Gust

APRIL 11, 2014

Let’s get right down to business: Dilution of founders’ and other early shareholders’ equity in startups is frequently a subject of intense interest and debate. Expert commentators including David S. Viewing each as a discrete measure can make it easier to grasp what is often counterintuitive.

Dilution 162

Dilution Equity Pre-Money Valuation Prospectus 162

Gust

DECEMBER 1, 2011

Notice what is missing from this list of priorities: The company itself – that is, a business entity, most often a corporation , that will own the entire business (however defined), issue equity to founders, take investment capital , enter into contracts, make sales, pay employees and contractors, and so forth.

IP 114

IP Intellectual Property Equity Liquidity Event 114

Gust

JUNE 17, 2012

Yet, I find that startup founders often fixate on one or two sources, often to the detriment of their business. A startup incubator is a company, university, or other organization which provides resources for equity to nurture young companies, helping them to survive and grow during the startup period when they are most vulnerable.

Technical Review 164

Technical Review Bootstrapping Venture Capital Incubator 164

Gust

JUNE 16, 2023

And plenty of founders do sabotage the game: It’s estimated that 80% of startups don’t make it past the first year, and 90% fail over the long run. So, what can a startup founder do to ensure they’re navigating raising funds strategically?

Equity 91

Equity Security Founder Startup 91

Gust

NOVEMBER 8, 2012

Then sit down with your co-founders and divvy up the equity based on the contributions you all believe each of you will make…providing for reverse vesting, a large option pool, and a clear decision-making structure.

Founder 134

Founder Option Pool Vesting Cofounder 134

Gust

JULY 12, 2012

It doesn’t give you more cash compensation, more equity ownership or more direct control over the operating business. If you are going to be a true co-founder (and 20% equity sounds like it), sharing over-all decision making about company direction, strategy, financing, staffing, etc. They don’t *join* it later.

Cofounder 107

Cofounder Founder Warrant Equity 107

Gust

NOVEMBER 14, 2011

Remember that up to this point, the investor has primarily seen and talked to the founder and CEO, and studied written documents. All private equity groups go about due diligence in their own way, but there are a few key areas of focus that entrepreneurs should always expect: • Team strength and health.

Technical Review 152

Technical Review Due Diligence Intellectual Property Private Equity 152

Gust

NOVEMBER 8, 2012

Nevertheless, there are literally thousands of other examples scattered around the country, each of which grew from a founder or two with an idea to a successful growth company employing scores, hundreds or even thousands of skilled employees, with the attendant benefits to the local and national economy.

Silicon Valley 187

Silicon Valley San Francisco Intellectual Property Accredited Investor 187

Gust

DECEMBER 18, 2013

Assuming the company is able to make effective use of the seed money to greatly increase the value of the enterprise, all of that value therefore accrues to the founder, rather than the investor.

Valuation 150

Valuation Founder Seed Money Common Stock 150

Gust

NOVEMBER 11, 2011

Usually these term sheets involve convertible notes, which are supposed to convert to equity at the next round of financing, like when the serious venture capitalists do a Series A. From what I’ve seen, it’s critical to make sure startup founders are thoroughly aware of the term sheet and what it means. Are they worth the risk?

Software Review 79

Software Review Term Sheet Due Diligence Angel Investor 79

Gust

DECEMBER 6, 2012

Those names and faces and backgrounds that turn up in pitches and business plans might be deep and important relationships, somebody with options or equity who is going to be helping for the long term; or meaningless fluff, somebody who agreed once to have his or her name appear, but really does nothing. . Equity is forever.

Startup 165

Startup Equity Capitalization Table Naming 165

Gust

APRIL 23, 2014

From a completely biased perspective, I’d nominate the nascent and not yet completely visible rise of online equity investing platforms. Note: The author of this answer is completely biased, as he is the founder and CEO of the aforementioned platform. original post can be found on Quora @ [link] *.

Angel Groups 127

Angel Groups Accredited Investor Private Equity Deal Flow 127

Gust

SEPTEMBER 5, 2012

Convertible equity? The new form of convertible security or “convertible equity” is essentially a convertible note containing most of the usual terms — except it’s been stripped of the features that would make it a loan. How to finance a new seed-stage startup? Convertible debt?

