1. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Financial Statements That Investors Want From Your Start-Up David Sheffield

2. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Introduction My CV 8 Years in Banking and Finance Most famously, Analyst for Sir Stelios Haji-Ioannou and the easyGroup Participated in the founding of a number of companies: EasyGym Fastjet Space Sports Responsible for screening all submitted investment proposals.

3. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What are your biggest fears about talking to investors? Question #1

4. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What are the most important characteristics I was asked to look for in potential investments? Question #2

5. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #2 Contracts or LOIs or Patents Scalable Model Market Research, Financial Projections, Competitive Analysis Financing Terms Metrics

6. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What do you think is the best way to interest investors? Question #3

7. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #3 Asking for advice gets you money, asking for money gets you advice. (Mainly about where to go shove things!) The “Me Too” mentality.

8. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What do you guys know about letters of intent? Question #4

9. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #4 Not a contract Outlines terms of a potential deal Useful for negotiating other aspects of the firm Brings the attention of an investor, shows intention of commitment

10. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What’s the difference between an income and a cash flow? Question #5

11. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #5 Can be the same, sometimes not Cash flows are when money changes hands Income can be contracted but not yet paid Cash flows can also come from non-income activities (Ex: Borrowing from the bank, Stock issuance)

12. www.sheffieldfinancialforms.com www.sheffieldinvestments.net You sell 10,000 units to a store that will pay you 90 days. When is it an income, and when is it a cash flow? Question #6

13. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #6 It’s an income now It’s a cash flow in 90 days (If they pay!)

14. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What are the three major financial statements? Question #7

15. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #7 Income Statement Balance Sheet Statement of Cash Flows Investors need to see all 3 to get the full picture

16. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Income Statement

17. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Balance Sheet

18. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Statement of Cash Flows

19. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What do you guys think Stelios’s favourite breakfast is? Question #8

20. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #8 Full English Breakfast with imported Cumberland sausages, black pudding, half a roasted tomato, bacon, eggs, and baked beans.

21. www.sheffieldfinancialforms.com www.sheffieldinvestments.net What’s the difference between preferred stock and common stock? Question #9

22. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #9 Liquidation Preference Preferred Shares, by default, do not participate in the profits of an enterprise and receive different terms for their repayment and scheduled dividends. Common stock receive income after Preferred stock, receiving whatever is left of the profits.

23. www.sheffieldfinancialforms.com www.sheffieldinvestments.net So… does anyone know what non- participating, convertible preferred stock with a 1x liquidation preference is? Question #10

24. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #10 A mouthful A specific kind of preferred stock that investors in start-ups want. Example: The bait-and-switch with regular stock You invest €0, Investor invests €1,000,000 for 50% You sell your company to your buddy for €500,000. The investor gets 50% of the proceeds, €250,000. You, the founder, get €250,000. Your buddy gets a company with €1m in the bank for €500,000. Who wins? You got €250,000 for nothing, your buddy gets €500,000 for nothing. Who loses? The investor! He put in €1m, and gets back €250,000. Bummer! This kind of stock is there to protect investors.

25. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #10 1x Liquidation Preference If the company liquidates, the investor gets back 100% of his invested capital before you get back anything. So in the preceding example, they get back €500,000, you get nothing. Convertible If the company goes well, the investor has the option to convert to Common Stock which lets them participate in the profits of the company. Non-participating This is actually for you, not the investor – otherwise they would be able to double-dip and get both their full money back in the event of sale as well as convert to get an additional chunk of the profits.

26. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Does anyone know what an IRR is? Question #11

27. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #11 IRR means Internal Rate of Return. It’s not the only valuation method, but it is a widely used one. It is a compounded annual return. Ex: You put €1.00 in the bank. With an IRR of 50%, in one year it is worth €1.50. In two years, it is worth €2.25 (The 50% is calculated on the €1.50, meaning it increases by €0.75.)

28. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Does anyone know what an exit value is? Question #12

29. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Question #12 Exit value is the value if the company is sold. Even if you’re not planning on selling your company after 5 years, you should still put an exit value at the end of a 5 year financial projection. Why? Because otherwise you’re estimating that the company runs for 5 years and is worth nothing at the end! The Exit value gives a potential valuation price to show that there is ongoing value in the firm from year 5 and beyond. Usually it is a multiple of some metric – in start-ups, it tends to be revenue or gross profit.

30. www.sheffieldfinancialforms.com www.sheffieldinvestments.net Thanks for coming! Check out www.sheffieldfinancialforms.com to find useful templates to help your early stage business!www.sheffieldfinancialforms.com When you make a billion dollars, remember me! I’m a financial advisor and can help you invest it! ;-) www.sheffieldinvestments.net www.sheffieldinvestments.net I hope you guys found this stuff useful and my door is always open to entrepreneurs. If you have any questions, feel free to e-mail me at info@sheffieldinvestments.net.info@sheffieldinvestments.net Q&A ? Got anything on your minds? Now’s the time to ask! Have a great rest of the week!