TheStartup411 (tm)

What the new U.S. crowdfunding bill means for entrepreneurs

whosonmy_ortho41 — Thu, 10 Nov 2011 15:56:46 +0000

Last week, the U.S. House of Representatives passed a crowdfunding bill that will allow startups to offer and sell securities via crowdfunding sites and social networks. If passed by the Senate and signed off on by the President, the bill will become a law, giving entrepreneurs new options for raising money for their companies.

Here’s a look at the current and proposed crowdfunding rules, and how this bill could shake things up for startups.

What is crowdfuding? As the term suggests, crowdfunding is funding from a crowd of people; that is, many people provide small amounts of money to finance something. Crowdfunding has its roots in charitable causes, including the advent of microfinancing to provide financial services to poor people, but has progressed to the online funding of creative and other projects via sites like Kickstarter and Rockethub.

Under current laws, startups may not sell stock or other securities through crowdfunding sites or social networks, such as Twitter or Facebook. They may, however, accept donations. This is because of applicable federal securities laws, which have been in place (in one form or another) since the 1930s. The laws including the following:

Crowd funding legislation could help startup businesses

whosonmy_ortho41 — Wed, 09 Nov 2011 20:01:42 +0000

Traditionally when businesses expand they fund growth by offering company stock or pledging assets to secure debt. As the public offering and lending markets have pulled back in the current economy we see more business expansion funded through venture capital and angel investor groups. With angels moving up the funding hierarchy and leaving a gap with only friends-and-family as the next funding option for entrepreneurs, there is an interesting legislative initiative proposed to fill this gap with federally authorized crowd funding.

Crowd funding has not been recognized as a legal way of offering investment in a company because it does not comply with securities regulations designed to inform investors of risk. Accordingly, crowd funding has been limited to patron contributions with no investor potential for upside if the business succeeds. Crowd funding has worked well for artistic endeavors but has not had great success backing companies that will build the next green tech gizmos.

The House Financial Services committee recently backed a crowd funding bill known as the “Entrepreneur Access to Capital Act”. The law effectively waives the federal accredited investor requirements and allows companies seeking less than $2 million to offer a private investor up to $10,000 of stock. The act also provides provisions for third-party facilitators to make a market for transactions between startups and investors.

Convertible Debt – Wrap Up

whosonmy_ortho41 — Sat, 22 Oct 2011 02:53:15 +0000

We’ve completed our series on convertible debt and hope that you enjoyed it. If we ever get around to writing a second edition of Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist we’ll be sure to include this as well.

If you go to the resources section of Ask the VC we’ve included standard forms used in a variety of venture deals. As of this posting, we’ll include some standard convertible debt documents subject to the disclaimer that we aren’t you lawyers and make no reps or warranties with respect to these documents, so use at your own risk.

Convertible Debt – Early Versus Late Stage Dynamics
Convertible Debt Series
Convertible Debt – Conversion In A Sale Of The Company
Convertible Debt – The Discount
Convertible Debt – Valuation Caps

Understanding How Dilution Affects You At A Startup

whosonmy_ortho41 — Sat, 22 Oct 2011 02:03:00 +0000

Everybody knows that when you raise money at a startup your ownership percentage of the company goes down. The goal is to have the value of the startup go up by enough that you own a smaller percentage of a much larger business and therefore your total personal value goes up.

The simplest way to think about this is: If you own 20% of a $2 million company your stake is worth $400,000. If you raise a new round of venture capital (say $2.5 million at a $7.5 million pre-money valuation, which is a $10 million post-money) you get diluted by 25% (2.5m / 10m). So you own 15% of the new company but that 15% is now worth $1.5 million or a gain of $1.1 million.

But understanding how you’re likely to get diluted over time is a more difficult concept. And figuring out how much your equity may be worth over the course of a 5-year stint at a startup is even more complicated.

I’ve had to simplify a bit, but to make it easier to understand I’ve teamed up with Jess Bachman at Visual.ly.

Entrepreneurial Communities Must Be Led By Entrepreneurs

whosonmy_ortho41 — Thu, 20 Oct 2011 22:46:52 +0000

Following is the video (see original post) along with my notes. Four key principles of entrepreneurial communities - led by entrepreneurs - 20 year view from today - engage the entire entrepreneurial stack - continually get fresh blood into the system briefly focus on the first – entrepreneurial communities have to be led by entrepreneurs entrepreneurial communities have leaders and feeders feeders include everyone that does things that are inputs into the entrepreneurial community - lawyers - accountants - angel investors - venture capitalists - government leaders are the entrepreneurs -
. . . → Read More: Entrepreneurial Communities Must Be Led By Entrepreneurs

Angel Investors and Startups — A VC Perspective

whosonmy_ortho41 — Thu, 13 Oct 2011 17:49:18 +0000

The Wall Street Journal has a story out today that says “Web Startups Hit Cash Crunch.” There has been a fair bit of reaction in the tech blogs and I thought I’d toss into the discussion some things we are seeing:

1) There are so many startups out there raising money. I don’t think this is a bad thing. It’s a good thing. Entrepreneurship is in vogue. Innovators are innovating. Makers are making. But I cannot remember a time when we have gotten more inbound traffic. It is not just coming from entrepreneurs. It is coming from angels, seed investors, VCs, lawyers, accountants, friends, aunts, uncles, you name it. I’m waiting for the guy who sits at the front desk in our building to pass me a business plan on my way into the office.

