True a e at the he E End? nd? Solid Leadership 1. Opportunity for a Sizable Return 2. Team’s Ability to Execute 3. Fair Terms 4.

What at the Star artups ar are as asking of Y You? For You to Believe in Them 1. To Accept the Risk with $$$ and Time 2. To be Patient 3. To Focus on the End-Game 4.

Do they ey have e a lea ead invest stor?

Do t the hey ha have a an n attorney?

4 4 thi hing ngs to kno now about Du Due Di Diligence

Ste tep 1: F : Focus on w what t is importa tant Team = Team and Ability to Execute 1. Upside = Market/Business Model 2. Impact = Traction/Progress/Use of Funds 3.

2. 2. D Don’ n’t be an A Assh sshole Even when they are being assholes

Step 3: Unde nderstand t nd the heir b baby is ugly and nd will di die. B Be ni nice about it. No business plan survives first contact with customers They will change course many times before exit They will make huge mistakes They will need to raise more money

Step 4: 4: U Unde nderstand t nd the he T Terms Entity Vehicle Valuation Anti-Dilution Preferred Stock

Mak ake it Eas asy Be Responsive Be Patient Be Thorough Be Nice

Now ow f for or the A Actual Proces ess of Due e Diligen ence

1. Val alidat ate 2. D Disc scover 3. D Decide

The P e Proces ess of D Due D e Diligen ence Organizational Process Discovery/Research Process ● ● Decide on DD lead Send Document Request (see next ● Set deadline for process completion slide) ● ● Assign team to areas (Finances, Call initial meeting – establish major Market, Customers, Leadership, risks based on document review ● Business Model, Terms, ect) Meet with CEO/Site Visit ● ● Set meeting schedule Conduct validation work (market ● Communicate all of the above to research, customer calls, Startup financial/operational review) ● Call team meeting to discuss risks and go/no go decision (or request additional information) ● Make a recommendation/Present findings

The B Big L Lis ist ● ● Tax Returns Customer List and Contact Info ● ● Pro Forma Org Chart (Current and Proposed) ● ● Budget Team resumes/Bios ● ● P&L/Balance Sheet/Cash Flows Business Plan ● ● Cap Table Detailed Offering Terms ● Detailed use of Funds

2 Li Likely Ou Outcomes

Failure e is the e most likel ely ou outcom ome of of any inves estmen ent

Rais isin ing more money is is the e other er likel ely outcome

Quest stions? s?

Tha hank nk You will@signalrockcapital.com

Thank you for j oining us! Join us October 30 at 5:30 PM for “ Pitch Deconstruction” Thank you Will Fowler, S ignal Rock akangelconference.com @AlaskaAngel