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Further
Reading ...
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10 Easy Steps to Boost Your Search Engine Rankings! - Marcus Schroefel
In order that someone finds your website and buys your product on the Internet it is essential to make it known to the world. So the first thing you do is to submit to search engines. But a search engine listing alone does not assure you will...
Real Estate Investing - Buying Pre-Foreclosures? - Lou Castillo
So you wanna buy pre-foreclosures? or at the courthouse steps? So many people ask us about this. Here's our '30 second seminar' on it. If you're going to buy PRE-foreclosures--after the seller is behind on her payments, but before the lender's...
100,000 Subscribers In 30 Days? - Willie Crawford
Two years ago, I sat in Joel Christopher's "Master List Builder Seminar" listening to ideas on how to build my list faster. The room was filled with seasoned on-line and off-line marketers. They all told us that the money was in the list......
To-the-point... Achieve your business objectives 25-50% faster - Robert Poulton
As a business turnaround entrepreneur for the past 20 years, I have had a lot of conversations with people about what really makes a business work - - oh, yes, that over worked word - successful. Communication... For every communication there is...
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Attract more Venture Capital by Avoiding Angel Round Conflict
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Written By:
Mike Sage
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A venture capitalist reveals what you need to know
By Mike Sage
Founder of Capital Now and author of Capital Now Complete
Free Trial copy available at http://www.venturecapitalguru.com
The use of friends, business associates and Angels as sources of financing often appears attractive as a relatively uncomplicated, readily available capital source. For startups, they are often the only form of capital available. Yet, care must be taken to ensure that this early round of capital does not interfere with long-term financing. Angel financing is typically a one-time source, in which the investors have unrealistic return expectations. Typically, these sources are not professional investors with diversified and balanced portfolios. They can hardly be blamed for nervousness over the inevitable ups and downs of the your company's development cycle; however, as friends or previously successful entrepreneurs themselves, you can be sure that they will make their advice and concerns well known to the company.
Part of the problem some of you encounter is that you tend to over-value the company for the Angel round. Then you are placed in the uncomfortable position of explaining to people who often do not understand venture capital that they have to take what they would consider to be a valuation "haircut."
We've encountered entrepreneurs that say, "We've just raised a $10 million pre-money valuation, and now we're going to go out and get a $15 million valuation." Then we learn they only raised $500,000 at the $10 million pre-money valuation. That's not a solid basis for a $10 million pre-money valuation. Yet there are some of you who mistakenly believe it is a solid valuation and potentially put the company in jeopardy to fail in the next financial round.
Angel Round Strategy
Here's one option to consider when trying to value your company for a seed-round investment. Avoid it altogether; after all, it doesn't make sense and can only present a potential liability down the road. Instead of offering equity, offer debt that can be converted into equity at some point - continued below ...
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continued ...
in the future. This is a much more secure financial instrument, which will provide a lien on the assets to the Angels if the business does not progress. The lien would be released upon a debt-to-equity conversion that could take place at the first round of a venture capital investment. The conversion price can based on the pre-money value paid by a VC, adjusted with a discount based on how much time passes until conversion.
For example, let's assume that an Angel investor group provides a convertible loan in the amount of $1,000,000, and one year later a VC buys 2,000,000 shares of stock at $1 per share. The Angels could then have the option to convert the $1,000,000 loan into shares at a price discounted from the $1 price that the VC paid. Assuming further that the discount is 20%, the Angels would then convert this loan into 1,250,000 shares of stock at 80 cents per share.
This strategy avoids the problem of applying an improper valuation too early in the life of the company. Using debt instead of equity for Angels will provide an equitable solution for all investors and help you avoid a major headache. The Angel is protected, assuming that a future investment takes place, because they see an increase in the value of their investment. The venture capitalist is pleased because the Angel did not buy stock at an abnormally low price relative to the valuation the VC is applying. And you are content because you have your money and your investors are happy.
Copyright ©2004 by CTC Publishing, All Rights Reserved.
Mike Sage, Founder of Capital Now (http://www.venturecapitalguru.com), has been an early stage venture capital investor with two major funds as well as an entrepreneur starting businesses. Mike can be reached at mike@venturecapitalguru.com.
About the Author
Mike Sage, Founder of Capital Now (http://www.venturecapitalguru.com), has been an early stage venture capital investor with two major funds as well as an entrepreneur starting businesses. Mike can be reached at mike@venturecapitalguru.com.
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| _Additional Resources ... |
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How to squeeze hundreds of dollars from even the oldest resale rights products within 48 hours - Tukshad Engineer
Here’s an interesting little statistic- 95% of resale rights holders hardly make any sales. Why is this? There are 2 reasons- first, many people obtain resale rights (eg. Via ebook bundles) and do absolutely nothing with them. They sit and gather...
ClickBank Link Theft: Is It Really That Bad? - Tim Coulter
If you have visited any of the affiliate-related websites or read any of the various ebooks about affiliate marketing, you’ve almost certainly seen references to the thorny subject of link theft. Indeed, so contentious is this issue that it is...
That Personal Touch - Dave Balch
What makes a person want to do business with one business but not with another? I'm not talking about wishy-washy preferences here, like "Well, I'd prefer this to that". I'm talking about a definite want to do business with a particular business,...
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