2017-08-10

Negotiating Startup Valuation With Venture Capitalist

Startup valuation

There is a common confusion between the two financial terms, namely angel investors, and venture capitalists. Both even though provides and expects the very same thing, there is still a significant difference between both of them. While angel investors are those wealthy investors who generally invest their personal money in any kind of company they see fit. Venture capitalists generally fund startups and they invest money of other investors and entities. Personal money is included but it is a rare case scenario. Also, angel investors are generally not included in the decision-making of the company. However, venture capitalists are always attentive to what’s happening in the company and they have a major part in taking any decision. Though both of them look forward to the success of the entities they have invested in. Now, Valuation is an important factor not only for the owner but for the investor also. Determining the value of a company in its initial stages can be a bit tricky. Described below are the factors which affect a startup valuation and how can it be negotiated.

Startup valuation can be very difficult on the basis of the company’s profit. Being a startup, you cannot hope to make a profit instantly; therefore valuation on the basis of it will be unjustified. Startup valuation can be done on discounted cash flow method or the venture capital method. It can also be done by comparing the startup in the market. Investors invest in a startup after looking and analyzing many things. It can be the vision and goals of the company or the management of the company. It can be the dedication or the promising attitude of the venture.It is very common that market’s valuation of your startup is less than from what you have calculated. How can you negotiate that value then?

Now there can be two cases;

Your company actually values more, however, the market value of your company is low. It happens when you have liquid assets but they are not that valuable to be included in the valuation. Or it may be because of weak presentation and working of your startup. That generally leads to low funds or at least lower than what you have expected. It may happen that value of your startup is not more than what has been told by the market. Contradicting them won’t be fruitful since they will be your investors and they have the right to tell you things. It doesn’t mean that you get intimated by them. You need to learn to improve or work in a more organized way.
Your company values more but the market is trying to make it low. In that case scenario, you need to have a proper financial forecast. Other than an awesome business plan and a more awesome management team you need to have a financial analysis of your company. It will help you to have a proper valuation of your startup. It will also help you to persuade the market. Negotiation with the investors will become easy.

In order to negotiate, you need to be persistent and should not appear desperate. You should know how to command things but in a way that your investors feel that they have the upper hand. You need to show them the good side of your company, the promising future of your startup. Build up a professional relationship full of trust. They will easily be attracted if you have a plan. Like a real plan.

Startups even though are at a high risk, they still have the highest scope to excel and establish themselves firmly. Try and be smart. Learn to bend things your way. Be an entrepreneur.

This article has been contributed by Simmi Setia, Content Writer at LegalRaasta, an online portal for GST Software, GST Return Filing, GST Registration, Section 8 Company Registration, Nidhi Company Registration, IEC Registration, Fssai License, File ITR Online.

2017-08-10

Dealing With Venture Capitalists For Your Startup

Dealing with Venture Capitalists

Startups usually don’t have any connections with capital markets. Under such circumstances, Venture capital can be one of the most important sources of funds. Venture Capitalists are those investors who invest in the small business as well as startups. They generally look for potential and promising Entrepreneurs. They can be one of the easiest ways for you to get your funds. Before approaching a venture capitalist you need to do your homework. You need to analyze your business and then approach others. Make sure they invest in the very same field in which your company is established. Otherwise, your whole dream of obtaining funds will remain a dream only. Learn about your potential investors. Prioritize them on the basis of your needs and then make the first move. But what all other things are needed before that? How are you supposed to deal with these Venture Capitalists? The same is described below.

The first thing you need to do is understand the Venture Capitalists and how they work. They are just like you. They look for profit just like you do. The difference being that they have money and you have an idea. For a moment, think like a customer. Assume you need to buy apples. Now, there are three aisles of apples in the same shop but with different prices. Ten rupees for one lot is full of rotten apples. Fifteen rupees for another lot full of mediocre apple. Finally, twenty rupees for last lot full of sweet and juicy apples. What will you do? Will you go for the cheapest of all or will you choose on quality basis? Well, majority of people will go with quality. Similarly, venture capitalists see the quality and not the quantity. They look for people who have the potential to excel, to make their money double or maybe triple. It is more like a game of gambling. And in order to make venture capitalists bet on you, you need to be unique.

