Tag Archives: Grant

What are the Best Avenues for Raising Capital? Six Points

Situation: The technology sector is booming with AI and other exciting new technologies. Whether you want to fund a new company or a new effort within a smaller company, what are the best approaches? What are the best avenues for raising capital?

Advice:

  • Funding and credit markets are opening but still tight. The bar has been raised because too many people are chasing too few available dollars.
  • The venture capital (VC) sector has consolidated. The primary focus is on technology, software and medical. Much less goes to the consumer sector. It is important to target angels, VCs or investors who specialize in your technology, market and business model. Research current VC portfolios.
  • Angels now act more like VCs – particularly structured angel groups. Initial investments are typically under $1 million.
  • If you have a technology, investigate the grant world – e.g., NIH or DARPA. These organizations fund research, but not marketing, distribution or sales. Look for specific programs or RFPs that align with your technology. Target your grant request toward prototype development and studies. Search LinkedIn for military people who can introduce you to contacts within programs like DARPA.
  • Investigate SBA Grants, and foundations with an interest in your technology or application. Foundations sometimes will grant funds ($100k) to support the work of individual scientists and researchers. Call on friends and family who believe in you and your work.
  • Whoever you approach, these rules apply: (1) Do your homework. Choose sources that align with your project and profile. (2) Presentations must be crisp and easily understood. Investing in professional assistance is wise. (3) Be able to make your case in 15 minutes or less. The first minutes are most crucial, so have your ‘elevator’ pitch perfected. (4) Your model and financials must support a high multiple exit, 5-10x their investment in a reasonable period of time – about 5 years. (5) Team, Team, Team – credentials, experience, presentation – be a team with whom the investor can work.

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What are the Trade-offs of Becoming a Company Principal? Four Points

Situation: A senior employee is on a good growth track within her company. The CEO has stated that he believes that she has the potential to become a principal of the company in the future. What are the tradeoffs of becoming a company principal?
Advice from the CEOs:
• Becoming a principal involves both greater potential rewards than being an employee and greater potential risks. Create a chart with two columns. In one, list the potential rewards of having a stake in the company. In the other list the costs and potential liabilities. This will help to weigh the rewards against the liabilities.
• Areas to negotiate include voting rights, granting of options, understanding the perks of becoming a partner, and also the possibility of legal liability for any malfeasance that the company may commit.
• If you see liabilities that concern you talk to an attorney – your own, not the company’s – about how to address these liabilities in the terms of an employment contract as a principal.
• Evaluate the potential long term value of the ownership share being offered. Does the company have a buy-back policy for a principal’s ownership share and, if so, what are the terms?

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How Do You Value the Stock of a Private Company? Three Factors

Situation: A private company has not issued stock options in over 6 months. The business press highlights concerns over appropriate valuation at the time of option grant. How do you value the stock of a private company to assure that option awards reflect proper company value?

Advice from the CEOs:

  • Decide on the objectives of your valuation exercise. These may include:
    • A credible valuation to protect the Board from challenges over option valuation.
    • A calculation that the company can use quarterly or semi-annually to assess company valuation; possibly something that can be done internally on a quarterly basis, with independent validation annually.
  • Given that your concern is option valuation and protection of your Board, they only clean way to do this is to have an outside party perform your valuation. Internal valuations are subject to challenge. Look for reputable CPAs that specialize in private company stock valuation and get quotes from several for initial valuations plus follow-up valuations in 12 months. You may anticipate paying a fee of $12,000 to $15,000+ for this service.
  • There are issues that you will want to address in your valuation process:
    • A valuation must have a supportable rationale and demonstrate consistency of methodology so that valuations will be performed on a comparable basis year after year.
    • You want to see consistency between valuations with your annual financial audits which will reflect company performance.
    • There are at least two models that you may follow – a hard model and a soft model.
      • The hard model is a one-time valuation based on your financials. This may include historic performance, as well as forward-looking ROI.
      • The soft model is based on operational and risk assessment.

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