Pre Money Valuation

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I was talking with a friend of mine that sits on the board of an angel investor group. He told me that one of the first (and favorite) questions they like to ask presenters is what their “pre-money” valuation is.

Unless you’ve been down this road before, or have been coached, then you might be caught off-guard.

In this short video, which I filmed in my car, I give you the simple formula to calculate your pre-money valuation.

In a nutshell, you take the “Post-Money” valuation and subtract the amount of money you are raising.

Your Post-Money valuation is simply the amount of capital you are raising divided by the amount of equity you are offering.

So for example, if you are raising $500,000 and offering 33% of your company to do that, then:

  • Post-Money Valuation is $500,000 ÷ .33 = $1,515,000 (rounded)
  • Pre-Money Valuation then is $1,515,000 – $500,000 = $1,000,000 (rounded)

What Startup Mentors Say About Raising Money From Friends And Family

So you’re setting out to capitalize (both literally and figuratively) your new venture. Should you seek to raise money from friends and family?

A recent survey from Pepperdine University’s Graziadio School of Business shows that about 13% of small businesses sought capital from friends and family this year.

Here are three points from startup mentors to keep in mind when raising money from friends and family:

  1. ‘No’ is not a rejection – just because you think your idea is great, it may not resonate with everyone.
  2. Use your own cash as long as possible – get to the point where you can clearly articulate you offering, and if possible, achieve concept validation.
  3. A positive signal to other investors – having a “money vote” is good, but when its from family it sends a signal that you’re all in.
  4. Real financial risk – if things don’t work out, family gatherings can be a little stressful.

Read more in the WSJ

Image courtesy of Flickr and Evil Erin

5 Tips For A Successful Crowdfunding Project

There are many ways to fund a new business project. Traditional bank funding, business cash advances from sites like, venture capitalist funding, and private placements, have long been the mainstays of corporate finance. These can be very effective, but there is a modern alternative: crowdfunding. This allows you to gather the donations of a large amount of people to finance your project. The donations can be small, but since you are accessing many people, they can add up to large amounts.

If this sounds like the way charities work, you’re on the right track. There are significant differences between crowdfunding and soliciting charitable donations. Donors, despite the title, get something back in exchange for their money. The return doesn’t have to be monetary. Sites like Kickstarter allow people to set up projects where the payback can come in the form of something as simple as a download or something fairly elaborate. We offer tips on how you can plan, grow, and connect with your new crowdfunding project.

Read more

What Is A Private Placement?

A Private Placement is a capital transaction between an issuer, the entity seeking to raise capital, and an investor, or group of investors. When discussing a private placement, its usually in the context of a private company raising capital; however, public companies will also seek to raise capital using a private placement. In the latter case, this type of transaction is known as a “PIPE,” which stands for private investment in a private entity.

Private placements fall under what is know as Regulation D, or Reg D of the Securities Act of 1933. Private placements are also sometimes called Reg D offering. Reg D is what provides for the registration exemption under the Securities Act requirement that any offer to sell securities must either: 1) be registered with the SEC, or 2) meet an exemption. The exemptions provided under Reg D are known as Rule 504, Rule 505 and Rule 506.

Read more

Private Placement Market Opens Up With The JOBS Act

Issuing a Private Placement might get a little easier for small businesses seeking to raise debt or equity using a Private Placement. One of the big changes is the proposed elimination of the prohibition on advertising and general solicitation.

Are you ready?

The JOBS Act Opens The Private Placement Market

The President recently signed the Jumpstart Our Business Startups Act (known as the “JOBS Act“) with broad bipartisan support. The JOBS Act removes restrictions on solicitation and advertising for companies seeking to raise

Six Steps To Raising Venture Capital – Its About Laying The Foundation

This article talks about laying the foundation to raising venture capital (I think there’s insight here for non-venture capital as well). The first three steps of laying the foundation include building a relationship with a person, not the firm; get personal, and give freely and authentically; and get a meaningful referral. Read more for the last three steps.

