Above All Else: avoid over-talking, avoid giving off excess CO2. Let the investor learn the business in their own way at their own pace.
Take the position that the first impression the investor sees will be of the business itself, preferably a repeating video that has minimal voice-narration. Only after being triggered by that, will the investor maybe see the financials, meet you personally,
Your financials (AKA pitch documents) will vary depending on the type of investor. There is no one-size-fits-all set of financial investor-documents. We avoid the expression "pitch documents" and "pitch deck" because the founder(s) are probably not going to get a chance to pitch. The objective video and objective documents should do that actual pitching (convincing).
Most founders are over-invested, talk too much, stick to their canned presentation too much, fall in love with their own PowerPoint, and read it to themselves.
In general the following investor-financials are preferred/recommended:
business plan
income statement,
cash flow statement,
balance sheet
Capitalization Table (Cap Table) showing ownership structure, including founders and investors. A common mistake is to leave people off this that you used to get along with, but now don't like. This is a bad idea. Its not good to just hope these people disappear.
It does not matter that the business may have been unprofitable. These other contributors may still consider themselves to have a right to recovery of their original contributions, whether cash, sweat equity, use of equipment or materials, etc.
A better way is to close down the earlier business, notify all parties that their rights are extinguished, and re-start the business with new foundation documents.
Historical Financials:
Past tax returns (redacted);
Profit & Loss (P&L) statements;
balance sheets;
Future Financials:
We hate these. They are never accurate. A particular fallacy is when these are based on a % of TAM (Total Addressable Market).
Term Sheet including valuation and control rights.
Private Placement Memorandum (PPM):
OpAg - - Articles of Incorporation
Intellectual Property Protection: Patents, trademarks, and copyrights.
Key Operational Documents
Customer Contracts/Traction-Proof: Evidence of revenue and demand.
1) term sheet or offering documents; Profit & Loss (P&L); 2) balance sheet; 3)
Some famous Private Equity investors have a public portal where interested parties can make submissions. Classified lists also exist. JUST KNOW there is no way to automate this, but service providers can be found that will take on this task, and the tedium of it.
Don't have investor discussions without informing them of your total human capital involved (e.g. LLC Membership). This may not be needed right away, but eventually an investor will ask. Many reasonable, responsible people have made mistakes in their past. Its best to openly disclose this. Its one thing to have made the mistakes, its another to try to omit it.
Expect that eventually, before any investor-money is tendered, a criminal/credit check will be performed on each participant/member in your biz-org. These parties will have to give up their SS# & DoB to a neutral 3rd party background-checker. For participants that are married, this will (eventually) include their spouse. A particular area of concern is student loan debt. If an investor signs up for a Series A round of e.g. $half-million, but someone in the company has $70K student loan debt, that investor has the right to be concerned about this. In making a half-million investment, their investment is already impaired right at the start, such that effectively they are only getting a $430K yield on their $500K investment. This is dangerous. Such an investor is starting in the hole.
Student loan debt is non-dischargeable in BK. That means that any investor is not only buying into the company, but also potentially buying into any debt problems that company has. Student Loan debt is especially pernicious because its intellectual property, not tangible. Student Loan debt is secured to the person, not to their vehicle or tangible real property.
A common problem is when everyone gets along, and and investor is ready to pay, checkbook in-hand. They say "prior to writing the check, we must do one last background scrub". They then find a ton of skeletons and disappointments. DONT WAIT FOR THIS. Anticipate this problem, have your own scrubs pre-done. Have your explanations ready for whichever negative information comes up (every human anywhere has something in their past).
Further, all parties involved should be identified in an Op Agreement (we believe in LLCs not INCs).
A particular area of concern to an investor is student loan debt. If an investor signs up for a Series A round of e.g. $half-million, but someone in the company has $70K student loan debt, that investor has the right to be concerned about this. In making a half-million investment, their investment is already impaired right at the start, such that effectively they are starting off getting only a $430K yield on their $500K investment. This is dangerous. Such an investor is starting in the hole.
Student loan debt is non-dischargeable in BK. That means that any investor is not only buying into the company, but also potentially buying into any debt problems that company has. Student Loan debt is especially pernicious because its intellectual property, not tangible. Student Loan debt is secured to the person, not to their vehicle or tangible real property.
A common problem is when everyone gets along, and and investor is ready to pay, checkbook in-hand. They say "prior to writing the check, we must do one last background scrub". They then find a ton of skeletons and disappointments. DONT WAIT FOR THIS. Anticipate this problem, have your own scrubs pre-done. Have your explanations ready for whichever negative information comes up (every human anywhere has something in their past).
Further, all parties involved should be identified in an Op Agreement (we believe in LLCs not INCs).
Human capital, roles/responsibilities of each party, things they brought to the company, roles they agreed to, roles they were not aware of, this all should be settled and clear. There is a way to update an OpAg every e.g. 6 months, although few even highly-responsible LLCs do this. THis is likely because they are not seeking investment. A great way to kill an investment is to "forget" that an unknown person is still listed as Member in a long-outdated OpAg. We see this a lot, and that person must be found, even if e.g. 6 years later. Often they must be bought out or silenced in order to not make trouble.
Any LLC that has not updated their Op Agreement within at least 1.5 years . . .
a) likely contains facts and obligations in the Op Ag that are stale, obsolete, no longer accurate; which in turns means
b) likely the entire Op Ag is invalid and unenforceable, or at least subject to dispute. Certain portions may have to be severed. This is bad, its like a car with frame-damage. The car may still appear to run, but its impaired and unsafe.
We all understand in starting a company, there will be losses. But its a good idea to document those losses. Such documentation could make a company more enticing to an Investor. This is because the Investor wants not only to generate Revenue, but also strive to keep as much of that Revenue as possible, and drive it back into the Company. Properly documenting all expenses, and noting these expenses in a tax return, could be advantageous later on, as these losses can be set against Revenue and reduce tax exposure. This in turn means the Investor is more likely to recover her initial cash outlay.
Unfortunately, most LLCs don't bother doing this. Its expensive and time-consuming. It often turns out to make no difference at all. But in the event the company becomes solvent, the various losses (if properly documented and statutory) can be carried forward into a profitable year.
The primary IRS codes governing tax benefits for inventors and researchers are IRC Section 174 (research and experimental expenditures) and IRC Section 41 (the Research and Development, or R&D, tax credit). These sections allow for the deduction of R&D costs and provide credits for increased research activities. Even the most astute inventors are not aware of these, and blow all this off. To their detriment.
An investor may see such documentation and diligence, and still not invest. But having the above advantages in-hand and already set up, can make a favorable impression.
If one of the key assets of the company seeking investment arose from a student project, its very possible patent rights to these key assets are impaired or lost outright. Investors don't like finding this out after-the-fact. Check into this.
a) list of intangible assets b) debt maturity schedule c) recurring expense schedule, are all helpful because they show an Investor what you are up against.
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