Angel & VC Equity

mhudson.jpgDay 8, Wednesday 30th Jan: Marianne Hudson from Angel Capital Association spoke with us about ‘Trends in early stage equity and Angel investors’. Marianne emphasised a few key points surrounding angel investment:
– Angel funding is more likely as seed funding
– Seek our angels that can make an intellectual contribution
– Who can provide advice, not just $$$
– How to value company accurately pre-investment
– Value based on a combination of IP, contracts, sales, brand/goodwill
– Usually a 4x sales valuation
– Identify angels with whom you have chemistry, thrust, rapport
– Use referred angels – more likely to obtain investment
– Angels assume you’re going to exit
– Family business => not for equity investment
– Pitching for angel funding – Passion is key
– If you haven’t attracted investments from some of your friends and family money – why not? Also have you invested your own money?
– They’re looking for the type of people who have been working long hours unpaid on a project.
– The person is the product being pitched to angels…
– Kauffman Foundation’s resources for funding sources available online at the KF’s eventuring website.

On Wednesday I also went to a meeting with Merrilea Mayo, Director, Future of Learning Initiatives at the Kauffman Foundation. She is currently involved in a project to deploy learning-centric sports applications on mobile devices. I volunteered with three of the other Global Scholars to meet Merrilea and discuss the project and some ideas I had about location-based sports/educational games, Bluetooth tagging and Bluetooth pushing. We also volunteered to assist the software company developing the J2ME app with evaluations of the current prototype of the application.

nodonnell.jpgNiall O’Donnell is a Kauffman Associate and Fellow, and is currently working with RiverVest venture capitalist firm.  Dr. O’Donnell has drug discovery and development experience and a strong background in immunology. He has been involved in the formation of early-stage biotechnology companies, including a start-up developing novel peptide-based therapeutics for the treatment of pulmonary and liver fibrosis.  In addition, he has worked with an Eli Lilly spin-out developing treatment for Crohn’s Disease by targeting Toll-like receptors. And last but not least Niall is from Omagh in CO. Tyrone, Northern Ireland! Niall gave us insight into his industry and advice on how to approach Angel and VC funding. Some key points from his seminar:
– Niall provided us with a sample Term Sheet for future reference when negotiating VC terms

graph_vc_risk.jpg
– Types of funding:
      – 3xF’s, Angel 50-100K; VCs up to 20/30M, Hedge funds 100s Ms
– Don’t take money from people who don’t add value to the team
      – Enlist respected advisors & mentors
      – Find out their track record of investments and exits
      – Do you like and thrust them? Rapport?
– Exit horizon – how far along is it?
– Parallel lines in embedded graph details sweet spot which combines
      – % risk failure – how far along timeline/lifecycle
      – Company value – VC will try to invest exactly at point ‘Series A’
      – Cumulative cost – not shown in this graph

– “No one ever got sacked for buying legacy solutions!”
– Partner with bit 800lb gorilla in the industry! – show them how good your product is.
Valuing company:
– Overvalue – pointless as wont get funding
– Undervalue – want fair market value
– Comparisons are king – review similar companies that obtained funding recently (analogous to house prices on the same street!!)

graph_vc_stock-share3.jpg

– Convertible preferred stock vrs participating preferred stock
      – Non-participating – profits shared based on equity from start
      – Participating – investor gets initial investment out first
– Anti-dilution policies in VC Term Sheets
      – Full ratchet anti-dilution – maybe for mezzanine funding when near IPO; or dangerously close to something truly innovative. But to be avoided at all other times!
      – Weighted average anti-dilution – standard/common approach
      – No anti-dilution terms – VC keeps same shares – very unlikely
– Board members
      – Odd number
      – Founder, 2-3 VCs, Independent specialist (with entrepreneurial track record and market knowledge)
– Term sheets – some key red flags
      – 3X or above – would imply investor gets 3 times initial investment before
      – Full ratchet
      – Board with no industrial experience (lifestyle board)
      – Big board => dysfunctional (maybe 5/7)
      – Only 1 investor/VC – lack of opinion and network
      – No shop – stops me…
            …shopping around for other VCs
            …potentially finding the true market value of the company
      – Voting byclass – VC can block exit/new investment
      – Options pool – good investor will want to recharge options @ each round
            Provides incentives – need to carve this out at start.
            Series A 15-20%; Series B 5-10 % of total shares.
– Beware of VCs pushing Series A expenditure to allow them to invest more at Series B before value decreases too much!

mrk.gifOn Wednesday night we watched a film about Ewing Marion Kauffman’s life, titled: “Mr. K: A Common Man With Uncommon Vision”. This film biography captures Ewing Kauffman’s unconventional approach to life as a great American entrepreneur, Major League Baseball team owner, and philanthropist. It was a very inspiring film and I highly recommend watching it. Key to the whole story was his dedication to: sharing profits, working hard, his employees or associates as he called them. By the time Mr Kauffman’s company reached its IPO stage everyone shared in the wealth, making many people millionaires many times over, from admin assistants to VPs!

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