1. DOING A START-UP

2. INGREDIENTS FOR A START-UP v The basic idea (the opportunity)— menocheck/Pace One v The key person - management team v The private placement memorandum - the “Package” v The (venture’s) capital

3. KEY PERSON - MANAGEMENT TEAM v One chief executive or a group? v Characteristics of an entrepreneur : Confidence And most of all, Character

4. Elements of the Basic Idea

5. Forms of Organization v How should we organize this new venture?

6. Plan (softly) for an “out” v Venture capital rule of thumb: 10 times my money 10 times my money in in 3-5 years 3-5 years ** multiple of earnings, generally but many other valuation methods but many other valuation methods

7. Basic Profitability v Pricing the product/gross profit, and v Estimating the size of the market v Is it a pain killer….or a vitamin? v Pricing the product by marking up the cost is the sign of an amateur entrepreneur; reap your extraordinary profits now

8. Capital Intensity v Sunk costs v You don’t have to make what you sell v You don’t have to package what you make v You don’t have to store what you sell v You don’t have to sell what you sell

9. One Product Firms v Can be “OK” v Are you losing an opportunity to sell MORE to a customer? v Revenues!!! v Commitment to a “line”

10. Repeat Orders vs. Single Sale

11. Capable of an “out” v 10 times money in 3-5 years v Go Public v Merely paying dividends or interest doesn’t excite this type of investor

12. Capable of an “out” (cont.) v When outside investors get involved in a deal, the whole situation changes for the entrepreneur v Some entrepreneurs associate raising “outside” money as being a measure of success

13. Barriers to Entry v Intellectual Property v Is 1 st to market desireable?

14. Tell Me Upfront v The opportunity/idea – 16 words in 16 seconds in terms on a 16 year old level v Tell me what you want from me v Tell me what you’re gonna give me

15. PRIVATE PLACEMENT MEMORANDUM v Overall appearance v Length : no more than 25 pages plus pro-forma financials (“most likely” scenario only). v Double spaced v No mistakes

16. PRIVATE PLACEMENT MEMORANDUM v v Introduction and summary—excite me and tell me what you want v v The product - What it is that you are going to make or sell ? v v Marketing: Perhaps the most important section – –The need for market research or equivalent:prove the market and forecasted revenues v v Management: track record v v Financial summary: – –Review of sales and profits – –How much money will it take? – –Pro-Forma Financials: Footnote everything

17. HOW MUCH STOCK TO OFFER? v Use the following formula for your offer: Investment X Rate of Return desired (some multiple) Fifth year earnings X Suggested P/E ratio v Points up the importance of the “Basic Profitability”; low profit firms mean that you will be giving up much more equity! v Let’s look at handout-you need to internalize this!!!

18. HOW MUCH MONEY DOES IT TAKE? v First, you take the maximum negative cash balance for most likely scenario, M. v Next, you calculate the maximum negative cash balance for most pessimistic scenario, A, and the maximum negative balance for the most optimistic scenario, B. v Then you take the greater difference between M and A and compare that with the difference between M and B.

19. HOW MUCH MONEY DOES IT TAKE? v Amount of money needed = M v Plus: A contingency = The greater difference between A and M and B and M, and then round for cosmetic purposes. v For example: If M = $850,000, A = $925,000 and B = $1,050,000 then: – –Amount of money needed $850,000 – –Plus: Contingency 200,000 – –Equals: Total amount needed $1,050,000

20. GET IT WHILE ITS HOT! v “If you want to fly to financial paradise, have enough gas to make the trip as there are no good service stations on the way.” v There are exceptions, of course, but in general it is wise to get all the money you need up front because if you have to go back for more it is likely to be terribly expensive. Also, when you call for more, it may not be there.

21. PRO-FORMA FINANCIALS v Three income statements, three balance sheets and three cash flow statements (monthly for 2 years/ quarterly for next 3)(Yours should probably be weekly) v Where you prepare three each of these statements, only put the “ most likely” in your Package. v Footnote every item in your statements; even show such things as the changes in A/R or Inventory. v Remember who is going to read this Package.

22. TYPES OF VENTURE CAPITAL v “Seed money” - what you need to get the idea to the point where you can raise the venture capital. v Angel money. v “Venture capital” - the amount of money needed to do the deal. v “Second stage money”- money you can use to grow; if you have to have it, it isn’t “second stage money.”