Some businesses just can\u2019t fit within the angel capital or friends and family model for raising funds.\u00a0 Sooner or later these businesses will have to seek venture capital and accommodate the needs of the venture community in negotiating the terms of an investment.<\/p>\n
First, VC\u2019s in general cannot invest in \u2018S\u2019 corporations or limited liability companies (LLC\u2019s).\u00a0 This is only a minor problem in that both forms can convert easily into \u2018C\u2019 corporations at low cost and little consequence.<\/p>\n
More importantly, VC\u2019s will worry over a number of issues when looking at a company and deciding about an investment.\u00a0 Is the price paid for shares by previous investors excessive, creating a post-money valuation too high for the actual value of the company?\u00a0 If so, the VC will contemplate a “down round\u201d – that is: offering an investment where previous investors find their investments instantly worth less than their original value, even if the investments were made at high risk and years earlier.\u00a0 No one wants to face this, but the need for money and the possible overpricing of the first rounds may have created an unsustainable valuation.<\/p>\n
[Email readers, continue here…]\u00a0 <\/span><\/em>Second, it is important in the first investment round to face the issues that may be required later by subsequent, more sophisticated, investors such as VC\u2019s.\u00a0 These include \u201ctag along rights\u201d which allow investors to sell some shares when others, such as management or founders, sell any shares.\u00a0 Also included are \u201cdrag-along rights\u201d in which minority shareholders may be forced to obey the vote of the majority in such important votes as to sell the company or take a round of financing at lower share prices.<\/p>\n Most VC\u2019s today are becoming enlightened (as are organized angels), correctly forcing many decisions that might have been dictated by investment documents instead to the corporate board to decide.\u00a0 This allows for a discussion – and perhaps a negotiation – between inside and outside board members in such instances, all for the good of the corporation, not just one class of shareholder.\u00a0 You may recall that board members have a \u201cduty of loyalty\u201d to the corporation, not to their constituent investors.\u00a0 This enlightened thinking reinforces that duty, even sometimes at the expense of profit to the VC\u2019s.<\/p>\n","protected":false},"excerpt":{"rendered":" Some businesses just can\u2019t fit within the angel capital or friends and family model for raising funds.\u00a0 Sooner or later these businesses will have to seek venture capital and accommodate the needs of the venture community in negotiating the terms … Continue reading