FREE online courses on Venture Capital Funding - Major Sections of a Business Proposal - Financing

 

First in “proposed financing” you should describe the common stock, preferred stock or convertible debentures -- whatever it is you are trying to sell to the Venture Capitalist. Be sure to provide enough details so that there will be no question about what you are selling.

 

Common stock

If you are selling common stock:

·         Will there be a dividend on the common stock?

·         Will the dividend be cumulative in case you miss it?

·         Will redemption of the common stock be required after a period of time in order to give the investor his money back?

·         What price will the investor pay for the common stock?

·         Will there be restrictions on the shares?

·         What voting rights will holders of common stock have?

·         What registration rights will holders of common stock have?

·         Can the Venture Capitalist take you for a public listing?

 

Preferred stock

If you are selling preferred stock:

·         What dividend will you pay?

·         Will the dividend be cumulative (meaning that in case you do not pay it one year or one quarter, then you must make it up in some other year or quarter)?

·         What redemption will there be of the preferred stock? For example, after five years, will you have to begin redeeming the stock over a number of years to give the investor his money back?

·         Is the preferred stock convertible into common stock? If so, what is the conversion price?

·         What restrictions are there on these shares and does the preferred stock have voting rights? Does it control the board of directors? What preferential treatment will it have?

 

Convertible debentures

If you are proposing convertible debentures:

·         Are they for five years or ten years?

·         Will there be an interest-only period?

·         What interest rate are you seeking?

·         Will the interest rate be variable or fixed?

·         Will the loan be convertible into common stock or preferred stock?

 

If you are flexible as to the type of financing or the terms of the financing, state your willingness to negotiate in this section.

 

Capital structure

Here you should describe the common stock, preferred stock, and long term debt that is currently outstanding so that the Venture Capitalist will know the general capital structure of the company.

 

Capital Structure	Before Financing	After Financing
Long-term debt	100,000	--
Long-term venture capital convertible debt	--	500,000
Preferred stock	--	--
Common stock	100,000	100,000

 

Collateral for the financing

Obviously, if common stock is involved, there is no collateral. If the financing is to be subordinated debt, list the debts that will be senior to this debt. Explain what will be used to make this debt collateral.

 

Guarantees

Here indicate the personal or corporate guarantees that will be given to the Venture Capitalist for his investment. If there is to be a personal guarantee, you will be required to supply a personal financial statement on the guarantors.

 

Conditions

Describe any conditions of the financing. For example, must the company provide a seat on the board of directors for the venture capital company's representative? Will the company have to live by any ratios? What milestones must the company achieve?

 

Reporting

Describe what reporting you intend to make to the investor with regard to this financing. For example, will you provide a monthly profit and loss statement, a balance sheet and an annual audit?

 

Use of proceeds

Specify where you intend to apply the funds. Do not use the amorphous name "working capital", but specify how the funds will be spent. Be as specific as possible.

 

Ownership

Indicate the number of shares outstanding by each shareholder and the number that would be owned by the venture firm if this financing occurs. Indicate the amount paid/will be paid for the ownership, and the percentage of ownership each shareholder will have of the company.

 

If the promoter shareholders have received or will receive shares other than for cash, give full details, such as in-consideration of what shares were received i.e. for land, buildings or machinery supplied, promoters shares etc. and the current market value of the assets provided.

 

 

Shares	Before Financing	After Financing	Percentage	Price Paid
Existing shareholders	800,000	800,000	80	50,000
Venture Capitalist		200,000	20	200,000

 

Dilution

Describe the degree to which the new investor is diluted in terms of book value.

 

Fees paid

In this section indicate whether you will pay fees to the consultant, and whether you will pay the legal fees of closing the investment.

 

Investor involvement

Venture Capitalists want to have the right to attend board meetings and to become a member of the board of directors. They may want one or two board positions. Describe the amount of investor involvement that you are seeking or would like to have from the Venture Capitalist.

 

There may be other opportunities for the venture capital firm to offer services to your small company. You may want the venture capital firm to provide you with assistance in the area of finance and may offer to pay a fee for this assistance. You could require a particular type of financing and may offer the Venture Capitalist a fee for a private placement, for example, 2 per cent of the amount being placed. 

 

Financial statements

This is not a section so much as it is a collection of supporting documents. It should consist of complete financial statements. If independent auditors do not certify your financials, an independent auditing company should review them. You should have a consolidated balance sheet, statement of income, statement of shareholders' equity, and statement of changes in financial position.

 

You should add appropriate notes of explanation to the financial statements. This exhibit should include the last several years of financial statements, as well as current financial statements that may or may not be audited by an accounting firm. These should all be attached as Exhibit #1-Financial Statements and your business proposal should mention these exhibits.

 

If you are to demonstrate that you are operating a stable business, you should present its current financial statements.  How can anyone make a decision to invest in a company on the basis of financial statements that are history?