Key Insights: From Capital Raising to Exits Academy Session 1 – Financing 101
CohnReznick and law firm McCarter & English have collaborated to co-host a year-long, four-part series, From Capital Raising to Exits Academy. The program covers financing alternatives, term sheets, public offerings, strategic alliances, and monetization events, and features experts in the accounting, legal, and venture capital fields, as well as successful growth company representatives who share their personal insights of the process.
Below, we reveal key insights gleaned from the expert panelists featured in the first session, moderated by Asael Meir, CohnReznick Partner and Leader of the Firm’s Technology Industry Practice based in New York.
Session 1 – Financing 101
Asael Meir kicked off the first session in the series, Financing 101, introducing an expert panel that included Graham Brown of Lerer Hippeau Ventures, John Frankel of ffVC, Brian Hirsch of Tribeca Venture Partners, and Dave Sorin of McCarter & English. Mark Clifton, President and Chief Executive Officer of Princeton Identity, Inc., was the evening’s featured client.
Clifton started the discussion by sharing his experience combining, at inception, a management buyout/corporate spinoff, a large Series A venture financing, and a material strategic relationship with a corporate partner. He also advised the audience on the importance of timing to the market.
The panelists delivered their respective insights and views on early stage investments, including successful financing and company building. They covered best practices, from ideation/formation through various capital raising transactions and beyond, including the importance of devising an appropriate capital raising strategy, protecting the company’s human capital and intellectual property, equity allocation and vesting among co-founders, and the nature of the venture firm/management team relationship.
Below is a summary of key insights presented during the session:
Before Raising Capital
- Position and prepare your company for financing before contacting investors.
- Sorin: “When you are an entrepreneur and you’re getting started, position yourself for financing, and do it right the first time. You will be in a better position when you are talking to your prospective investors, and, at the time of investment itself, think through your ultimate financing strategy."
- Develop a realistic valuation of your company. Convertible debt is one way to defer a valuation decision of early corporate stages.
- Don’t focus on getting the last dollar off the table during the negotiation. Instead, think long-term.
- Negotiate the terms of a transaction with the ultimate goals for your company at the forefront. Note: The ultimate goal is not the successful completion of your first round.
- When calculating the amount of a capital raise, ask this very important question: “What do I need to get to the next stage of development?”
An Investor's Perspective
- As a company seeking capital, research the investment criteria of potential investors. Each investor works with specific investment criteria. In most cases, investors will not take an investment request and make it fit their investment thesis.
- Ask investors for capital amounts they typically invest.
- The dynamics of the investment fund structure traditionally dictate the size of the deal.
- Each investor’s level of involvement and engagement with a company is different. Be aware of this during negotiations.
- Check references before formalizing a relationship with an investor. Speak to current and past portfolio company management teams.
- The average relationship with an early round investor is likely to last longer than most marriages. Choose wisely.
- Without selecting the right seed investor, you may be challenged when seeking additional capital in the “next” capital round.
- Frankel: “Consider the party round problem—the CEO raises too much money at too high a valuation from a large group of people who have cut checks that are too small for them to care, so there is no stewardship.”
- Brown highlighted that his fund receives a plethora of calls from companies looking to raise capital. However, the number one source of deals is referrals from the founders of his portfolio companies.
- Hirsch: “When you are raising a seed investment, pick a firm that is going to take ownership of that seed, and put their name to a company. Otherwise, you’re going to be in seed plus, seed extension, seed square, or whatever seed term you want to be.”
- The team, the market, and the product influence an investor’s ultimate decision, with the team being the most important.
- It is important to have a capital table and organizational structure that supports the involvement of key team members. This helps support the longer term strategy for the company.
- Qualified Small Business Stock (QSBS) gains exclusion offers tax advantages for founders and investors alike. This should be discussed with an accountant and legal advisor.