WCU ENT640 – Entrepreneurial Feasibility Analysis
To begin the section on Structuring, Amis and Stephenson state that “the what and who of your investment are far more important than the terms.” However, the varying strategies regarding this subject between current Angel Investors and Venture capitalist differ greatly and even contradict this statement all together. Like a lot of fundamentals, as we learn the adjoining pieces that structure the deal can complicate things if we don’t make the effort to “Keep It Simple Stupid.” I also learned in this section that investing in a start-up can have more considerations and negotiation than just handing over some capital for some equity in the company. Predominantly however, Amis and Stephenson make a very detailed and informative case that unless you are looking for a specific type of protection or edge then keeping the deal as simple as possible can be very important to the overall health of the start-up both now and in the future as further rounds of investing come into play.
There is a dominating theory that the more complicated you structure the deal in the early stages of investing the more restrictive you make the later rounds or even into the life of the company. Negotiating too much control or restrictive rights may negatively influence what type of investors look at the next round or even scare some off. You could even cause the founder to find his exit earlier than initially planned. All of this can impact the future health of the company before it even begins the fact being that such a low percentage of start-ups become successful long-term and those that do typically will pay for those that do not. Most of the time what you negotiate in the early rounds of investing will not greatly impact your successes, the risk is greater that it will have a negative effect.
In David Amis’s interview of successful Angel and Harvard Business School Professor, Bill Sahlman, it is pointed out that “whether you have referred stock or anything doesn’t matter because there’s not much value left of the company anyway.” The difference of money you are protecting yourself from losing is minute compared to the risk you take restricting the success of the company. Sahlman points out how Venture Capitalist John Doerr was “roundly criticized when he put money into Amazon at a $60m pre-money valuation” and “in the end the company achieved a $30bn market cap 2 years later. So, whether he’d paid 60, 70, 55, or whether he’d used participating preferred, non-participating preferred – it didn’t matter.” Many angels believe that part of your intent as an early investor is to help the company position itself for future success.
One of the most interesting parts of the book is the Financial Chronology of Amazon.com from 1994-1999. Taken from Mark van Osnabrugge’s book Angel Investing: Matching Start-up Funds With Start-up Companies, the graph shows at conception how Jeff Bezos founded the company with $10,000 of his own money and borrowed $44,000. Amazing in of itself, the graph shows the price per share of Amazon increasing from $.001 to $52.11 in less than 4 years. In detailing the investment rounds we get a look into the valuation growth of the company with each round of investment. If only our companies performed this way!
As for my business, I don’t think I will ever experience rounds of investment. I am strategizing in hopes to find a way to entice just one. However, the structure terms and options were very educational for me and most certainly something that I would consider in the structure when an investor does come along.
Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.