Secondly, you need to have an advisor. He can help you analyze those factors which may not even cross your mind. They will give you an honest advice. They will help you tackle these Venture Capitalists in a more easy and effective way. Your advisor should be chosen carefully. Find someone who has experience as well as wisdom. He should know how to play this game called ‘Capital and Funding’.

You will be offered a term sheet by the interested Venture Capitalists. The term sheet is a document which will outline your relationship with the opposite party, mainly in financial terms. They will cover all the important business terms and conditions. Hence making it is a very important document. Therefore, what you need is an effective and carefully drafted term sheet. In order to have one, you need to have proper awareness of your market, your requirements, your goals and the funding cycle. It will also make all the terms and conditions crystal clear to both the parties. Hence, avoiding any future disputes.

You need to tackle the ‘Elephant in the room’. When you deal with a Venture capitalist, it happens that while making all the future predictions and using flowery language, you ignore some of the present time issues. This leads to internal conflicts later on. And what’s worse? Both the parties know about these issues yet are afraid to talk on the topic. it is a major rule that you understand all the rules and regulations of the game you are about to play. Hence, you need to tackle. Avoid those awkward silences and ask away. Be confident.

Find the right investors. You need to approach only the potential ones. This will save your time, energy as well as money. This will also give you a large ground to score big with the potential ones. To find the right one, search on the local level first. See and analyze similar ventures like you. Research about their funding methods. See if you can get through the venture capitalists that are funding them. The Internet can be a boon for you. Use it wisely. Check out different portals. Check their reliability and get yourself some funds.

Be ready to share and decide the extent up to which you are ready. Venture capitalists when to invest their money, they will demand some kind of power in that venture. It’s reasonable for it’s their money at stake. Therefore, you need to decide what all power you are ready to share or give up. Make sure they are attractive. Also be ready for an intervention. Power will allow capitalists to intervene and even make, change or alter decisions.

The last and of the most important way to deal with a venture capitalist is to be persistent. Now, being persistent and being desperate are two different things. Venture Capitalists should be excited to listen to you. Brew that excitement. Make yourself that persistent. But don’t pester them away. Desperation will do that. Be the man of your word. Do what you say and don’t be afraid. You want to do business and so do they. Deal just like you will deal with any other. Respect them but don’t let them intimidate you. If you are looking for someone to give you funds, then they are also looking for someone to whom they can give their funds to. Make yourself and your company worthy enough.

Rest, approach a Venture Capitalist only when there are no other options. Because, once you have taken a fund, you can’t fire the investors. You will be entitled to listen to them. And you will also have to follow a time frame. Fund yourself on your own, at least as much as you can. Anyhow, they are important and famous. Mostly, you will need Venture Capitalists when you decide to make your business big. Play smart! Other than that, we, at LegalRaasta can provide you with legal solutions in raising funds for your startups.

2017-08-10

Cash Flow Planning And Profits For Startups

Planning and Profits for Startups

Any business start-up requires high-level planning and every aspect should be considered before starting a business but only if you wish to make it a huge success. On similar grounds, Planning Cash Flow, as well as profits for startups, is very essential. However, Cash Flow Planning and Profits are generally misinterpreted and are considered to be one and the same thing. But you need to understand that they are two very different things. Described below is the general definition of the two financial words along with how you should plan a strategically good plan action for startups in terms of cash flow and profits.

While one can explain cash flow as the total amount of money which is transferred to a business ( in and out) which also affects liquidity, profit can be explained as the amount of money a company saves or makes a certain deal or project. Basically, it’s the amount you save after every expense is covered and everyone is paid. Profit is mandatory for any company, it may be on a large-scale or a small-scale. It anyhow increases the ranking of a company.

This planning can be easily included while planning your business plan. Cash flow planning and cash flow statements are one tricky part included in financial planning. One, therefore, needs to clearly understand how cash flow works, Putting it in simple words, cash flow can be considered as the amount of money you take and give. Now it’s important because we need a balance between the give and take a statement, you cannot give more than you take. Or maybe you cannot have more output than input or you simply will go bankrupt. Therefore, a startup needs a careful planning of cash flow so as to run it successfully. Of course, it’s quite rough at the starting but who says that starting up a business is easy, one simply should not be scared of failure. Your Cash flow statements should be simple and very clear. There should be no lagging in the daily inputs.

