yummy part 4

Your Sources and Use of Funds statement on page 311 is particularly helpful to you with investors or lenders if you show you are using your funds to start or expand a business rather than to offset existing debts (a use that investors notoriously dislike), or if you already have some commitment of financing already from respected sources (which shows that other people believe in your company), or if you are committing significant personal funds (which shows you believe in the project enough to take substantial personal risk). In “Sources of Funds,” you should include both funds you have received to date and the amounts you are now seeking, clearly delineating each. In preparing the “Sources and Use of Funds” statement, consider the following issues and terms: ■ Funding Rounds. The number of development stages at which you will seek financing from the investment community. ■ Total Amount. Amount of money sought in this round of financing, from all funding sources. ■ Equity Financing. Amount you will raise by selling ownership interest in the company. ■ Preferred Stock. Outstanding stock for which dividends will be paid, before other dividends can be paid for common stock or before other obligations of the company are paid; investors often want preferred stock. ■ Common Stock. Stock for which dividends are paid when the company is profitable and has paid preferred stock dividends and other obligations. ■ Debt Financing. Amount of money you will raise by taking out loans. ■ Long-Term Loans. Loans to be paid back in more than a year’s time. ■ Mortgage Loans. Loans taken out with property as collateral. ■ Short-Term Loans. Bridge loans, credit lines, and other loans to be paid back in less than a year. ■ Convertible Debt. Loans that are later convertible to stock at the funder’s option, giving both the security of a loan and the potential of stock. ■ Investment from Principals. Amount of money that you or other key employees are contributing to the company; this can be in the form of cash or property. ■ Capital Expenditures. Purchase of necessary equipment or property. ■ Working Capital. Funds to be used for the ongoing operating expenses of the business. ■ Debt Retirement. Funds used to pay off existing loans or obligations. “In the financials, I look for a well-prepared, well-annotated balance sheet. And I like an Assumption Sheet with the Income Statement, so I know exactly how those figures got there.” Ann Winblad Venture Capitalist Assumption Sheet Financial forms are merely meaningless numbers unless they are based on decisions and facts. Your potential financing sources want to see how you arrived at your numbers and must be convinced that your assumptions are reasonably accurate. If, for instance, you have indicated your sales at a certain amount, investors want to see what size you are assuming the market to be and what percentage of the market you are assuming you will be able to secure. If those figures seem realistic, you increase your credibility; if those assumptions seem based on inaccurate numbers or overly optimistic projections, investors are going to look at the rest of your plan with greater skepticism. It is good discipline for you, as well, to learn to develop an assumption sheet whenever you do financial projections. Otherwise, you can be too easily tempted to write down figures that look good on paper but have little to do with reality. If you have worked through the business planning process, putting together an assumption sheet should be a relatively easy task. You have already asked yourself most of the questions called for on this form and have the answers available to you. An assumption sheet should list purely straightforward information; it does not require substantial detail or explanation. You do not even need to use sentences; just provide the data in each category. (You can use the first sentence, as written on the worksheet, on your own assumption sheet.) Be familiar with these assumptions so that you are ready to defend your assumptions when meeting with investors.