Venture

Capital
Guide

NDSB [Link]
TA BLE OF CONTENT S

Startup Guide for Founders Looking to Raise Capital

Knowing YOUR Business 4

Customer Discovery 5

Value Proposition 5

Total Addressable Market 5

Go -to Market Strategy 5

Industry Comparables / Valuation 5

Deal Structure - SAFEs, Convertible Notes, and Priced Rounds 6

Future Funding Strategy 7

Exit Strategy 7

Startup Guide for early-stage Investors

Knowing what YOU like to invest in 8

Impact vs Performance 9

Industry Differences & Traction 10

Identifying Risks and Red Flags 14

Common Deal Types and Investor Rights 15

Due Diligence 16

For Midwest investors and entrepreneurs. Please consult your own professional team for advice on any legal or tax decisions related to
your business. Created by the team at 701 Fund and local entrepreneurs. Contributors: Greg Syrup, Gavin Justice, Heather McDougall
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ENTR EPR ENEUR S
K NOW ING YOUR BU S INE S S
- A R E YOU A GOOD FI T FOR
OU T S IDE IN V E S TOR S ?
Are you a small business or a startup? Is there a This is important because it really impacts the types
difference? of funding or financing that you should seek out. A
small business may be best fit for some type of loan
There are absolutely differences. When we think of or is often self-funded through an individual’s or
small business, early-stage startups often get lumped group’s 401k/retirement, home equity, and personal
in with this, but they are not the same. A small savings.
business is considered more a “lifestyle” business,
examples of this might be a retail clothing store, Whereas a startup is the best fit for outside investors
a restaurant, construction, etc. Small businesses because it may be costly to achieve the necessary
can be successful but they are usually focused on market penetration in order to capture a share of
a very specific market or geography. Most startups the market to sustain growth. Venture capital can
alternatively are technology based and are looking to help accelerate growth and provide timely advice,
perform in very large industries or markets. Another depending on the investor.
important distinction of a startup is in its ability to
grow. A startup should have the ability to scale – Now, it is important to consider that you may need to
sell more products and add new customers, without utilize multiple sources of capital in order to achieve
having to add any new employees or increase the growth you want to see:
expenses dramatically.

TYPE EXAMPLES
Bootstrapping Self-funding, reinvesting any income, savings, home equity, 401K, credit cards, etc.

Friends, Family, and Fools Often the first to borrow or invest money with less stringent terms

Grants Local, state, and federal programs have often been an attractive form of non-dilutive
funding, the SBIR/STTR Grant programs ([Link]) award over $2 billion annually
State Funded Programs Usually, some sort of loan or convertible debt

Equity Raising money from outside investors for a piece of ownership, such as angel
investors, venture capital, private equity
Debt Borrowed funds from a bank, credit union, or other lender

Crowdfunding Companies will often leverage a marketing campaign to pre-sell products, exclusive
merchandise, or other unique opportunities to generate capital
Equity Crowdfunding Since the creation of the JOBS act, non-accredited and accredited investors have found
new opportunities through equity crowdfunding – this allows for smaller investments
(less than $5,000) to be made in early-stage companies
Licensing/Royalties If there is attractive intellectual property with many potential applications, other
business partners may seek to license the technology for their own purposes.
Restrictions may be necessary in order to prevent direct competition if you intend to
use the IP otherwise.

4
CU S TOME R DI S COV E RY - W HO products provide a multitude of potential benefits.
Educating the customer is sometimes a necessary
I S GOING TO BU Y T HI S ? step to helping them purchase.