As a startup, cash flow management is very important for the survival of the business. You can say that startups are kind of vulnerable to cash flow statements and hence planning should be done on the practical and realistic basis. Including self-applied strategies and it should also include the profit of the customer otherwise customers will never be attracted and hence the whole essence of the planning will go completely waste.

Now profit planning is interrelated to cash flow planning, if there is a proper cash flow management without any doubt the company will see a profit, if not, then it’s time to change your strategies. Startups mean experimenting while strictly keeping in mind the interests of a customer.

Maintain a cash flow forecaster which includes the expected shortfalls and customer payments. It will also help to deal with banks and similar organizations also helping to fill taxes on time. It may happen that due to some unexpected issues the forecast imbalances, it may be due to higher costs of some raw material or lower sales rate or maybe customers not paying up on time. In such situation, experience is required and for startups, this turns out to be a big hurdle. For startups, you can always take the help of company registration. As always, Play smart!

2017-08-10

■

Planning and Profits for Startups

2017-08-10

Short-Term Bank Loans For A Startup

Short-Term Bank Loans

Money, capital, finance, funds, monetary assets. All these financial terms can scare anyone away. However, an Entrepreneur should know how to play with these terms, if he aspires to become successful. Raising Capital, especially when it comes to startups can be a very big issue. Entrepreneurs with their startups look for capital and funds wherever they can. Sometimes it may happen that a company is going through a serious financial crisis, at that time the company may look for financial help. It can be through loans or funds. However, it is very difficult for a startup to raise enough funds. Therefore taking loan seems like an easy way. However taking loan makes you a debtor for a long period of time (Long-term loans). Here come the short-term bank loans. Described below is what short-term bank loans are and how they can help you and your startup.

Now, Short-term bank loans as the name suggest refers to a loan with a less maturity period, generally one to three years. It also depends upon the amount of loan taken. You can always take a long term loan however short term loans have considerably low-interest rates. The risk involved is lower in short term loans and are easier to obtain. Short term bank loans are generally considered in times of emergency. Startups can be benefited from the features of the short-term bank loans. Since they don’t have much capital. Lower interest rates for a short period are a good option.

The amount can be withdrawn under forty-eight hours, however, the high amount cannot be taken as a loan. They include working capital loans, loans concerning accounts receivable and lines of credit.

When it comes to startups, banks can be wary of giving loans, seeing the high probability of the failure of the startup. Credit history and collateral can help you there. Collateral includes accounts receivable, inventories and personal assets. Collateral acts as a guarantee for the bank. Your business plan should be impressive and realistic. It should not be full of optimistic views. it should show a practical approach to certain things. Try and show the bank that what they will gain with funding your company. They don’t care about you. They care about their money.

The amount of money you are expecting should be clearly mentioned. Also what the money will be used for should be planned beforehand. Without collateral security, banks do provide loans. This is done under the CGTMSE scheme (Credit Guarantee Fund Trust Scheme for Micro, Small and Medium Enterprise). This scheme works under a specific framework. This scheme is not applicable for research work or technology development.

So, we can say that short-term bank loans can help start-ups but only up to a certain limit. They should be considered in times of emergency only. Funds and other investors should be the first option for any start up. Plan carefully and practically. Be transparent and you will get a loan quickly. Security matters but what matter more is your approach towards certain things. Take the right step.

For any legal aid, you can contact us, LegalRaasta any time.

2017-08-10

Generate Startup Funds Through Smart Working Capital Management

Working Capital Management

Working Capital is a quantity which simply tells about a company’s financial status and investments though only for a short term. It is generally related to liquid assets such as cash, accounts receivable and payable, inventories, debts and such more things. To manage a business and smooth working of a company, an Entrepreneur needs to have adequate capital. This capital can only come from the proper management of company’s assets and liabilities. For this maintenance, what a company needs is a working capital management. Many companies have already adopted and are implementing this management. Common sense is enough to tell us how important it is to manage our cash if we do not want to face any kind of financial crisis which is enough to deteriorate a company’s position or worst to completely shut it down. Startups especially can generate a lot of capital (mostly funds) through working capital management, a smart one at that.

Described below is how you can do working capital management and raise funds.

