ENT640 – Winning Angels – Structuring
“Structuring the deal is a key aspect of completing an angel round of financing. It is critical to ensuring that management, employees, past investors, current investors and future investors are all satisfied with the company under its new capital structure.” (2007, Koss)
How do I create win-win situations when structuring a deal? Amis and Stevenson tend to think that “both enlightened and so-called virgin angels think that structure doesn’t matter too much.” (2001, pg. 182) Trust is the anchor or they reserve to preserve the relationship instead being a hard-noise.
What does a win-win or “sensible deal” look like? Questions to ponder:
Is it simple? Think of the document like a resume-one or two pages is enough. “…complicated structures create more work and less flexibility down the road.” (pg. 206) The courtship will end if the exchange is too complicated. Is it fair? Structure can be used to limit the entrepreneurs exit and to ensure that they are on course. Is there a reflection of trust or verbiage? Here again we reflect on trust in the relationship which will show transparency instead of terminology that confuses and even deters the deal. Is it robust enough to weather a slight differentiation in the plan? Is there a perverse incentive section to cause all involved to behave badly? (pg. 182) Remember the relationship for the greater gain.Structuring is about equity ownership. A lesson in stock options… “Equity ownership structures commonly used are common stock, preferred stock, participating preferred stock, and convertible notes. Preferred stock is distinguished from common stock when the company goes bankrupt or undergoes liquidation. Then the preferred stock holders have priority in getting their invested capital back, along with any unpaid dividends (known as a preferred return), before the common stock holders receive any distributions. In contrast to preferred stockholders, participating preferred stockholders will be repaid their original investment plus any unpaid dividends upon liquidation, and then share in the remaining assets as if they held common stock. Thus, the participating preferred stockholders still earn a return, even if common stockholders realize little or no return. Convertible preferred shares are able to be converted to common shares at a predefined conversion rate. They perform like a note by providing downside protection for the investor because they have preferred status and the option to convert to common stock provides upside.” (Koss)
The key to structuring is equity departure on the part of the entrepreneur. How much equity you are willing to share will affect future aspects of your business.
Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
Koss, A. (2007, July). Best Practice Guidance for Angel Groups-Deal Structure and Negotiation. Retrieved June 18, 2017, from http://www.angelcapitalassociation.org/data/Documents/Resources/AngelCapitalEducation/ACEF_BEST_PRACTICES_Deal_Structuring.pdf