You’ve got a really cool product or service, but do

you KNOW that someone wants to buy it. In many TOTA L A DDR E S S A B LE M A R K E T
cases, it is easy to see where there can be some - HOW M A N Y PEOPLE OR
market demand. Often times this is something that BU S INE S S E S COULD BU Y T HI S /
is a great assumption by an entrepreneur. Talking
to customers about their problems or frustrations
HOW M A N Y T IME S ?
around a certain experience via a survey can help
What is the size of the market for the individual and
you answer important questions. For instance, is
collective products you plan to sell? Most investors
this a big problem? What solutions have you tried
will only consider opportunities with at least a billion
previously? How much would you be willing to pay?
$ market opportunity! Not all, but some, and the
reason for this is because most startups need to
Unfortunately, many companies don’t ask these
achieve $50 million in sales to achieve a huge ROI.
questions before going through expensive product
That’s 5% of the overall industry
development and then either need to start over
completely or make further changes to get it to a
position that the customer will better engage. It is GO -TO M A R K E T S T R AT EG Y
important to think about who the actual decision - HOW W ILL YOU GE T T HE
maker is that will buy the product you are creating.
HR software, for example, is a service that will
PRODUC T OR S E RV ICE S IN T HE
decided upon by company leadership – so you U S E R S ’ H A NDS ?
should talk to the HR Manager, COO, CEO, etc. Yes,
the employees or users of such software may also What is the delivery method? How are people going
be worth talking to, but they won’t be able to drive to find out about your product? What does the
the purchase decision. buying process look like?

Having the process outlined will also have a

monumental benefit in helping you understand your
customer. Discuss this with others and see how
people react to different processes.

INDU S T RY COMPA R A B LE /
VA LUAT ION - HOW MUCH
C A PI TA L DO YOU NE E D?
Most investors prefer you to raise enough capital to
cover you for 12-24 months without considering any
revenue growth. This is so you can achieve some
VA LUE PROP OS I T ION - W H Y crucial milestones – like $1 million in ARR.
S HOULD T HE Y BU Y I T ?
Fundraising takes time. Too much time. Many
In the simplest way possible, what are the benefits investors can be tire kickers, don’t depend on
that a customer can expect when using your product? promises – they won’t pay the bills. If you sense
Different customers may have different reasons they resistance, they may not be the right investor. If it’s
are buying. Distinguishing those benefits based taking too long then you may want to consider making
upon who is buying can be helpful in communicating your investment opportunity more attractive. The
the value you can provide. easiest way to do this is by leveraging your equity.
Sometimes the investor is worth the adjustment, but
Communicating that value is another story. Some not always.
products provide one clear benefit whereas other

5
If you can get a good price, that’s great but keep in are set to convert into equity at either a later date
mind that if you fail to see significant growth and or often in the event of qualified financing – when
raise capital at an overvalued position, you may have a company raises an aggregate amount of capital.
to do a down-round. Both SAFEs and Convertible notes are less formal and
more ambiguous than priced rounds. They are often
This shouldn’t be a conversation you avoid if you have used in very early stages or bridge rounds. SAFEs are
a question or want to understand. Any entrepreneur considered company friendly, but really any deal is
should be comfortable justifying how they came to only as good as the terms involved. Combinator has
a certain price when doing a priced round. Have a really led the charge with template legal documents
discussion and think critically about the opportunity. for SAFEs. Sometimes the National Venture Capital
If you have concerns, nothing is written in stone and Association will also have standardized legal
as an early investor you are likely to take the most document templates for this purpose as well.
risk as an outside investor.
The type of deal and the terms can dramatically
DE A L S T RUC T UR E - S A FE S , affect the outcome of your investment. Additionally,
the type of company you are investing in can also be
CON V E R T IB LE NOT E S , A ND something worth considering. If you are investing in
PR ICE D ROUNDS an LLC, you may find that you are now due to receive
a K-1. Some investors choose not to invest in LLCs
Priced rounds are common in the exchange of as that creates tax deadline concerns that they may
equity ownership at a set share price. SAFEs have not want to deal with. That said, investors receiving
become way more popular in the last decade. K-1s are able to take a passive loss or income as the
Simple Agreement for Future Equity (SAFE) is meant investments are at risk, whereas when you invest
to allow the company an opportunity to grow while in a C-Corp, which seems to be the most commonly
not committing to a price or any stringent terms. used for growing companies, you do not receive a
Convertible notes are similar to SAFEs in that they K-1 and do not get the benefit of any passive losses.