Managing a company’s short-term liabilities and short-term assets is what makes a smart working capital management. It ensures that company has sufficient capital to proceed and can cover every short term expenses.

When you read about managing working capital, you need to keep in mind that you can not only take care of the assets but also the liabilities. You can manage them since both of them are interrelated. Firstly, talking about company’s assets;

Company’s assets can be mainly divided into two slots one being inventories and other being accounts receivables. While inventories give you an extra stock of your services and goods, it may help you in a time of high demand and any technical fault in the company. It is basically the not-sold-out products, though raw materials and under-production material are also included in it. These products can be considered liquid assets and hence can add a lot to your working capital; therefore they should be carefully handled. Smart storage and moving will be one of the most important factors. Keeping Inventories for a long time should be avoided, since longer storage may deteriorate the quality of the product. Then comes accounts receivable. They are mainly the amount you need to receive from customers or debtors. To maintain a smooth working capital this capital should be collected soon. A thirty-day term is usually provided to debtors in order to clear all of their debts; an invoice system is also introduced in many companies. Fast cash will allow more exposure to new technology.

Talking about company’s liabilities; you need to make sure that whatever debt you are entitled to or whatever creditors you have to pay is done on time, this can be easily done when you have a smooth accounts receivable payments. So, you can say that they are interrelated, though, a certain margin is always kept to avoid any kind of circumstances, they still are highly interconnected as can be seen in the flowchart also.

2017-08-09

Choose Between LLP And Private Limited Company

Choose the best one for you

Whether you want to start as an LLP or private limited company depends upon the objective, scope and capital and sale of the business entity. LLP is recommended when the capital amount is less than 25 lacs and sales turnover is more than 40 lacs. In such cases, LLP is not required to audit their statements and other compliance obligation and thus reduce cost.

If LLP crosses the sales turnover of Rs.40 lakhs or capital contribution of Rs. 25 lacs, then it is advisable to opt for Private Limited Company as the compliance requirement of LLP will be same as that of a company. In addition, LLP won’t be able to raise equity capital as currently there is no procedure for converting LLP into Private Company. Hence, if the entrepreneur wants to expand business and infuse equity capital from private equity investors, venture capitalist or angel investors then a Pvt limited company is the best choice.

Reasons for LLP Registration

The LLP registration in India has seen increasing trend due to following reason:

Increase in awareness among small business regarding the concept of LLP.
It is easy to start and manage.
It provides the benefit of limited liability as well as flexibility to organize their firm internally.
The audit is not required except if annual sale more than Rs.40 lakhs and or capital contribution is less than Rs.25 lakhs. Auditing is mandatory in Private Limited Company irrespective of sales turnover and capital contribution.
LLP does not have to pay dividend distribution tax (DDT) which is 15%( surcharge & educational cess) for Private Limited Company.
LLP does not have to organize Board meeting or annual meeting, unlike private Limited company.
The government fee for registration of LLP is significantly lower than the incorporation of the private limited company. LegalRaasta offers Private Limited Company at Rs. 13999/- all inclusive. Whereas, LLP Registration fee is Rs. 7999/- all inclusive.
Fewer documents and less burdensome is the process for registration of LLP as compared to Private Limited Company.Read what documents are required for Registering LLP.
The above reasons have led to a strong growth in the number of LLPs registered in India.

For detailed discussion read Advantages of LLP and If LLP is the right choice for you.

Reason for Private Limited Company Registration

In spite of all the benefits that LLP avail, there are some bottlenecks that business entities preferred Private Limited Company (Read Advantages of Private Limited Company in detail). The reasons are as follow:

There is no concept of shareholders in case of LLP. All the owners of an LLP are a Partner in the LLP making it unsuitable for investors such as Venture Capitalists and Private Equity Investors who do not intend to actively participate in the management of the Company. Hence, for investors, Private Limited Company is the viable choice. Therefore, if the business entity has the scope for expansion of business, then it must be registered as a private limited company.
With growing interest among investor in increasing their foothold in the second largest market, Foreign Direct Investment (FDI) are gaining popularity. However, Foreign Direct Investment (FDI) in a private limited company is under the automatic route whereas government approval is necessary for FDI in LLP making it undesirable for investors. Therefore, businesses that have NRI or foreign promoters must prefer incorporation of a private limited company.