Finance 134

Finance Convertible Security Equity Seed Stage 134

Gust

MAY 24, 2012

Some commentators have suggested this is the wave of the future, signifying a shift in the balance of power from investors to founders of the relatively small, elite group of growth companies that make it to public markets. Options and warrants, when issued, are also typically exercisable for shares of Common Stock.

IPO 159

IPO Equity Common Stock Stock 159

Gust

DECEMBER 8, 2011

Likewise, founders can benefit from understanding basic characteristics of the overall legal structure, formation and governance documents, rights and responsibilities of team members, etc. Stepping off the soapbox, let’s examine the highest level “To Do” list for a new startup: Formation, Governance and Equity. Newco, Inc.”)

Intellectual Property 139

Intellectual Property Non-disclosure Agreement Delaware Stock 139

Gust

DECEMBER 8, 2013

If you really want to impress a startup founder as a potential employee, or you want to be a smart investor, you need to know the right questions to ask. These are the questions that get past the hype of a founder “vision to change the world,” and into the realm of real business strengths, weaknesses, and current health. Now you know.

Due Diligence 174

Due Diligence Sweat Equity Intellectual Property Burn Rate 174

Gust

MAY 3, 2014

This is also (and even more so) true for other groups that seem to receive less than their proportionate share of equity investments: Blacks, Latinos, LGBTQ, etc.

Venture Capital 152

Venture Capital Portfolio Equity Programming 152

Gust

SEPTEMBER 29, 2011

It should therefore come as no surprise that an asymmetry of information exists, mostly gleaned from experience, between founders and investors in a venture financing deal. Others have discussed in detail the pros and cons of convertible debt vs. seed equity rounds. Conversion terms are where the money is, literally and figuratively.

Finance 178

Finance Term Sheet Preferred Stock Bridge Financing 178

Gust

JUNE 7, 2014

9) Common Stock (including any Preferred that converted to Common, any exercised options, and all Founders stock) and Common stock warrants. So, here is the typical payout order, from first to last: 1) Salaries owed to employees. 2) Secured creditors. 3) Un-secured trade creditors. 4) Noteholders (convertible and other).

Warrant 157

Warrant Preferred Stock Early Stage Common Stock 157

Gust

OCTOBER 11, 2012

They include structuring the relationship between co-founders, and founders and employees, limiting liability, being able to open a bank account, issuing equity to employees and advisors, etc.

Delaware 122

Delaware Stock Options Cofounder Stock 122

Gust

OCTOBER 26, 2014

Bootstrapping avoids all the cost, pain, and distractions of finding angels or VCs, and allows you to keep control and all your hard-earned equity for yourself. Most startup founders already do this, rather than take a salary, to improve their offering. Don’t justify over-spending initially with “long-run” thinking.

Bootstrapping 176

Bootstrapping Startup Merger Salary 176

Gust

OCTOBER 21, 2011

For convertible notes, the only liquidity event we need be concerned with is an acquisition of the startup in the near future, before the maturity date; otherwise, the notes will convert to equity of one kind or another, and the eventual sale of that equity (in a public offering, acquisition, or private sale) is a different subject for another day.

Finance 79

Finance Pre-Money Valuation Term Sheet Liquidity Event 79

Gust

JULY 18, 2012

Yet I’ve rarely seen entrepreneurs more fired up than when recounting war stories of startups whose founders had control of the company wrested from them, were forced to take financing or compensation deals on outrageously onerous terms , or worst of all, fired from their own companies.

Stock Options 188

Stock Options SEC Stock Government 188

Gust

SEPTEMBER 17, 2014

I know how to structure around that to protect the founders from getting screwed on a multiple liquidation preference. But most VCs don’t bother so many convertible note founders get screwed and never know it until they sell their companies. But lawyers will charge much more for equity.” Try doing THAT with equity.

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

Gust

NOVEMBER 4, 2011

In brief, a cap acts to place a limit on the conversion price of a convertible note such that investors are guaranteed a minimum number of shares for their bridge loans if the startup does a priced equity round at a high pre-money valuation – “high” meaning above the cap, which is often a heavily negotiated term. (The by February 2006).

Valuation 98

Valuation Pre-Money Valuation Merger Vesting 98

Gust

DECEMBER 7, 2014

Even a small investor in the early days will take a large equity percentage, due to that pesky valuation challenge. Investors like to replace Founders who don’t seem to be moving fast enough. Be prepared to live with communication, negotiation, and milestones every day. Managing investors is a distraction from your core business.

