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Company Ownership Structure
My name is Andreas Kraemer and I am a founding partner at CENAK Consulting L.P., a boutique investment bank focusing on the needs of early stage growth companies. I have a successful track record of over 16 years in venture capital investing, deal structuring and M&A.
One question we get asked over and over again is how to structure a company initially. There is the question of the legal structure, which I will discuss in a later posting. Many founders ask me what the “right” ownership structure is when two or more partners are involved.
The answer is simple: there is no “right” structure.
There are many factors to consider in structuring a company’s ownership. Financing is just one but certainly an important factor. Other questions to ask are: How much does each team member contribute in sweat equity today and down the road? How do we incentivize people so that they stay with the company long term? What do investors want to see?
One key thing to remember is that greed will not get you there. Too many business ventures with good business models fail because management got greedy. My advice: don’t do it.
These are just a few considerations for an initial ownership structure. The important thing is to get independent opinions, and a good business attorney to document it all.
Do you have a company that requires funding and do you need help from experienced entrepreneurs and investment bankers? Let us help you turn that idea into reality. If you want to be considered as a CENAK Consulting L.P. client submit your information to info@cenak.com.
Hey Ladies! What’s the score?
Hey Ladies! What’s the score?
http://www.huffingtonpost.com/tabby-biddle/women-venture-capital_b_356383.html
A question often raised in the venture capital community is around the lack of women at the forefront of the venture capital headlines. We all assume that since men are hard-wired (testosterone driven) to be bigger risk takers than women, their leadership will result in bigger returns. After all bigger appetite for risk equals bigger possible returns right? Well, it can also result in more strike outs than home runs.
A study by Hedge Fund Research found that, from January 2000 through May 31, 2009, hedge funds run by women delivered nearly double the investment performance of those managed by men. Female managers produced average annual returns of 9%, versus 5.82% for men. (ref: Business Week )
Lotta Alsen opines, “Women don’t start companies for the same reason men do. Women start businesses as an expression of themselves, as a way to balance family and work, and to be able to be their own bosses.” This makes women owned businesses a lot more personal, but is that a bad thing? When it is personal, there is a real passion for success.
Let us help you turn that winning expression into a successful venture plan to secure the funding you need to make your ideas pay off and show those boys how to really run the world. If you are currently considering raising funds and you wish to become a CENAK Consulting L.P. client, please submit your information to info@cenak.com.
Underdog
The news these weeks has been filled with dramatic stories of natural disaster and widespread unrest across the global landscape. Naturally, we are all focused on thinking of ways to lend support to Japan and how the call for reform and resulting violence in the Middle East will impact us. I’m certainly feeling change at the pump, aren’t you?
The broader market is reacting to these events with uncertainty, resulting in volatility in the markets.
But, out of crisis and chaos come opportunity. In moments like this, innovation is required in response to changing market needs and could quite literally “save the day.”
Innovation is at the heart of both of these news events. Cell phones and social media have been lynchpin to communications across the Middle East. The same technology has allowed the Japanese to capture the disaster as it happens (in pictures and other media) which has implications for crisis planning/prevention in the future, and has allowed the Japanese to help locate loved ones or to get messages out of Japan to loved ones abroad.
Recovery after such events relies on innovation. Do you have an “underdog” of an idea waiting to save the day? Let us help you turn that idea into reality. If you want to be considered as a CENAK Consulting L.P.l client submit your information to info@cenak.com.
I don’t have a crystal ball. How can I build a financial model?
Let’s face it, if you could predict the future, would you be reading this right now? Would you be on LinkedIn trying to network or learn something about your business if you could forecast, say, Google’s stock price? We didn’t think so.
Nevertheless, there are compelling reasons why you as a business owner seeking funding from a VC or other sophisticated investor need to prepare a financial model. Here are some of them.
A financial model ultimately helps you develop and refine your business plan. It forces you to break down your value drivers into milestones and benchmarks. Thus, it helps you identify those value drivers, set goals and analyze your company’s underlying business proposition.
A well structured, bottoms-up financial model let’s you analyze what-if scenarios. By changing your set of assumptions, you can “test drive” different scenarios and develop a strategy for dealing with them in the future. As such, a financial model becomes a management tool that helps you understand the financial implications of certain actions, without going through potentially costly trial and error phases.
There are many more compelling reasons why you need a detailed financial model. In the end, if you would like to raise funds from sophisticated investors, you need to show that you have done your homework. A financial model becomes a sales tool that tells investors that you know what you are talking about.
What should a model not be used for? In our view, it should not be used to calculate a single number such as an IRR or return multiple. If you think you can accurately predict that, you may want to think about becoming that day trader.
If you have a valuation question or are currently considering raising funds and you wish to become a CENAK Consulting L.P. client, please submit your information to info@cenak.com.
Compensation Issues of VC-Backed Companies
I’d like to share some thoughts on compensation in VC-backed start-ups today. According to a recent export poll by ExpertCEO of 56 CEOs from venture backed companies, the average compensation of CEOs was $330,145 in 2010, with a salary of $246,742 and a bonus of $83,403. In 2011, CEOs expect their salaries on average to remain relatively flat at $247,950, but their bonuses to increase to $106,337, for a total average compensation of $354,287.