6
FU T UR E FUNDING S T R AT EG Y - E X I T S T R AT EG Y - W H AT
DOE S I T PAY TO PL A N A HE A D? S HOULD YOUR IN V E S TOR S
E X PEC T OV E R T HE NE X T
Many companies will think about the current phase
of their business. It is critical to discuss the vision of
SEVER AL YEARS ?
the company and the capital it will take to grow. If
Communication continues to be the best way to
the margins in the business are slim or the customers
keep your investors happy. Many entrepreneurs
have a long sales cycle, it will take a lot of capital. This
have even shifted to giving a video update and
may mean multiple rounds and for early investors
walking through key documents to make them more
this pretty much guarantees that you will get diluted.
engaging and easier to digest.
For instance, 701 Fund invested in Company A and
was able to receive 3% equity in the Seed round –
Investors are interested in knowing what the ultimate
no other investments in the company. The company
goal of the business is. Should you grow to an
later got acquired, at which point 701 Fund only
Initial Public Offering (IPO), get acquired by a Special
owned 0.6% of the business. If the company didn’t
Purpose Acquisition Company (SPAC), merge with a
see significant value growth – at least 5x in this case,
vertically integrated partner, or maybe get acquired
you won’t see all of your money back.
by a Fortune 500 company. Talking about this is
Thinking about the Seed or Series A round in the important. It is a helpful exercise also in that it may
even help you to identify potential strategic partners.
context of the 5- and 10-year company vision will
Strategic partners will often acquire businesses they
help you strategize the best path for you to do
work with when they see efficiencies.
this. Setting goals or milestones is essential to
accomplishing this. These metrics often determine
who will invest and at what price.

7
IN V E S TOR S
Preface: K NOW ING W H AT YOU LIK E TO
Venture capital is an adventure, as the name implies. IN V E S T IN
As with all adventures, it comes with great risks and
great rewards. The art of investing in startups lies in It goes without saying that you should consider most
deciding whether those risks outweigh the reward. opportunities that you are presented with IF you are
Unlike investing in publicly traded stocks, you willing to learn the things needed to evaluate them.
cannot rely on a long performance history or safety Identifying risk in new companies and industries can
ratings but on your instincts regarding their product be very difficult and often ambiguous. Identifying
or service, the founder, their team, and the market a strategy for you to align yourself with is a
they are operating in. Is their product innovative and fundamental first step for every successful investor.
attractive? Is the founder motivated and personally
invested? Is the team qualified and up to the job? Is Here are some questions to consider for determining
the market growing or shrinking? These are some of which companies you should spend your time with:
the kinds of questions you’ll need to ask and have
answered to make an investment decision. • Do you have experience, industry knowledge, or
contacts that would be beneficial to the company
you are considering investing in? If you answered
“Yes”, then you should take the time to consider
these opportunities, especially. Most successful
investors invest in things that they know and
understand well, specifically, they understand
the problem that the founder is trying to solve
and they can help along the way.
• What stage do you like to invest in? Usually,
new startups are very risky opportunities but
as they grow the investment opportunities will
often become less risky – although, they still
There are many things to consider about the company carry considerable risk in comparison to other
and how interactions with them play out, all of which opportunities, such as those found on public
may indicate potential success or failure. This is stock exchanges. You need to determine how
initially overwhelming, but this guide is intended to comfortable you are with the risk at each stage
help bring you up to speed with VC and get started of investment.
on this new adventure. It is also important to
• Is market size important to you? Some investors
understand the mindset of an entrepreneur as an
will only consider companies pursuing market
investor. Oftentimes, investors can misinterpret
opportunities that are poised to be over $1B in
an entrepreneur’s intentions. Alternatively,
annual market value – this allows a company to
entrepreneurs will benefit from understanding how
grow and capture enough of a market to get the
investors think and make decisions. Of course,
investor at least 10x of their original investment
neither of the two entrepreneurs nor investors think
– depending upon how early they made the
alike, but if we can create some common ground
investment.
or best practices for this critical conversation, we
can likely improve the outcomes. This ultimately • How important is the founding team? It is
benefits the entrepreneurs, the investors, and the critically important that you believe in and trust
communities in which you invest. the people that you are investing in. Additionally,
you want to make sure these are people that
you can see yourself working with for the next