“One of the big misconceptions in baseball is that playing the game keeps you in shape to pitch. I wish that was true. It’s not.” Steven Ellis, Professional Pitcher Major League baseball pitchers spend far more time preparing to pitch than they actually do pitching. The same should be true of an entrepreneur who is […]
6 Steps To Raising Venture Capital — Hint: Preparation Matters More Than Your Pitch

Image via Flickr

Two Simple Steps For Staying Out Of Hot Water

Part of the process of structuring your private placement, or offering, is to target an IRR, or Internal Rate of Return.

But unless you’re constantly in the market, you’re probably just taking a shot in the dark. The solution of course is to talk to the market. Go out and have discussion with potential investors about what you are seeking to do and take note of the feedback you receive.

However, you need to be careful that your market intelligence gathering is not misconstrued as offering securities for sale.

The two things I’ve done to avoid this potential problem:

1. Add a watermark on each page of the Executive Summary that reads FOR DISCUSSION ONLY; and

2. Add disclaimer language to the Executive Summary that explicitly states that the document is not an offer to sell or solicit and offer to buy any securities. Also add language before the financial projections and the term sheet.

If you need disclaimer language, you can download it here:

Now go out and gather some market intelligence so you can structure your deal with confidence.

Private Money And Blue Sky Laws

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Today I’m going to show you a cool tool right here on TransCapital Pro

My consulting clients have been asking me about Blue Sky laws and what they need to do to be in compliance.

Well, because it would be difficult to be fluent in each states Blue Sky laws, I built this interactive map (thanks to Pat Flynn) where you can click on any state and be taken to that state’s securities regulation division.

And as a side note, the trigger for complying with a state’s Blue Sky law is whether your investor, or prospective investor is a resident of that state.

So for example, I’m a resident of the state of Ohio. But if I were seeking to raise money from investors in Indiana and Kentucky, I would have to make sure I was in compliance with the securities laws of those states.

So lets take a look. You can find the map at TransCapitalPro. I have the page open, but you can click on the navigation, here under Blue Sky.

You can see that the map is easy to use. When you hoover over the map the states get highlighted. And when you click on a state, a new tab opens to the securities division for that state.

If you get a bad link, try the table – that’s where I update the urls.

If you like this tool, please tweet it, like it, plus-on it or share it on LinkedIn.

Investment Funds – Structure and Mechanics Part II

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In the last video we ended with a slide that showed the tremendous leverage that is available on the General Partner’s capital.

Before we dig into the economic mechanics of an investment partnership, we need to understand a few concepts:

  • Carried Interest
  • Preferred Return
  • Waterfall

Carried Interest is defined as a share of any profits as long as i) all capital is returned to the investors; and ii) the investors receive their Preferred Return.

Preferred Return is the return on invested capital before the General Partner receives its carried interest.

The Waterfall defines the priority of the distribution of invested capital of an investment fund in general, and from the exit of each discrete investment in particular. The Waterfall is not just for an investment fund, or blind pool; its also applicable if you are raising money for a single asset transaction – such as a single real estate investment.

So, what does a waterfall look like, in other words, what does the priority of distribution look like?

Below is the “Executive Summary” version of a waterfall from one of our offering memorandum templates:

i.     return of 100% of invested capital;
ii.    the Preferred Return;
iii.  100% to the G.P. as a catch-up until the G.P. has received 20% of distributed profits; and
iv.  thereafter, 80% to the partners and 20% to the G.P.

Traditionally, the carried interest on investment funds is 20%

Also, note that the Partners do not receive their Preferred Return AND an 80% allocation of the profits; they receive 80% of the profits. The Preferred Return is the hurdle rate for the G.P.

For example, if the G.P. has been receiving its Carried Interest in the early years of the partnership, but the the partnership sustains some losses so that the Partners’ return is less than the Preferred Return, then the Partners can “Claw Back” some of the Carried Interest received by the G.P. until the Preferred Return is met.

Towards the end of the video in this post I walk through an example of a fund and show how the dollars flow. I also present the IRR for the fund, the Limited Partners, and the General Partners.