Bootstrapping 191

Bootstrapping Entrepreneur Startup Burn Rate 191

Gust

DECEMBER 16, 2012

The corporate entity lends itself best to the concept of “sharing” equity required by investors, and unincorporated entities don’t get funding. If the founders are not experienced, find a couple of advisors from the business sector to fill the gap. Line up an experienced team. Prepare an investment-grade business plan.

Angel Investor 179

Angel Investor Intellectual Property Elevator Pitch Angel Groups 179

Gust

OCTOBER 17, 2011

Define equity type. The first capital a young company receives usually takes the form of common stock, the same class of shares the founders hold. These “IV drip” financings may reduce risk for investors, but put more pressure on founders. But the lead angel would certainly ask to be given a seat. Outline multiple tranches.

Term Sheet 158

Term Sheet Pre-Money Valuation Due Diligence Post-Money Valuation 158

Gust

NOVEMBER 29, 2011

Consequently, US regulators have discouraged the selling of equity (shares) through crowd funding websites, so online companies, such as Kickstarter.com , offer the opportunity to donate funds to interesting US startup ventures in exchange for the right to become early product users or simply listed on the new ventures’ websites.

Securities and Exchange Commission 154

Securities and Exchange Commission Accredited Investor Angel Investor Due Diligence 154

Gust

DECEMBER 27, 2011

Here is the inverse, sometimes called reverse due diligence, describing what you should do to validate your investor before signing up for an equity partnership. I’ve had startup founders tell me that it’s only about the color of the money, but I disagree – particularly if you are desperate.

Due Diligence 119

Due Diligence Entrepreneur Offshore Angel Groups 119

Gust

OCTOBER 5, 2011

In case it isn’t clear by now, angel investors aren’t in the business of making risky early stage investments in order to earn 6% interest on their money, or even 10%— the upside is all in conversion to equity—so the interest rate isn’t a major point of negotiation. per share for 2,000,000 shares of newly issued Series A Preferred Stock.

Finance 79

Finance Preferred Stock Term Sheet Early Stage 79

Gust

OCTOBER 12, 2011

It’s worth mentioning two key attributes of convertible note venture deals here: The debt is almost always unsecured , meaning there are no underlying assets to be seized as collateral in the event of default (unlike, say, a mortgage or car loan), and is not personally guaranteed by founders or shareholders.

Finance 107

Finance Term Sheet Pre-Money Valuation Early Stage 107

Gust

OCTOBER 25, 2011

I’m an angel investor now, but I also had a small piece of co-founder equity in a software company that went public, and whole ownership of a software company that grew and prospered but remained private. That’s what we’re here for. But angel investment isn’t for everybody. My own experience keeps me open minded on this point.

Cofounder 133

Cofounder Angel Investor Equity Software 133

Gust

JULY 8, 2012

In the last year, there has been a resurgence of interest, some say a bubble, by both angels and VCs, in a pre-Series A kicker to identify promising startups with seed funding, before major equity has been given away. Early-stage startup. Every startup is early-stage to someone.

Early Stage 177

Early Stage Finance Seed Stage Entrepreneur 177

Gust

DECEMBER 27, 2012

Keep in mind that any cash you put in will remain in the company as Founders’ Equity, and will only come back to you on a successful exit in which your investors make money. [3a. With #1 – #3 under your belt, you should start preparing the components you will use to support your pitch to outside investors.

Software Review 164

Software Review Term Sheet Technical Review Angel Investor 164

Gust

OCTOBER 29, 2014

Subject to specific rules and dollar limits (10% of your income in aggregate for all investments per year, etc.) you will be able to invest online, just as easily as buying books from Amazon. So, the bottom line is that this is a great time to start thinking about investing in high growth startup companies!

Accredited Investor 157

Accredited Investor Securities and Exchange Commission Technical Review Due Diligence 157

Gust

OCTOBER 20, 2011

Individual accredited investors in typical angel deals put personal capital at risk for an equity share of growth-oriented, start-up companies. For this round of investment, the angels collectively purchase 20-40% of the equity of the company and are seeking a return on investment of 20-30X in a period of five to eight years.

Valuation 146

Valuation Pre-Money Valuation Intellectual Property Technical Review 146