8
several years. Some investors prefer to invest in IMPAC T V S PE R FOR M A NCE
entrepreneurs who are experienced in startups
and have had past exits/successes. Statistically,
Is your goal a financial return?
experienced entrepreneurs are more likely to
succeed than most first-time founders – but it is
If your goal is to make money, I hope you are a fan
certainly not a drastic difference in probability of
of the long-term approach. Although it seems like
success
success happens overnight – startup investing can
• Can you add value? The best opportunities are take several years or more to start seeing a return
often those where you or someone you know on your investment. Average performance across
closely can add value and impact the company the industry suggests annualized returns of 8-12% in
in a positive way. This makes you attractive as an most startup industries.
investor and means you are improving the odds
of your own investment being successful. You should be prepared to lose it all and expect that
• How many companies should I invest in? even the brightest of companies may fail.
Again, data suggests that Accredited Investors
should seek to compose a diverse portfolio of Are you open to impact investing?
investments to be successful. Some experts
suggest 12-15 companies should be the goal More investors are considering impact investing and
of a new investor over an investment period. for good reasons. In recent years, impact investment
By making many investments, an investor industries have been performing well for investors.
improves their odds of producing enough They are no longer the “charity cases” looking for
returns to make up for failed investments. kind-hearted supporters.

Are you open to diverse owners?

Experts suggest you should not make only a single
or a few select investments if losing the entire
In the last few years, statistics have shown us that
investment would be detrimental to you financially.
Minority and Women-owned businesses perform
just as well or even better than average within
startup industries. Perhaps these disadvantaged
Objective: groups are used to the challenges that often cripple
Usually, the best companies for you to startups and are seemingly able to navigate complex
invest in will be ones in an industry you problems with considerable ease.
have experience in, at a stage of growth
that you’re comfortable with, operating An open mind may serve you well!
in a market of an acceptable size, having
a founding team you trust and are willing
to support, and one that you personally
can help grow. Also, be sure to diversify, Objective:
especially if a loss would be financially Be aware that in Venture Capital it typically
detrimental to you. takes years to see a company’s books go
black and to have your investment make
a return. Additionally, impact investing
is becoming more than just a statement
and is actually becoming profitable, and
Minority and Women-owned businesses
perform equally well or better than average
for startups.

9
INDU S T RY DIFFE R E NCE S & T R AC T ION
Industries:

There are several industries that you may come across in your journey as an investor – almost all of them will
likely include some form of technology.

Common industries for investment consideration in the Midwest are:

Industry EXAMPLE
Software Microsoft Office

E-Commerce [Link]

Manufacturing Automobiles

Autonomous machines / Tesla automated driving software; smart appliances – Google Home, Amazon Alexa
Internet of things (IOT)
Climate Tech Advanced recycling, alternative energy creation/utilization

Ag Tech In ground soil sensors; software to communicate agronomist info to farm

equipment
Fin Tech Buy now, pay later providers; virtual banks

Med Tech / Healthcare New methods of drug delivery; advanced therapies

Space Tech Satellites; optimization of propulsion systems, sustainability

Web 3,4,5... Blockchains, crypto, NFTs

Which one should you focus on? Other industries, such as those dealing with NFTs
(a type of virtual asset), may require you to think
That depends on what you are most comfortable differently about how you evaluate opportunities.
with. That said, most early-stage investors benefit from
investing in quantifiable metrics based on actual
Some of these industries will be able to provide traction and not future possibilities. In short, revenue
meaningful information about traction they have is often a good indicator of traction – if you think
had – how many users, average order value (AOV), there is value but no revenue or traction to grasp
Customer Lifetime Value (LTV), Monthly Recurring a hold of, then you had better be very comfortable
Revenue (MRR), Annual Recurring Revenue (ARR), with the possibility of losing it all. Some newer
Monthly/Daily Active Users (MAU/DAU) - which is industries – such as cryptocurrencies and NFTs are
data to consider while thinking if the company has considered speculative opportunities by some.
achieved product/market fit and problem/solution
fit.

