Deal Terms

By: Christopher Mirabile, ACA Chair, Launchpad Venture Group, and co-founder of Seraf-investor.com

This post originally appeared on Seraf-investor.com

In the first article in this deal terms series, we observed that the concepts covered in a typical term sheet can be grouped into four main categories of investor concerns: Deal Economics; Investor Rights/Protection; Governance, Management & Control; and Exits/Liquidity. In the second article in this deal terms series we gave an overview and mapping of all of the key term sheet clauses used by investors to address the concerns in each category. In the third article we dug deeper into the provisions relating to Deal Economics, in the fourth Investor Rights/Protection, and in this article we are going to tackle the Governance, Management and Control category.

By: Marianne Hudson, ACA Executive Director

Recently I had the chance to check in with ACA members in detail on their preferred investment structures.  This all started in June at the ACA Pacific Northwest Regional Meeting, attended by more than 200 investors.  One of my favorite sessions was a debate on deal terms, with Angela Jackson of the Portland Seed Fund arguing for convertible notes and Bill Payne of Frontier Angels speaking for priced rounds.  It was a lively discussion and you could tell the audience was into it. 

By: Marianne Hudson, ACA Executive Director

This post originally appeared on Forbes.com

Every angel portfolio needs some real gems to provide an overall return.  Selecting which companies to add to your angel portfolio sometimes feels like hunting for an elusive pearl among thousands of oysters. So many look the same from the outside. Are there telltale signs that point to which oyster contains the pearl without having to pry open every one?

By Michelle Stewart and George Willman, of Reed Smith LLP

Traditionally, investors have selected between two main modes of accomplishing early-stage financing – direct issuance of equity or convertible debt.  There have been some changes over time, such as the increasing proportion of early-stage financings using convertible notes, and increased investor demand for better economics in the notes, with features such as valuation caps and discounts to conversion. However, for a long time, early-stage investments were generally limited to these two modes of financing without a lot of fundamental change. 

Recently, several new approaches have emerged, which have generated quite a bit of interest in the early-stage financing community.  These include SAFE (Simple Agreement for Future Equity), KISS (Keep it Simple Security), and Series Seed. SAFE, proposed by Y Combinator, and KISS, proposed by 500 Startups, were quickly adopted by companies coming out of these well-known accelerators.  But the use of, and interest in, these new approaches reaches beyond these portfolio companies to other emerging companies looking for something different.  The Wall Street Journal highlighted this trend recently in “Startups Offer Unusual Reward for Investing - Simple Agreement for Future Equity promises benefits later if the firm is able to move forward,” April 1, 2015.

By Bill Payne, Frontier Angel Funds

Three outcomes dominate exits of angel-funded companies:

  • Dead bugs – Startups that go out of business, returning less-than-invested capital to angels (usually zero).
  • Positive exits – Companies that liquidate with capital gains to investors, usually via a cash sale to a larger company.  While IPOs are possible, they are very rare for angel-funded companies.  The exits can range from simply return of capital to wildly exiting multiples.
  • The living dead – These companies continue indefinitely to operate with internally generated cash without pursuing an exit.  By intention or due to market forces, these entrepreneurs turn what at first appeared to be a high-growth opportunity into a lifestyle company, that is, a company that meets payroll for all employees but does not demonstrate sufficient upside potential to attract buyers.  Such companies are going sideways and, as such, offer no opportunities to angels to harvest their investment – not even to write off their investment.  There are also examples of entrepreneurs who “get comfortable” with the income provided by their startup companies and simply choose not to pursue an exit.

By: Bill Payne, Frontier Angels

Entrepreneurs seem genuinely surprised to find that investors in Peoria or Little Rock are not willing to invest in startup companies at Silicon Valley prices.  After all, they just read in TechCrunch that investors funded a company similar to theirs at an $8 million pre-money valuation! 

The valuation of startup companies shouldn’t be impacted by location, should they?  Guess again!  A newly-constructed 3500 square foot home with a pool near New York City is priced well above a similar home in Fargo, right?  Well, the same differentials are true for startup companies.  In fact, the issues that influence residential real estate pricing are quite analogous to those which determine the price investors will pay for ownership in startup companies.

Subscribe

Tapping into America’s Biomedical Seed Fund by Ethel Rubin  on  February 12
The Seraf Method to Valuing Startups: Exit Practicalities by Ham and Christopher LM  on  January 16