Given the expected increase in bonuses it seems timely to briefly talk about stock options versus restricted stock. Restricted stock is becoming increasingly popular over stock options. One reason is that restricted stock still has value if the stock trades below the price when the stock was granted, whereas stock options are worthless if the stock price is below the strike price that was set when the stock option was granted.
Another reason for the growing popularity of restricted stock is §409A of the IRS, which became effective on January 1, 2005. Under this rule, compensation that is not considered deferred is subject to hefty taxes and fees. Stock options with a strike price set below the current valuation of the company are not to be treated as deferred compensation and therefore do not comply with §409A. For example, if the strike price is $10 and the company is valued at $12, you will have to pay an additional tax on the difference. The costs are substantial and include an additional 20% tax, among others.
Valuation is a big question for companies that are not yet listed i.e., VC-backed companies who also often rely on stock options to retain talent. There is no silver bullet and the IRS increasingly scrutinizes valuations presented to them. Valuation methods applied are asset valuation, option valuation (Black Scholes), income valuation (DCF), and valuation events, to name a few. But how do you defend a valuation of an early stage start-up that hasn’t yet generated revenues or experienced a valuation event? Having a reputable company such as CENAK Consulting L.P. prepare a valuation analysis always helps.
One way to avoid having to deal with §409A is to grant restricted stock or Restricted Stock Units (RSUs). These are becoming increasingly popular and warrant spending some time on before deciding which way your company wants to go. Both restricted stock and RSUs will still have to be taxed as income and you will have to pay capital gains tax once you sell them hopefully at a profit, but you do not have the dreaded §409A-question hanging over you. Also, at least with restricted stock you can elect to pay income tax when the stock is granted, not when it vests. For shareholders of strong growing, VC-backed companies this is an attractive option. RSUs do not have this feature as they are an unsecured promise by the employer to grant a set number of shares to the employee in the future upon the completion of the vesting schedule.
What does this mean for those companies that are currently exploring compensation alternatives? You need to do your homework and include tax advisors and accountants in the decision process. Taxation of stock options and restricted stock is one thing; accounting for them is a separate issue. Whatever you do, get your advice from experts in the area.
This posting should not be construed as tax advice. We simply want to make you aware of these choices you have to make that could potentially have costly and unwanted consequences down the road.
You also need to have a reputable company on your side that can help you present a defendable valuation. If you have a valuation question or are currently considering raising funds and you wish to become a CENAK Consulting L.P.client, please submit your information to info@cenak.com.
Batter, Batter, Batter…SWING!
I’d like to share some thoughts on the VC industry today. According to a recent article on cnnmoney.com, despite the past decades biggest hits (e.g. Google, YouTube, etc.), the typical VC fund has lost money for its limited partners. The median net return to VC investors has not been positive for any vintage year since 1998.
What does this mean to those out there seeking funding? There is still funding to be found (as the headlines about Facebook and Groupon have triumphantly indicated), but given the recent history of returns, investors are very interested in finding the next homerun.
One way to ensure that you communicate your all-star potential is to make sure you have a well developed business plan, a strategy for selling your plan, and an experienced business partner to help you along the way.
So, have you got a homerun for us to help you hit out of the park? If the answer is yes and you wish to become a CENAK Consulting L.P. client, please submit your information to info@cenak.com.
Venture Capital is Dead! Long live Venture Capital!
A current browse of venture capital articles and opinions would seem to indicate that the venture capital model is dead. The heady days of venture capital seem, indeed, to be over. According to research firm VentureSource only 119 new venture funds were raised in the U.S. last year, totaling $11.6 billion in assets. That is down from 215 new venture funds totaling $40.1 billion in 2007.
Venture Capital is DEAD! Or is it?
One should be cautious of declaring a downward spiral on two data points. Though activity is significantly down, there is still activity. One may also draw a conclusion that venture capital is harder to come by, that investors have become more cautious or more risk averse in a pessimistic economic environment.
Perhaps the venture capital model is evolving into a newer, hopefully more efficient, version of itself? One where investors are more patient and cautious, and willing to trade off fast and furious returns for smarter and more fundamentally sound business models? Or perhaps, venture capital is shifting away from a its traditional approach and evolving into a model where smaller rounds dominate and where VC firms work closely with entrepreneurs, such as the model successfully implemented by Tandem Entrepreneurs.
Which ever way venture capital is evolving, it is clear that companies seeking funding today need to be especially well prepared for the step into the spotlight. Given the many deals chasing a limited pool of funds, preparation and presentation are becoming increasingly important.
CENAK Consulting L.P. is a boutique investment bank with global reach. We prepare businesses for fundraising by vetting business models, preparing due diligence materials, and positioning them in the fast changing investor environment. If you wish to become a CENAK Consulting L.P. client, please submit your information to info@cenak.com
