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May 16th, 2012 One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, “it’s just another way to lower the price”.
I’ll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I’ll explain.
But first, let me lay out a few things for those who aren’t well versed in these matters. The
. . . → Read More: Valuation and Option Pool — Understand the trade off
May 16th, 2012 I just returned from the 2011 Angel Capital Association Summit in Boston, April 4-6, 2011. It was attended by over 500 angels and associates, including about 60 international angel leaders. It was an excellent meeting – the best yet of the half-dozen or so US ACA angel Summits to date. On Wednesday afternoon, I was fortunate to be asked to facilitate a roundtable discussion entitled: “Valuation of Pre-Revenue Companies and Irrational Exuberance” attended by 50 or so delegates. We reviewed the following chart based on an informal survey I conducted last summer: 2010 Angel Valuation Survey
. . . → Read More: Current Pre-money Valuations of Pre-revenue Companies
May 16th, 2012 While vesting is a simple concept, it can have profound and unexpected implications. Typically, stock and options will vest over four years – which means that you have to be around for four years to own all of your stock or options (for the rest of this post, I’ll simply refer to the equity as “stock” although exactly the same logic applies to options.) If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for VCs
. . . → Read More: Term Sheet — Vesting, Single and Double Trigger Acceleration
May 15th, 2012 Every investor approaches due diligence differently. Some angel investors may request information in a detailed manner all at once, while others may simply request information at different times or stages. Regardless of an investor’s method to obtain information on a potential company, it is a proven fact that exercising thorough due diligence is indicative of more profitable returns. The following documents may be requested in due diligence.
General Corporate Materials These documents include:
The company’s articles of Incorporation (and all amendments) bylaws (and all amendments), minute book (including all minutes and resolutions of shareholders and directors, executive committees, and other
. . . → Read More: Due Diligence Checklist – Angel Investors
May 2nd, 2012 Convertible promissory notes do not include a stated pre-money valuation. Instead, the convertible note seed investor and startup agree that the pre-money valuation for the convertible note investment will be determined by the pre-money valuation the startup receives at the Series A round. However, the convertible note investor does not receive the Series A pre-money valuation, but rather a lower pre-money valuation as determined by the conversion discount.
The convertible note seed investor gets a lower pre-money than the Series A investors for investing in the startup before the Series A round. Since the convertible note investor made the higher-risk
. . . → Read More: Conversion Discounts in Convertible Notes
May 2nd, 2012 One of the common areas of misunderstanding, and therefore conflict, in financing negotiations has to do with the relationship between the pre-money valuation and the option pool.
Investors want the company to have an adequate option pool for future hiring and it is customary to include the pool in the pre-money valuation. Some entrepreneurs see this as nothing more than a veiled attempt at lowering the value of the company. Well, yes and no. No in that investor aren’t actually lowering the value of the company as the option pool is net new–it comes on top of what they value
. . . → Read More: Option Pool, Post-Money and True Pre-Money. Trade Pool for Valuation.
April 17th, 2012 This is a Youtube video explanation of a cap (capitalization) table example that is available online. It may take a while get your head around the terminology and concepts involving the option pool and note conversion, and their impact on valuation. It is worth taking time to understand this if you want to see how the option pool and valuation can be played off against each other. Entrepreneurs need to understand this if negotiating with investors.
. . . → Read More: Venture Hacks Series A Cap Table, with Note Conversion and Option Pool
April 16th, 2012 A revenue-based finance (RBF) investment provides capital to a business by “selling” an ongoing percentage of a company’s future revenues to the investor. For simplicity, you can think of it as a revenue share type of arrangement. Investor gives capital to company in exchange for a small percentage of gross revenues. RBF lives as a hybrid of bank debt and venture capital. This kind of financing has been around for a while in non-tech industries such as mining, film production and drug development, but it’s recently been gaining traction in the world of growth finance and early-stage techno
. . . → Read More: Revenue Based Financing — often non-dilutive to founders, no valuation impact
April 16th, 2012 This post is the first part of a three-part primer on convertible note seed financings. Part 1 will address basic questions, such as (i) what is a convertible note? (ii) why are convertible notes issued instead of shares of common or preferred stock? and (iii) what are the advantages of issuing convertible notes?
. . . → Read More: Everything You Ever Wanted To Know About Convertible Note Seed Financings (But Were Afraid To Ask)
April 10th, 2012 Since the end of January, we have posted explanations of five methods for establishing the pre-money valuation of pre-revenue companies, specifically:
- The Scorecard Method (January 31, 2011)
- The Venture Capital Method (February 5, 2011)
- The Dave Berkus Method (February 14, 2011)
- The Cayenne Valuation Calculator (February 19, 2011), and
- The Risk Factor Summation Method (February 27, 2011)
Good practice suggests using at least three methods to first estimat
. . . → Read More: Startup Valuations: Using Several Methods to Determine the Pre-money Valuation of Pre-revenue Companies
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