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Video instructions and help with filling out and completing Why Form 2220 Startup

Instructions and Help about Why Form 2220 Startup

It all starts with a vision the project the product the service no one has done it before unbelievable it's so painfully obvious can you pull it off maybe your two friends you are excited design a logo designer name all fun and games designed a concept things get serious we decide to make this a company you need a structure a legal structure how much will that cost you in the US and cooperating a company will set you back anything between $25 and a few thousand dollars that's in part registration fees which actually vary depending on where you are and legal fees which vary depending on how fancy you need your first channel disagreement to be your corporation turns out to be on the pricey side also you need to rent a server in order to develop your product therefore you decide to collect some other people's money for it this early in your venture who on earth would give you their money you will get it from family friends or by crowdsourcing it usually a nuding corporate company issues one hundred thousand shares which are equal pieces of ownership you need to decide who will get how many of those you agree on forty thousand shares or forty percent of the company for each founder and twenty thousand shares or twenty percent of the company for a well-off family friend who buys them for fifty thousand dollars it's called an investment and at such an early stage in your startup it's called a seed investment the money he pays now belongs to the company if the company fails in the near future which statistically speaking is the most likely scenario you will probably never see a dime of it again $50,000 for 20% of the company puts the value of your enterprise at $250,000 which puts the value of your 40% at $100,000 not bad please sign here here and here congratulations you incorporated your company and finished your seed round of investment a year has passed you're having a successful beta trial with customers time to hire a few more people rent not just a server but a small office space the $50,000 of seed capital only got you so far time to collect your first big round of cash you will do this in a so called series a round you're looking for an investment of one million dollars this time you're contacting angel investors and venture capitalists also called feces feces of people who work for venture capital firms which raise venture capital funds they take other people's money which they then invested to young risky companies such as yours angel investors are individuals who professionally invest their own money into young companies often they successfully sold their own start of many years ago and are now looking to support early ventures you contacted a few VCS and angels some of them you found online some you got in touch with via friends and colleagues you sent them mails you sent them a business plan usually they don't care much for the business plan they want to see if the team is a competent the idea is it special they know it's not easy what have you already achieved is a promising what could you achieve can you dream big you set up some Skype calls a bit of small talk a lot of business talk describe the vision easy you've done countless times by now they ask you tough questions have you heard of that other startup which does a similar thing how are you different you spark interest you have second calls you have third calls you meet them in person then might invest time to talk valuation there is pre-money valuation and post-money valuation the pre-money valuation of your startup is how you currently value it the post-money valuation is the pre-money valuation plus the investment you're looking to collect this is hugely the one that you reference when you negotiate because the investment divided by the post-money valuation equals to the investors share in your startup investors want a low post-money valuation to get more for their money you or the high post-money valuation to keep a larger share you suggest a postponed evaluation of eight million dollars for the investor who were put in 1 million dollars this would mean the 12.5% stake in your company a few weeks down the road there are two offers on the table one VC offers an investment of 1 million dollars for post-money valuation of 6 million dollars an angel investor you talk to offers to invest $500,000 for a five million dollar post-money valuation the offer of the venture capitalist sounds like the better deal but the angel has great connections in the industry it's called smart money what do you do you decide to go for both we tell the angel that you have a standing offer of six million dollars post-money valuation but you would really love to have her on board she agrees tuned at a six million dollar post-money valuation great how's the cake split this time let's do the math together the VC and the angel will put in total of 1.5 million dollars into your business for a six million dollar post-money valuation this means that they will own 25% of the company you your co-founder and your family friend used to own 100% together with the new investors coming on board you will be diluted after the series investment your cumulative share will only add up to 75% of the company this dilution happens proportionally thus this mean that you have fewer shares now no here's how it works just like your company issued the first 100,000 shares when you incorporated it it will now issue more shares for the new investors to buy the company can create shares just like a central bank and print money the total number of shares.

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