| Topic Name: |
Angel round financing |
| Message Name: |
buying a big lottery ticket |
| Date Posted: |
05/02/2000 |
| In Reply To: |
I have been given the opportunity to invest in a company in the early-stage/Angel round. I have never participated in this type of investment and was hoping that some of you could give me some advise, i.e.:
what are certain things one should know before going into this type of an investment?
how is my ownership/stake in the company valued?
what are the ways of finding out what type of ownership I will have, i.e. options etc..?
what are usual exit strategies for angel share investors?
All comments would be greatly appreciated. |
| Message: |
You need to do a lot of homework, if not, you are just buying a big lottery ticket.
I am assuming that this is someone you know well and not an "opportunity" you found via Internet or email. This type of investing is for accredited, sophisticated, investors and it sounds form your post that you are not (sorry if I am being rude). You have to know that statistically you will most likely loose all your principle (I am assuming you are not Bill Gate's Aunt and he did not just ask you to invest in his new little idea).
Books can be written on your questions here are a few thoughts:
1. Q. "How is my ownership/stake in the company valued"?
A. Ask what the "post money" valuation of the company is and what your "post money" % is. They should provide you with a capitalization table. This shows how many shares are outstanding, who owns them, and at what prices (the cap table adds up to 100). Ask for a post-money fully diluted Cap Table (this will show you how the company is split up after the round). In an angle round they should have provided this with the Tem Sheet from the start. It should be simple and clear. If this "valuation" is set by the company then it is arbitrary. If it is set by a lead investor (much better) then it is still just a paper valuation.
2. They should give you an information package with detailed Term Sheet and business plan (A private placement memorandum). This would hopefully be modeled from a public prospectus.
3. They will provide very detailed subscription documents which you should have review by an attorney who is knowledgeable in the area of internet private placements. Since it sound that you are just a co-investor, so the major points are not negotiable for you, but the attorney will be able to tell you if the documents match the term sheet and anything that is unusually or in error.
4. EXIT: You are buying an illiquid investment (you can not sell it when you like). These are very very high risk investments. The most likely exit is bankruptcy and the total loss of your investment. A small percentage of start-ups exit by trade sale. When this is done you will receive some combination of cash or anther companies stock. An IPO is the very remote exit possibility and here you will generally be able to sell the stock 6 months after the offering.
5. Remember you are investing in the people first and foremost. Who are they? have they done this before? Know them well!!
6. Do not let greed get the most of you and do a lot of home work!
Just one man's opinion
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