10
Metric Meaning
Average Order Value Of all sales, what is the $ amount of the average transaction.

Lifetime Value The amount of $ an investor has spent/will spend with you

Monthly Recurring Revenue In aggregate, the sales monthly subscription and set to renew for the current
month
Annual Recurring Revenue In aggregate, the total sales from customers on annual subscriptions

Other industries, such as those that are dependent Product/Market Fit:

upon regulatory approval, will have different
types of traction or validation. For Medical Device Is there an audience for whatever your building? Is it
companies, you may want to look at what their FDA a large audience? Do they have the most competitive
clearance pathway looks like. If it is a novel device, it solution that is drawing people in?
may take longer and require clinical trials. If it isn’t
an invasive devise or a drug combination, you may Ultimately, these are products that provide some
see a company utilize the FDA 510k pathway, which type of meaningful solution that creates a lot of
can sometimes allow for faster clearance times. value. They do have a tendency to generate some
great momentum and, in some cases, sell themselves
You may want to consider any required licenses because the users are so happy with the experience.
or certifications that may be needed to operate in
various industries. Each industry has its nuances Unfortunately, this is not easy to discern, and many
and it is generally easy to research minimum companies feel they have achieved this before they
requirements. However, this is less likely and actually have. This is something that only experience
perhaps even more volatile in newer industries. can teach.

My best guess is that you want to see a certain

IMPORTANT! multiplier of growth Month to Month in order to
FDA Approval and FDA Clearance are not really qualify something – I think the other key point
the same thing. In other words: would be Customer Lifetime Value (LTV). If you can
show that customers will return on their own with
“The FDA regulates medical devices to no additional marketing or sales cost, you’re ahead
protect consumers from potential harm; of the curve.
devices are placed into three classes, with
class I being the lowest risk and class Problem/Solution Fit:
III being the highest. Depending on the
In addition to Product/Market, you certainly need
device class, they may be marketed as
to consider if the solution solves a problem that
“FDA-Registered,” “FDA-Cleared,” or “FDA-
is worth solving. Or if the solution itself is not
Approved” devices. Before a new device
prohibitive in terms of cost or time commitment.
can be marketed, companies must submit
If the problem is too large or ambiguous, that can
appropriate applications to the FDA. This
also cause issues – the problem needs to be specific
process helps ensure that medical devices
and manageable with a specific solution. If there
are appropriately monitored for safety and
are easy workarounds or alternatives that are widely
effectiveness before they are available to
available, it can be difficult to remain competitive.
the public.

Other startups may have other types of traction

– such as being a first mover or early mover in a

11
new segment of the market. Or, for medical device If you want to develop a new business model, it is
companies, some type of FDA clearance may be of worth taking a look at the existing business model
value. Or, in medical or research-based companies, from a superior perspective. With methods such as
SBIR/STTR awardees can also be strong candidates the Business Model Canvas, business models can
for consideration of investment. These are rigorous be clearly presented and further developed. At a
programs but can provide hundreds of thousands in glance, you can see where there is hidden potential
capital to support a new company. for improvement or weaknesses. At the same time, a
common point of reference and a common language
In many cases, intellectual property or strategic will be created, which enables a playful development
alliances can be incredibly advantageous to locking of ideas and avoids protracted conversations and
out competitors. discussions.

