Hello there and how do you do. Welcome to another “Break It Down” blog post where we break topics, books, videos, articles, and anything else entrepreneurial-related down from a failed businessman’s point of view. If you didn’t know, last week, the Denver Nuggets defeated the Miami Heat to win the franchise’s first NBA championship. As we continue to break down different chapters of Amis’s “Winning Angels: The Seven Fundamentals of Early-stage Investing,” I was reminded of this historical feat. The Denver Nuggets were finally successful because of the way they “structured” their team, combining homegrown talent with veteran player acquisitions. I liken this is what angel investors are looking for when it comes to entrepreneurs, a combination of a good business structure with the right entrepreneurial attitude.
As we read this chapter notes three fundamental structures to include common stock, preferred convertible with various terms, and convertible note with various terms. Along with these structures come attributes to include exit impact, relationship impact, downside protection, upside protection, entrepreneur protection, worst case scenarios, and notes and suggestions. For angel investors, it’s all about finding the right relationship and avoiding the worst scenarios. When I started my first business, I had no structure, nor did I consider how I might appeal to someone wanting to invest in my organization. As I took in the material, if I wanted to present the right structure, it would be closer to the preferred convertible with various terms. For me an investor is like having a partner; empowering them with aggressive terms will help us grow the business together in one accord and make the investor feel safer.
One of the coolest takeaways from this chapter resides within the winning tools and tactics, which explains how angel investors who carry one pager, usually can know the parameters of deals when they agree to place an investment. As we further explore the book, we explore the common standard term sheet, which provides insight into terms for preferred stocks. Reading this sheet really shifted my mindset as an entrepreneur because I realized even more so that I was way in over my head a couple of years ago. Even something as simple as voting rights (which empower the levels of angel investors A vs B), was something I never factored in. The last eye-opening portion of these terms was how “vesting” options would/could differ between founders and employees. I thought all along everyone and anyone who wanted to buy into a company would all play by the same rules and abide by the same time frames, boy, was I wrong.
At the end of the day, the term “knowledge is power” is run into the ground every single day but holds true. As a failed businessman, I am fortunate that I am learning from my errors and miscalculations, but I am motivated to do better. As I continue to look at business from the investing standpoint, I now see how intricate deals may be, and the structure investors are looking for to make things go smoother. I implore you (the reader) to ask yourself, “If I had $1 million dollars, what kind of deal would I look for?” and the answer may surprise you. No matter how good a deal sounds, if the organization and terms aren’t structured right, then that million could turn into $1 quickly.
Reference
Amis, D., & Stevenson, H.H. (2001). Winning Angels: The Seven Fundamentals of Early-stage Investing.
Greg,
I like how you’ve pointed out the callback we get, in this section on structuring, to some of the sourcing advice written about in the sourcing section; that is, the on-pager. As you’ve observed, “One of the coolest takeaways from this chapter resides within the winning tools and tactics, which explains how angel investors who carry one pager, usually can know the parameters of deals when they agree to place an investment.”
In essence, these investors that come prepared with a one-pager, come to the “deal table” with a pretty significant “blueprint” for what they want to prioritize during the deal making process. It made me think about how, as entrepreneurs, what’s to stop us from bringing forward the same?
Having our own one-pager could help us protect our interests in the structuring process, or at least ensure each of our preferences is addressed and not forgotten. Prepared is a good practice.
-Amanda
Greg,
Enjoy your blog and in the structure post you highlighted, “I liken this is what angel investors are looking for when it comes to entrepreneurs, a combination of a good business structure with the right entrepreneurial attitude.”
I agree. Any successful angel investor evaluates both the business model or structure and the entrepreneurial team when considering an investment. Angel investors pay particular attention to the entrepreneurial team when considering an investment because it is a significant determinant of the company’s success. Which made me consider why. Why does the entrepreneurial team matter?
There are a handful of reason I consider:
Execution Capability: Any idea is only as good as the team that executes it.
Resilience: A startup is a journey of obstacles and challenges.
Industry Knowledge: Understanding the market can be a significant competitive advantage.
Leadership: Good leadership inspires, bad leadership detracts.
Decision Making: The decisions made by the entrepreneurial team can make or break a company.
Chemistry: Investing in a startup involves a close working relationship between the investor and the team.
Integrity: The trust factor plays a huge role in any business transaction, and even more so in the high-risk world of startups.
Hi Greg, great title. Every serious person, whether in business, family, or community seeks structure. It helps keep goals in check, people in shape, and communities accountable. Structure in investing was a very interesting topic for me as I sought to grasp the author’s terms and definition. In your post, the point that structure makes an investor feel safer was a golden sentence. It highlighted the need for a clear and transparent structure. Otherwise, both the investor and entrepreneur are going into a new business that has no foundation, and that feels scary. Great post.