The seed debate rages on
Brad Feld has another fine post on seed investing. His post, like so many others, focuses on the intent of the investor. In effect, he says there are good seed investors and crappy seed investors. He is undoubtedly right about that, but I am not sure it matters as far as optionality and signaling are concerned. Any VC seed investor is likely to have a choice whether or not to fund an “A” round. It does not matter whether they made the investment with the intent of securing that choice or not. With respect to the value of the option, it does not matter that...
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Seed and Angel Investor Notes
Seed and angel investments often come in the form of convertible notes – often notes that are convertible into some future round of equity investment at a discount to the valuation at the time of conversion. They have other terms as well such as interest rates, maturity dates, prepayment premiums in the event of an early sale of the business, waiver of certain debtor protections etc. These all may form the focus of future posts. I want to focus on what, if any, influence seed/angel investors who invest in these types of notes want (or get) concerning the terms of...
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How much to discount a convertible angel note
This issue (how much of a discount should there be on an angel note that converts into the next round of financing?) seems to come up every day. And, there does not seem to be a good answer. So, consider this: a 20% discount is, in effect, a “guaranteed” 25% return on the investment. (Of course it is not really guaranteed since you don’t get liquid until some dim point in the future, if ever.) Perhaps one way to look at what is an appropriate discount is to ask what the return should be over what period of time. 25% in six months justifies a high degree of...
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Angel Notes
As I have noted on many occasions, one of the most common structures for angel investments is a note that converts into shares of a future round at a discount to the price in that round. While this has the advantage, among other advantages, of putting off the moment when a valuation of the company must be agreed to, one client has recently pointed out the flip side to this benefit is that it caps the investor’s upside during the period from the angel investment to the moment of conversion into the future round at an amount equal to the relevant discount. While...
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If you can't get what you want at least get what you need
Sometimes you have to take your financing where you can find it and deal with the consequences later. If there were but world enough and time, you could negotiate the correct fair valuation for you business and the correct fair terms for you and the investors. But there never is (world enough and time) nor is this the best of all possible worlds. So, in the end you will have to settle, and, with luck, if you don’t get what you want at least you will get what you need. Along the lines of dealing with the real imperfect world,...
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Angel Groups
Here is a link to a lengthy article on angel groups. There are many angel groups in New England. A list of most of them can be found at the EEC Web Site. There is also a brief article by Ham Lord of LaunchPad in a recent EEC Perspectives publication. He has these two things to say " Angel financing is more than just seed round financing for future venture capital deals. In fact, angels fund 10 to 20 times more companies than venture firms do on an annual basis. This is because many angel deals will never need the type of...
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