A Business Model Canvas seeks to answer questions,

Objective: such as:
You should understand that there are
differences between the wide variety • How much revenue is generated by the
of industries and that these differences individual customer segments?
can affect the performance of startups in • How much revenue do the different channels
those industries. What works for a startup generate?
in one industry may not work for another.
• What are the costs of each channel?
For a specific startup, you should consider
how well their product or service caters • Which channels are the most profitable?
to their market and how well it solves the • What is the cost structure?
problem(s) that they have identified.
• How much does each key resource cost?
• Which key activities cause the highest costs?
BU S INE S S MODE L S & • How much does each source of income
INNOVAT ION contribute to total revenue?

What exactly is the business selling and how are they And more!
selling it?
When it comes to innovation there are a few key areas
There are often similar products sold in different to consider. First of all, to what extent is this new
ways. Let’s look at YouTube and Netflix – YouTube has product or service different, in the example above
4 billion views and monetizes those views through we discussed incremental innovation – a somewhat
ads – which are sold for pennies per view most likely. minor yet novel difference in how YouTube and
The customer is typically other businesses – business Netflix compete with one another.
to business (B2B)
Radical innovation on the other hand is typical of
Netflix sells a subscription to a similar type of more revolutionary products, such as smartphones,
content, but they make the viewer pay and not blockchain technology, cloud computing,
another business. This is business to consumer automobiles, MP3 players, etc. - these were all highly
(B2C). Additionally, each one provides a streaming disruptive and changed their respective industries.
service. But one provides premium content from
only a select few providers and the other allows you
to create and distribute your own or others content.
This is often considered incremental innovation
when considering the differences among them.

Below is a table showing Netflix business model

as seen through the Business Model Canvas. The
business model canvas breaks down a business
model into the nine most important areas that may
impact how a business function.

12
[Link]

Market-pull vs. Technology push

Objective:
Innovation is important for many reasons.
Innovation often occurs along a spectrum of customer Historically, companies that fail to innovate
demand and the creation of new technology. The will lose. Some examples of this would be
best opportunities have a strong balance of both and Blockbuster – failed to see the opportunity
perhaps more so leaning towards the Market – great with streaming services, Xerox was an early
businesses have customers! Unfortunately, great leader in computers but decided to instead
technology that doesn’t have an ideal customer or focus on copiers, Segway failed to identify
a customer with a burning problem may not ever new types of personal transportation
come to fruition. Understanding why the innovation machines and is no longer relevant, AOL
has occurred is an important question to consider. was one of the first to provide access to
the internet – by failing to Broadband
Furthermore, you should also be asking how they Internet access as a threat to dial up,
are continuing to innovate. Many companies have their $200 billion business. Consider how
built huge opportunities by leveraging either closed the company’s culture influences this. If
or open innovation strategies. Closed innovation an employee is scared to make a mistake
indicates that a company looks internally for or is lambasted for minor failures, this
innovative resources, whereas open innovation ultimately will kill any creative or any
indicates that a company may outsource or bring innovative juices that were flowing. Taking
in external resources to further innovate. There risks and experiencing some level of failure
are pros and cons to each, but understanding is necessary for growth and innovation to
this dynamic is valuable to both investors and occur.
entrepreneurs.

13
IDE N T IF Y ING R I S K S A ND R E D Runway/Burn Rate – most companies are not
raising enough capital and/or are spending money
FL AG S in ways that do not generate as much revenue is
needed to create positive cash flows. At a minimum,
There is no worse feeling than finding out a company companies should be raising enough capital to get
has failed and that it was totally avoidable. Most of them at least 12 months at in some cases at least 24
the time, it is preventable, but sometimes it is not. months before raising additional capital or achieving
positive cash flows.
Many businesses simply fail because there weren’t
as many customers interested in the product,
Meaningless/Indefensible IP – unfortunately, not all
maybe it was poorly executed, and eventually these
patents are created equal, and it is not necessarily
businesses run out of money. A lot of this can
depend upon a startup’s ability to recruit and retain
top talent.

Here are some red flags to consider

avoiding:

The silver-tongued salesperson – try not to fall in love

with what you are being told because people will tell
you what you want to hear if they want something
from you. Do your research and if things don’t line
up, ask questions. Great entrepreneurs are willing
to acknowledge their faults and learn from what you
have to say.