2) There are a lot of “me too” investments out there. And the delineation between startups is getting narrower. Almost every investment that comes our way these days causes us to ask ourselves “is this too close to xyz?” with xyz being one of our exisiting portfolio companies. The startup market is hypercompetitive. The user base is finite at some level. The capital markets are finite at some level.

5 Lessons For Raising Money From Family And Friends

whosonmy_ortho41 — Thu, 13 Oct 2011 15:54:13 +0000

It’s really easy to find information about raising money from angel investors or VCs, but many people don’t think about another important way to fund your startup: raising money from family and friends. I’ve raised money from friends and family twice and want to share what I’ve learned so that you can raise money from your friends and family and still be able to attend your family reunions. Raising money from friends and family can be easier and less complicated than raising money from professional investors, but is not without drawbacks.

There are certainly pros and cons to raising money from family and friends and when it came time to raise money with my first company, I had the choice to raise money via angel investors or from family and friends. We were able to raise six figures fairly quickly from a good group of investors, which helped us stay focused on running our business rather than raising money. Unlike working with an angle or VC groups that would have wanted to get to know us for at least three months, we were able to close our round in about six weeks.

Cap (Capitalization) Tables — Example Spreadsheet

whosonmy_ortho41 — Wed, 05 Oct 2011 16:29:53 +0000

Cap Tables (short for capitalization tables) are spreadsheets that show how much everyone owns of the company. You can get a stockholder ledger from your lawyer that will list all the stockholders and show how many shares or options they have, but I don’t consider that a cap table.

For the past 25 years, I’ve used a simple form, mostly given to me by the partners I worked for when I first entered the venture capital business in the mid-80s, but with a few modifications by me over the years.

Last night I put together a public read-only google spreadsheet that shows you a basic cap table in the format I like to use. (You can get the link in the original post.)

The basic outlines of this cap table are:

it shows all the major stockholders of the company listed down the left side. it also shows the major option holders and buckets of option holders
it shows all of the classes of stock and how much was paid for them across the top of the columns
for each investor, you show how much of each class was bought and how many shares of that class they own as a result
you total up the cost and shares and then calculate ownerships on a fully-diluted basis (which means you include the options, whether issued or non-issued or vested or non-vested).

I like this presentation for its simplicity and because it shows the progression of financing activity. It also has the benefit of showing how much each investor has put in on a cost basis, which many cap tables leave out.

If you want to make a cap table for your company, feel free to replicate this format. If you have angel investors, put them in the angel section. I would include the largest ones and bucket all the rest into “other angels.”

If you’ve got any questions about this cap table, or cap tables in general, feel free to ask them in the comments. I will answer them (maybe not until late today or tomorrow -I’ve got a crazy day today). And I bet the community will answer them too (probably well before me).

How Do VCs Mitigate Risk In Their Investment Portfolios?

whosonmy_ortho41 — Tue, 04 Oct 2011 17:22:45 +0000

(Although this original post was written about VC diversification, the points are equally valid for Angels.)

Question: How do VCs mitigate risk in their investment portfolios? Are VCs simply looking to diversify the type and stage of companies in which they invest, or do they employ other financial hedging strategies?

I’m not aware of VCs using classic financial hedging strategies. In many cases, they are prohibited from doing this by their LP agreements and/or investment documents in the companies when they make an investment. While I’m sure there are some folks that do this, I don’t believe it’s prevalent.

The primary ways VCs mitigate risk are (1) time diversification, (2) stage diversification, (3), sector diversification, (4) pro-rata or over pro-rata investing over time, and (5) number of investments in the portfolio.

Seed Capital From Angel Investors: David Rose, Founder and CEO of Gust / Angelsoft

whosonmy_ortho41 — Mon, 03 Oct 2011 15:24:36 +0000

Today, I’m talking with David Rose, who founded AngelSoft, now , in 2004. Gust provides a platform where angel investors and entrepreneurs can connect and discuss ventures. Originally created with angel investors’ needs in mind, Gust now has more than 750 investment organizations worldwide using its platform to manage deal flow and other day-to-day tasks. Over 125,000 startups have, through Gust, worked with more than 35,000 individual investors on their ventures. The company is based in New York City, has a development office in Vancouver, British Columbia, Canada, and a European office in Paris, France.

Sramana: Hi, David. Before we get into the AngelSoft story, can you give us a little bit of your background and what thought processes have led up to the AngelSoft story?

David: Sure. It’s actually now a Gust story, which is the new incarnation of AngelSoft. My background is typical of an entrepreneur in that I have no background whatsoever in anything that I’m doing. My early training was as an urban planner. I have a degree in urban planning. And then I went into government and politics, working for U.S. Senator . I went back to business school and got an MBA in finance, spent over a decade in real estate development and finance on the East Coast. I then started, along the way, a technology software company, which grew into an Internet company. I eventually moved into it full time. We ended up getting venture financing. We ended up getting very, very big, over 100 people, raising tens of millions of dollars with a wonderful product, which then nobody bought, which was very depressing. So, the company ended up restarting as a pure Internet company doing some exciting things in the wireless content space. I got more venture capital, hit the dot-com boom, and became a multi-national company. It was going great, got really big again, then hit the dot-com crash and disappeared again, whereupon my spouse said, “No more startup companies.”

That’s when I became an angel investor. I then founded , which is one of the more active angel groups in the country. Over the last decade or so, I’ve done probably 80 investments in early-stage startup companies. Along the way, with my experience as both an investor and an entrepreneur, as well as a focus on future trends, which I’m involved with, since I run the entrepreneurship and finance program at out at the campus in Moutain View. It was clear that there was a major societal change under way with the democratization of capital…….