Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

Here are some semi-random thoughts on preferences after my recent post on this topic.  Also, an entrepreneur in town recently asked me whether, and how, he could protect himself from the inevitable dilution of future rounds.   Consider this: over the past ten years venture funds, as a group, have not provided any return to their limited partners.  Now, there are some funds that have done well, but the zero rate of return is true of the industry as a whole.  This situation exists despite the preferences and participations that are standard features of so many venture investments.  OK, what do... More

 I was thinking about Rob Go’s post on valuation which makes one of those great points that fit in the category of common sense that people in my end of the business often feel intuitively but don’t articulate. With respect to the valuation of early stage VC investments (where there is no cash flow), he says: The answer is that vc rounds are priced by the market - by supply and demand. I once met an experienced VC who admitted to me that he didn’t actually know how to do a DCF. But he did know where a deal would likely close... More

Reproduced below are a couple of paragraphs from an article in VentureWire the thesis of which is that the venture economy has bottomed out.  The article, " Later-Stage Valuations Hold Steady In 2Q After Plunging In 1Q" is by Russell Garland.        The median pre-money valuation for later-stage deals was $35.8 million in the second period, up slightly from $33.5 million in the first three months of the year, according to the latest data from VentureSource, a research unit of VentureWire publisher Dow Jones & Co. The median later-stage valuation for the first half of 2009 stood at... More

Sometimes practical reality and legal niceties collide like trains guided by Chas Adams. Here is a typical situation that must happen on a daily basis somewhere: I recently had a start up client call up and say that he wants to issue options to a new employee. The company was founded a couple of months ago, founder shares were issued, IP was contributed, options were offered, new guy was hired, client wants to know how to price the options. Enter Section 409A of the Internal Revenue Code which provides that the options must have an exercise price not less than the fair market value... More

I recently met with a potential new client. The two entrepreneurs have a great business concept, and some real “traction” (a word upon which I have commented before) in the form of actual repeatable sales. This is one of those good ideas that, once described, seems so simple and obvious that it makes you wonder why you didn’t think of it. The margins aren’t software margins, but they are close, and the addressable market is deep into the hundreds of millions.  Like everyone else, they need money to support execution on the plan. They don’t need much: $1 million initially and perhaps another $3... More

Bad times may well cause this beast to come out of its cave. Full ratchet antidilution is a provision that protects investors to the max from low priced issuances. The gist of this provision is that the conversion price of a security (usually preferred stock, but not necessarily) will be reduced to the lowest price at which a company sells any shares of its common stock. So, if you have 1,000,000 shares of preferred outstanding with a conversion rate of $1.00, these shares will convert into 1,000,000 shares of common stock. However, if these shares have a full ratchet antidiluton provision and you issue... More

Many entrepreneurs focus on pre-money valuation to the detriment of other economic terms that can be equally significant in a venture financing.  As you may have heard venture investors or others say before, "I'll let you pick the valuation as long as I get to pick all the other terms." This is because beyond the pre-money valuation, there are an infinite number of ways through other economic terms for the investors to extract their returns. The pre-money valuation is used to determine the price per share that your investors will pay, but the idea that it is actually the valuation of the... More