Geography – Some may disagree with this, but there easy to evaluate patents or intellectual property that
are certain challenges that come with investing may prevent new entrants into the market.
in companies that are physically far away from
you. Being able to have an active presence or visit Integrity – if you sense anything criminal is going
the offices to meet the team may be important. on, you should try to find a way to get in touch with
Collaboration doesn’t have to be in person, but it is other investors in the company. Some people will
certainly easier at times to work together or share a talk their way out of every lie so it’s best to trust
meal in hopes of building the relationship. your gut. Give them a chance to come clean, but be
prepared to walk!
Bullshit – beware the “perfect” startup. Every
company has flaws and that is okay. However, there
are many that may try to convince you that an exit is
all but guaranteed. Be skeptical – there are always
risks involved.

Objective:
Venture Capital is the wild west in regards to what funds and entrepreneurs can try and sell
you on. One startup might be an honest attempt to solve a legitimate problem, and that
company could go all the way. Another might be a collection of shady paperwork designed to
give that executive suite a juicy salary for a few years and then fail, swallowing your entire
investment. Be cautious, but understand that every startup comes with risks.

[This may seem like harsh point, but I based on an actual company we did a DD on in DVG
that was definitely a scam (the six executives made up most of the burn rate). We passed
on investing and, sure enough, at least one of the founders quit a few months later and I’m
pretty sure the company is falling apart at the seams now.

14
COMMON T E R M S , DE A L T Y PE S , A ND IN V E S TOR R IGH T S
Equity Ownership of the company, in aggregate all shares will add up to
100%
Cap Table List of shareholders in the company, including investors, advisors,
and any employees with stock options
Authorized and When you incorporate you assign or authorize a # of shares. The
Issued Shares company can often reserve some to be used later and only issue a
lesser amount.
Fully Diluted Basis Once every investment is considered in this round, the amount of
equity held by a single party – post money/post investment value.
Dilution As new shares are issued, this will create a larger pool of stock and
existing shares will get watered down.
Liquidation Prefer- The order in which shareholders get paid, some investors want to
ence get paid before employees (who haven’t invested capital) in order to
diminish some of the risk of a total loss.
Term Sheet A legal document or memo outlining proposed terms that are being
discussed
Valuation The number of shares a company has multiplied by the price per
share. Valuation is often based on two things, art and science. The
art is the vision, proprietary info, and knowledge that a startup has,
where the science of it is some multiplier of revenue or EBITDA.
There are even some online valuation tools that will value your
company for you based on the executives’ background, industry and
other variables.
If it seems high, it probably is but is the juice worth the squeeze.
Accredited Investor Someone who is able to invest in private offerings based upon SEC
criteria – a net worth of $1 million or greater, not including your
primary residence or annual income of $200k single/$300k jointly
are two of the more common criteria used by eligible. Recently,
professional qualifications, such as those a financial advisor or wealth
manager would have, are also acceptable.
Preferred Stock Stock with additional rights than common stock, stock with voting
rights only most often. The additional rights could be a number of
things, liquidation, anti-dilution, most favored nations.
Subscription When purchasing an interest in a company, a subscription agreement
Agreement is fairly common.

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DUE DILIGE NCE
Due diligence is the process of reviewing a company for the purposes of making an investment. Typically, the
larger the investment is the more due diligence will be done. This includes just about anything you can think of:

• Financial Statements and Projections

• Management Team/Resumes
• Company Organization/Formation Docs *C-Corps are considered best practice*
• Employee Contracts
• Intellectual Property
• Sales Pipeline
• Pitch Deck
• Cap Table
• Marketing Materials
• Background Checks STILL HAVE QUESTIONS?
• Strategy – Go-to Market
Register with the North Dakota Small
Business Development Center (SBDC) and
get set up with an advisor who can answer
your questions and direct you to the right
resources.

Visit [Link] and register today!

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N DSBD C. org