You may have been hearing a lot of buzz recently around ‘alternative’ investment structures in private investing; this has been a particularly hot topic among angel investors. This blog post departs from our usual musings on how to efficiently and effectively use syndicates (aka SPVs or single purpose vehicles) to discuss our latest investment adventure: the launch of a revenue-based fund.
The saying: “no good deed goes unpunished” is particularly true in the world of angel groups. Group organizers start with the best of intentions: to support local entrepreneurs, to make investing efficient, to educate new investors, and to promote economic development. These individuals often make the mistake of donating their time up front and then leaving in frustration many years down the line. But it doesn’t have to be this way!
Terms like “warrants, waterfalls and preferences” can be confusing and intimidating when attempting to understand a capitalization table (aka cap table); it is no wonder we are often asked for a simple way to understand them! This article will give a brief overview of why cap tables are important and introduce a simple model to use early in the due diligence process.
Imagine you are the manager of a seed stage investment fund. Your job is to make money for your investors through selecting and managing a portfolio of private investments. You work hard to find good deals, to negotiate the terms, and to shepherd each deal to exit. You do this ten, twenty, thirty or more times in your fund, often looking at dozens of deals before making one investment. So how do you get paid?
When entrepreneurs raise capital through the sale of some type of security, the temptation is to take the money from whoever offers to invest, regardless of the amount of the investment offer. It is common practice to set a minimum investment, perhaps $25,000 or $50,000 and simply turn down amounts smaller than that. But raising capital is hard, time consuming work, and it’s difficult to tell small investors “I’m sorry, your investment is not large enough.” It’s even harder when an investor or an angel group pressures the entrepreneur to let them invest at a level below their minimum.
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